What Is Boeing's Most Profitable Plane?

Do you know Boeing (BA 1.08%)? I mean, do you really know Boeing?

Did you know that the Boeing 777 is one of the plane maker's most profitable airplanes? Photo source: Boeing.

Everyone knows that Boeing is a plane maker. That's what they do. But Boeing makes a lot of planes, and a lot of different kinds of planes -- from the ultrapopular 737 to the iconic 747 jumbo jet to the paradigm-shifting 787 "composite" Dreamliner. At last count, the company had something on the order of 5,800 plane orders stacked up in backlog, awaiting construction and delivery.

Any time Boeing sells one of these planes, that's good news for investors because, on one hand, it's new revenue for Boeing. On the other, it's a sale that won't be going to archrival Airbus. One key question that Boeing investors might want to ask, though, is this: Which of these planes makes the most profit for Boeing?

That's what we're going to look into today.

What Boeing tells us
When it comes to which of its planes earn the most money for Boeing, the company isn't in any rush to spell that out for investors. Here's just a sampling of how Boeing "explains" this, drawn from its 10-K filing with the SEC:

Our Commercial Airplanes segment predominantly uses program accounting to account for cost of sales related to its programs. Program accounting is applicable to products manufactured for delivery under production-type contracts where profitability is realized over multiple contracts and years. Under program accounting, inventoriable production costs, program tooling and other non-recurring costs, and warranty costs are accumulated and charged to cost of sales by program instead of by individual units or contracts.

Clear as mud, right?

Of course, the upshot of all this is probably well understood by Boeing investors. Basically, the company tallies up what it expects to spend developing, building, and warranting a particular airplane model, estimates the number of units of that model that it expects to sell, subtracts the former from the latter, and divides by the estimate -- to arrive at an estimate of the profit earned from selling each unit of airplane.

But that doesn't tell us which specific airplanes are the most profitable for Boeing.

What others tell us
There do appear to be a few general rules, however. For one thing, experts tell us that the older a plane line is, the more time it's had to pay down its development costs and begin turning the corner toward profitability. A second rule is that, as with automobiles, bigger is often better -- the larger the airplane, and the higher its price tag, the easier it is to fit in high-margin bells and whistles without causing a noticeable (percentage) increase in the cost. For example, a $10 million add-on to a Boeing 737-900ER costing $99 million is a 10% increase in total cost. But for a 777-300ER costing $330 million, $10 million worth of bells and whistles raises the total cost just 3% -- potentially a more palatable increase.

Also, there's the general rule that manufacturers tend to earn more profits when they can spread costs over a large number of units produced, capturing the advantages of scale production. Thus, the three keys to a profitable Boeing plane model:

• Age
• Size
• Number of units sold

In all three cases, more is better. Now, let's examine Boeing's four main airplane models in this light:

What can we surmise from this? As the oldest plane in Boeing's lineup, and the one whose development costs lie farthest in the past, and also the plane with the most units sold, Boeing's 737 line of aircraft is probably pretty profitable for the company -- despite its being a smaller jet. Conversely, despite being a big plane, the Boeing 787 was only recently developed, and hasn't sold a lot of units yet. It's therefore unlikely to be very profitable for the plane maker currently.

In between, the Boeing 747 -- big, old, and with many units sold -- should be a pretty profitable plane -- if Boeing can sell enough of them to keep production scale up. The 777 meanwhile, may be hitting the sweet spot combining development costs sufficiently far back in history, a big size, a big number of units already sold, and a large number of orders on backlog.

And incidentally, this largely lines up with what Boeing tells us (via a spokesperson I talked to) -- that the 737 and 777 are right now the company's real "profit drivers" in commercial aircraft, while the 747 and 787 are currently earning only low-single-digit operating margins.

What it means to investors
In a nutshell, what all this means to investors is pretty simple: Every Thursday, Boeing updates investors on new plane orders that have come in over the past week. For example, as of the end of February, Boeing had sold 63 narrowbody 737s, five big 777s, and just one 787 (all net of cancellations) in 2015.

Put another way, that's 68 probably very profitable plane sales through March 1, against only one marginally profitable sale of a 787. Which sounds to me like a very nice way to start off the year.