Boeing's (NYSE:BA) clean-slate, ground-breaking 787 Dreamliner has clocked north of 490,000 hours in service with 21 airline operators since its service entry in November 2011. The company touts the plane as the first-ever aircraft with 50% structure made of composite material, making it extremely light and efficient. The long-range, midsized, wide-body jet consumes at least 20% lesser fuel compared with similar jets. With seat capacity ranging between 242 and 323 across the three models -- 787-8, 787-9, and 787-10 -- Boeing claims the plane offers about 10% lower cash seat mile cost. The craze of this plane was such that it attracted a highest bid of $34,000 for a seat in the maiden commercial flight in October 2011.
While such amazing attributes stand the Dreamliner in good stead, what's worrying investors is the spiraling cost of the program -- recently the deferred cost crossed the previously estimated $25 billion mark. When will the Dreamliner start generating positive cash flows?
Unending series of challenges brings nightmares
Boeing warmed up to the idea of making a carbon-composite aircraft in 2003 and unveiled the Dreamliner the following year. All Nippon Airways became the launch customer of the jet with orders for 50 units to be delivered in 2008. However, supply chain and production challenges pushed the plane's entry in to service to 2011.
Technical snags post launch made costs overshoot big time. From engine failures, fuel leaks, to fire on an empty Japan Airlines Dreamliner at Boston, and wiring problems near the main battery -- have led Boeing to spend massively on safety probe while rectifying the issues. Late this September, a Warsaw-bound 787 made an emergency landing at the Glasgow airport after the fire alarm went off. These incidents have made Dreamliner's deferred costs go through the roof.
Deferred production cost, as Boeing explains, is the difference between how much the aero major spends in making the Dreamliner and how much the company sells it for (excluding the development cost of the plane). In October 2013, the American giant had lifted its 787 deferred cost projection from $20 billion to $25 billion on account of increased spending to launch the 787-10 and related plans to augment capacity at its factory in North Charleston in 2014 and 2015. However, in the latest quarter, Boeing reported that the Dreamliner's deferred cost has shot up by $947 million and gone past $25 billion to $25.2 billion.
When will the program generate positive cash flows?
Analysts' estimates for a Dreamliner's cost range from $160 million to $232 million (made a year ago at the end of 2013 third quarter). This might appear reasonably below the list price varying from $218.3 million for 787-8 to $297.5 million for 787-10, but there are massive discounts ranging between 20% and 60%, and averaging 45%, according to The Wall Street Journal.
And we know this directly from the horse's mouth. Boeing's said that it's been selling the Dreamliner below cost, which is sending the deferred cost higher. The question is how soon can the company stop bleeding cash?
Boeing expects to break even and earn positive cash flows in per unit sales of some versions next year, helping the deferred cost gradually go down. Currently, the jet maker produces the plane at the rate of 10 a month, and plans to boost it to 12 in 2016 and 14 by 2020. Boeing's CFO Greg Smith says that once the monthly production rate is augmented to 12 in 2016, deferred cost would start declining at a better rate. According to a J.P. Morgan analyst, the estimated cost and selling price gap had narrowed to $45 million in the third quarter of 2013 compared with $73 million in the first quarter.
Working toward breaking-even
Attaining breakeven in 2015 looks like an ambitious target given that Boeing's stocking up on components for the 787-9 to cut production risks and it could do the same for the 787-10. However, Boeing's committed to work on higher efficiency and productivity to improve cash flows. Also, though Boeing bleeds cash on the sale of each Dreamliner, it's able to book profits in its accounts -- thanks to its program accounting method that spreads the huge development cost over an extended time period.
The company is reorganizing its facilities to extract greater value, holding talks and discussing terms with suppliers and its workforce. There has been some progress, but it "still got a long way to go," says Smith. According to UBS, the company's definitely reduced the cash burn by lowering costs, but it needs to pull down the costs further to $110 million per unit to stop the cash drain. And this implies working at 50% greater efficiency level than what it managed with the 777. Presently, the 737 and 777 are the key cash generators, offsetting the 787 cash loss.
It's not very certain when exactly the Dreamliner will convert into a cash generator, but with greater experience and improving efficiency, it may happen sometime in the not-so-distant future. Though higher deferred cost may be worrying, with strong commercial aircraft demand, the 787 program could still fulfill the hopes of investors.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.