
Will 787 program ever show an overall profit? Analysts grow more skeptical - jerven
http://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/
======
rogerbinns
They didn't give an overall picture as to how this happens. Airliner
programmes run at a loss initially, because there were the development costs,
the costs for equipment and methods to build the plane, and that it takes way
longer to build the plane since that one hasn't been built before. However as
more and more are built, the whole process gets more and more efficient making
each one cheaper (aka the learning curve). It is generally measured by
comparing the costs on unit N with those of 2N, and for airliners is around
75-85% (eg unit 200 should cost 75-85% of unit 100). Javier has two excellents
posts - a more detailed explanation and how it happens in aerospace, and then
deriving the 787 curve based on public information:

[http://theblogbyjavier.com/2014/03/03/learning-
curves/](http://theblogbyjavier.com/2014/03/03/learning-curves/)

[http://theblogbyjavier.com/tag/learning-
curve/](http://theblogbyjavier.com/tag/learning-curve/)

The manufacturers also give steep discounts on the first few planes off the
assembly line, as they are less likely to meet the promised specs, probably
overweight, and more prone to teething issues. Consequently the most expensive
ones to make get lower revenues too. But then the manufacturer expects to make
it up in volume over time.

The 787 programme has all the above applying, but also was done differently.
In the late 90s McDonnell Douglas was bought by Boeing. The inside joke is
that McDonnell actually bought Boeing, using Boeing's own money. Some of the
senior management at Boeing for commercial aircraft was also taken over by
McDonnell people. McDonnell was well known for financial engineering, somewhat
as a side effect of not having much money,

They decided that the 787 would be revolutionary on many fronts at the same
time. That includes extensive use of composites, all electric architecture
(current planes use a lot of hydraulics and bleed air), new engines, and
advanced systems. They also farmed out much of the design and manufacturing
work (far more than normal for previous airliner programmes).

In theory that meant spreading of the risk, and that Boeing would slap the
planes together, collect the money and get rich. The optimism meant pricing
them really cheap which led to a huge number of orders, as airlines couldn't
say no to such a bargain and specs.

In practise Boeing hadn't discovered new magic, risks hurt everyone,
individual manufacturers had problems, different partners had different
priorities, things didn't run as cohesively as expected, Boeing had to spend
lots of money rectifying issues including buying some suppliers, assembly was
problematic and the list goes on.

The consequence is that the overall expenditures and initial far too low
pricing, combined with the actual learning curve means they are unlikely to
ever make an overall profit.

~~~
ADent
They also expected the 787 to be snapped together and spend only 3 days in
assembly. Ooops.

I assume the pricing curve was based on this quick assembly and why we are 300
units in and still losing money on each unit.

------
chollida1
Aircraft sales is a really weird industry. It's gone the way of the AAA video
game in the sense that its so expensive to build one now that there are only a
select few companies that can do so.

And going forward companies will go for iteration rather than new designs as
each new design is almost a literal bet the company proposition. Just look at
the 32 billion the article asserts that Boeing has already spent on the dream
liner!!

There was a great article that gets posted here every now and then called
something like why can't we fly any faster and it turns out the answer is that
consumer's don't want to pay for it. I think something similar is happening
with air craft design in the sense that we're seeing less improvement because
no one, in terms of passengers, wants to pay for the cost involved to really
inovate.

As to a comment about space travel/tourism eating Boeing's lunch, I think
that's a pretty uniformed comment. How many private company has more space
flight knowledge, patents, or design experience than Boeing?

There aren't many and I don't think there will be that many due to the costs
involved. I mean Boeing has spent 32 Billion on the dream liner, what is Space
X's valuation?

If I had to guess, the future of air craft design is increased partnership,
not more companies.

~~~
dogma1138
There can be quite a large amount of innovation even in iterating on existing
designs.

Boeing is using new materials, and the new high-bypass engines for the 787 and
747-8 are quite a technological achievement.

People also forget that Boeing like many other aerospace companies rely on
government funding and military contracts.

Many of Boeing's commercial aircraft either started as military designs for
long range bombers and cargo aircraft or were a sister project of one.

Airbus was pretty much a hail mary effort by Europe to revive their aerospace
industry, the UK, France, Italy and Germany have dumped billions of tax payer
money to get Airbus off the ground. Airbus got preferential treatment in the
EU market, and even it relies quite heavily on it's military wing for a large
part of their profits.

As far as individual programs go the 787 like the 777 doesn't have military
variants at this point, the "newest" Boeing aircraft with military versions is
the 767 (there are plenty of 737 tankers and CIC/AW aircraft out there, and
even 707's) and it does't look like they will ever receive one.

But it's also very hard to estimate the worth of a program, the 787 might not
break even in the books, but the technology, experience, patents and
intellectual property that came out of that program may very well be highly
profitable.

~~~
blisterpeanuts
+1 for pointing out that Boeing has significant revenue from military
contracts. The Seattle Times analysis seems not to take that into account, but
rather focuses on purely commercial aspects.

New passenger planes are extraordinarily expensive to develop, and only 2-3
corporations in the entire world are capable of it.

Boeing traditionally has introduced new models with advantageous features,
then continued selling them for decades, gradually rolling out slightly
modernized versions that the airlines can purchase to refresh their fleets
without completely retooling to support a newer model (retraining mechanics,
purchasing new parts, etc.).

The article argues that Boeing will take ~5 years to break even. That actually
sounds pretty good. I would give them 10-15 years.

The fact that only one Boeing person seems to have been consulted for this
article suggests that it's mostly speculation by outsiders and former
insiders, and not a realistic analysis based on comprehensive data. If
Boeing's betting on military contracts to keep it afloat while the more
profitable 787-9 and -10 models come online, so what? Sounds like a reasonable
thing for this kind of manufacturer.

~~~
dogma1138
And those designs live for quite a long time, the brand new USAF tankers which
will come into service in 2017 are based on the 767.

[https://en.wikipedia.org/wiki/Boeing_KC-46_Pegasus](https://en.wikipedia.org/wiki/Boeing_KC-46_Pegasus)

Those tankers however will use new technologies from other projects like the
cockpit displays and avionics from the 787.

And these ones will slowly replace the USAF current tankers the KC-135 which
are based on the Boeing 367 (which turned into the 707 for it's commercial
release) which has been flying since the mid 50's.

People underestimate the life span of most aircraft designs, at least of the
good ones if the design is superior it's practically timeless.

The US is still building new U-2's because there's nothing comparable to it
still.

~~~
rory096
> The US is still building new U-2's because there's nothing comparable to it
> still.

Last built in 1989 I'm afraid, though they're still pushing off retirement
because drones haven't _quite_ taken over the game yet.

~~~
Phlarp
What can a U2 do that a drone can't do?

~~~
dogma1138
The U2 carries pretty much every airborne sensor we've built so far, when it
comes to ISR roles the U2 can fly much higher and further than any drone, and
give both line of sight and over the horizon coverage which most drones cant.
The Global Hawk can almost match the U2 in altitude 60,000 feet vs 70,000 but
it can carry only a fraction of the sensors that the U2 can, and it also is
currently more expensive than the U2.

If it retires I hope that the US will preserve some for private sale, I would
rather fly in a U2 at this point than than on the spaceship one, there's just
something about a minimalistic design from the dawn of the "atomic age" which
is still relevant today that can bring you to 1/8th of the way to low earth
orbit that is inspiring.

------
jpatokal
The same question is being asked about the Airbus A380, and the A350 is also
way over budget and behind schedule. I suspect it's a matter of time until a
Chinese manufacturer ramps up and stomps all over the current airplane market
with cheap yet perfectly serviceable planes.

Anecdote: A few years back, I flew on a Xian MA60, a perfectly serviceable
commuter turboprop that's technically a descendant of the venerable Soviet
Antonov An-24 but in practice competes agains the ATR-42. A small detail that
weirded me out is how the garish livery on the seats inside looks exactly like
the one used in Chinese buses... which have also essentially obliterated
Western companies' bus sales in large swathes of Asia.

[http://www.patokallio.name/photo/travel/Laos/LaoAirlines/Lao...](http://www.patokallio.name/photo/travel/Laos/LaoAirlines/LaoAirlines_MA60_Exterior.JPG)

[http://www.patokallio.name/photo/travel/Laos/LaoAirlines/Lao...](http://www.patokallio.name/photo/travel/Laos/LaoAirlines/LaoAirlines_MA60_Interior.JPG)

The MA60's current customer list is a wacky but wide collection of obscure
outfits (Air Burundi, Lao Airlines, Boliviana...):

[https://en.wikipedia.org/wiki/Xian_MA60#Customer_summary](https://en.wikipedia.org/wiki/Xian_MA60#Customer_summary)

So what's the market going to look like when planes like the 737 clone Comac
C919 start ramping up?

[https://en.wikipedia.org/wiki/Comac_C919](https://en.wikipedia.org/wiki/Comac_C919)

~~~
notahacker
I'm not sure that Airbus and Boeing have much to fear from the C919, though
I'm sure it'll sell well enough in China.

Aircraft purchasers are conservative, and they're much more concerned about
operating costs, reliability, availability of third party maintenance and
type-rated pilots and residual values than they are about acquisition costs,
with the 737 and A320 enjoying massive brand and network effects. You only
have to look at the struggles of the Sukhoi Superjet to find buyers outside
Russia for what is reportedly a very decent modern aircraft. It's also a
racing certainty that COMAC will suffer similar if not worse problems with
delays and complications to the programme. Launching all-new aircraft is hard
even when you have substantial expertise in doing it.

The A380 is failing for a different reason: there just isn't the level of
demand for an aircraft of that size to make the programme viable.

~~~
ubernostrum
Another important point is how many airlines have standardized their narrow-
body fleets. Maintaining a single type/family is simpler and often cheaper
than having trained crew, mechanics and parts available for multiple types of
aircraft.

In the US, for example, Southwest and (mainline) Alaska are both pure-737
fleets. Virgin America, Frontier and Spirit are all A320-family, with JetBlue
operating only A320 family and the E190. US Airways, prior to its merger with
American, was moving toward an all-A320-family narrow-body fleet and was
nearly there (only a few 757s were left, and US Airways was looking to replace
them with a long-range variant of the A321 once it became available).

So a new narrow-body type -- whether it's COMAC's C919 or Bombardier's
C-Series -- probably will never make it into those carriers' fleets, which in
turn makes it that much harder to break into the market.

Added to that, the existing manufacturers (Airbus and Boeing) are established
enough and have the resources to be able to offer significant discounts to an
airline which commits to a large fleet overhaul. New entrants likely are not
financially able to do that, putting them at more of a disadvantage in trying
to place their first aircraft with the airlines.

~~~
caf
The C-Series isn't supposed to compete with the B737 or A320 - it's a smaller
aircraft, intended to replace aging B717s and the like.

~~~
ubernostrum
In terms of passenger capacity and range, the CS300 falls somewhere in between
the current 737-700 and 737-800, or current A319 and A320.

The CS100 is more of a 717/E-190 competitor, but the CS300 is absolutely aimed
at the types of roles 737s and A319s/A320s are currently deployed in.

------
bbanyc
I've heard a theory that commercial aviation as a whole has always been
unprofitable. Look at how many airlines have gone bankrupt since deregulation
in the US and the removal of flag-carrier subsidies in Europe. Boeing and
Airbus are both indirectly subsidized by their respective governments, with
each claiming the other's subsidies are somehow unfair.

~~~
sien
The worst sort of business is one that grows rapidly, requires significant
capital to engender the growth, and then earns little or no money. Think
airlines. Here a durable competitive advantage has proven elusive ever since
the days of the Wright Brothers. Indeed, if a farsighted capitalist had been
present at Kitty Hawk, he would have done his successors a huge favor by
shooting Orville down.

— Warren Buffett, annual letter to Berkshire Hathaway shareholders, February
2008.

~~~
bbanyc
This says as much about capitalism as it does about aviation.

------
skybrian
A big unknown is how long it will be before they have to design a replacement
for the 787. What are the error bars on that? It's not something analysts (or
anyone) can easily predict.

Given the enormous design costs and how close a 787 is to optimal efficiency,
perhaps they will be selling them as long as the 737?

------
bryanlarsen
tldr: will it show a profit? No. Does it matter? No, it's a sunk cost.

------
Shivetya
I figure it as more of an investment in technology to benefit future designs.
So while that one model may not show a profit lessons learned can be applied
going forward.

------
notatoad
>wikipedia: The airliner's maiden flight took place on December 15, 2009, and
completed flight testing in mid-2011.

>this article: Almost a dozen years after the jet was launched, however, the
prospect of the 787 ever making an overall profit for Boeing remains doubtful

it actually entered service almost exactly four years ago, i'm not sure where
they get 12 years from. It seems a little early to be saying it never will
reach a profit.

~~~
Riegerb
In the commercial airplane world 'launching' an airplane just means it can be
sold to customers, not that the airplane is done. Boeing adheres to a 'gated'
design process, where one of the earlier gates is the 'launch' of the aircraft
and the last is entry into service. The airplane is designed far enough to
close the business case and then can be 'launched'.

------
Animats
Historically, in the 20th century, Boeing's only profitable planes were the
727 and the 747. See "21st Century Jet", which is about the 777. (The book,
not the PBS special.)

------
us0r
Al Jazeera documentary on the 787 I found interesting:

[https://www.youtube.com/watch?v=rvkEpstd9os](https://www.youtube.com/watch?v=rvkEpstd9os)

------
frozenport
Can we consider it R&D?

------
dkarapetyan
So what? Boeing isn't going anywhere. Why are these business people trying to
figure out when and how Boeing is going to make a profit. At this point Boeing
is basically a government institution. It doesn't need to run like a business
so applying business principles to it makes no sense.

~~~
detaro
"Not going anywhere" != "a good investment", and the second part is something
"these business people" probably care a lot about.

~~~
dkarapetyan
Sounds like a self-inflicted mental anguish to me then.

------
JacobAldridge
With the development of space travel / tourism technologies, and the holy
grail of Sydney->London in 2 hours continuing to be sought (directly or
indirectly) by Virgin Galactica, Space X etc, there's a good chance Boeing and
Airbus will go the way of so many car manufacturers.

If they struggle this long to warrant the 787 investment, how hard will it be
(and what impact will it have on share prices, noting they currently view most
of the 787 investment as sunk cost) to make the next step-change in the
industry? Especially if by then there may not be a 30 year window to pay for
it.

They're not going anywhere soon, so maybe it won't happen until the back end
of my life. But I imagine people thinking with nostalgia about companies like
Boeing and watching movies on 12 hour flights that were only intermediate
legs, in the same way we talk about car brands and childhood experiences -
bucket seats, no air-conditioning, driving down the highway towards the beach
for summer.

~~~
notahacker
The struggle to recoup the investment in comparatively minor innovations in
the 787 is a pretty good indication of why 2 hour commercial flights to Sydney
are likely to remain a pipe dream.

~~~
ubernostrum
Yeah, the thing limiting supersonic/hypersonic/etc. passenger travel is not
the technology, it's the economics. There just aren't enough passengers
willing to pay the extremely high fares to make fast inter-continental service
work.

Also the precedent of Concorde is not particularly encouraging: building a
supersonic airliner required sacrifices of cabin space and comfort which
didn't align well with the preferences of the passengers wealthy enough to
afford the fare, so given the choice between paying 5x the subsonic fare for
quick but cramped, or 2x-3x for subsonic but luxurious, those passengers chose
subsonic.

The amount of discomfort that seems inevitable for the sub-orbital
trajectories (i.e., you get to know what it feels like to be an astronaut
during launch, shaking, g-forces and all) that seem unavoidable for fast
halfway-around-the-world-in-a-couple-hours service probably would sink it
economically as anything but an occasional jaunt for rich tourists who want to
say they rode it.

~~~
lotharbot
An additional issue with supersonic is it doesn't save you time waiting in
line at the airport or driving to and from. So the net comparison isn't 3.5
hours vs 7 hours of flight time (Concorde vs 747, New York to London); it's
more like 6.5 hours vs 10 hours of total cab + airport + flight time. Either
way, you're probably tired from the trip and won't be particularly productive,
so why not pay less money for a more comfortable seat in a bigger, slower jet?

(While I never flew Concorde, I did babysit one in a museum. There isn't a
single seat that isn't cramped -- even in the cockpit.)

