Now that the Boeing 787 is returning to service and deliveries have re-started, it’s only natural to wonder what the long-term impact will be on the manufacturer.
The answer is, not much.
The grounding, of course, cost Boeing in terms of research, design, development and installation of the fix. Estimates from Wall Street conclude this may be about $600m. Boeing, of course, won’t confirm this figure and in any event said on the most recent earnings call that the cost was easily absorbed into its R&D budget. The Federal Aviation Administration estimated that installing the fix is about $465,000 per airplane.
Compensation to customers, both those who had received the 50 787s prior to grounding, and those whose deliveries have been delayed, is another cost to Boeing. The company said it is not contractually obligated to pay any compensation, but Japan Air Lines, Qatar Airways, United Airlines and others already indicated publicly they intend to seek it.
Since the grounding was due to defect—the root cause of which remains unknown—we believe Boeing will do the right thing and provide compensation in some form.
While some in the media like to press home the question of financial impact on Boeing, we like to point out that the company weathered four years of delays at an estimated cost of $22bn. If Boeing could withstand this impact, what’s 3 ½ months and perhaps $1bn? Although we hesitate to characterize $1bn (if this is close to the number) as pocket change, given Boeing’s size, cash position and cash flow, this is hardly a cost that will make or break the company.
What about the lost revenue from the deliveries?
This is easy. The revenue is simply shifted from the first part of the year to the second half, because Boeing anticipates catching up all scheduled deliveries and handing these airplanes over before the end of the year. Had the grounding occurred in the fourth quarter instead of the first, the revenue would have slipped to next year.
The Boeing and 787 brands certainly took a hit and it will be a while before this damage is erased. But Boeing and the customers have made a good start. The effort will get a further boost when the 787-10 is launched with solid orders from blue-chip customers. We think by the end of this year, absent any other “event,” the 787 will be back in good graces with the flying public and certainly the customers.
Assembly begins this year on the 787-9, which will be another milestone in the brand recovery. By all accounts, the 9 will be a much better airplane than the 8, incorporating lessons learned, design improvements and benefitting from the general proposition that a stretch is always a more economical aircraft than the short version.
Production is ramping up smoothly toward 10 per month by the end of the year. This is another sign Boeing can point to that the program is back on track.
By next year, the aviation industry can get back to normal: Boeing vs Airbus and the fierce rivalry—and the news coverage—this enjoys.
There may not be a big difference between a 23bn blunder a 22bn blunder when viewed from cloud-level. But on the ground this means another few thousand families loosing their income in Boeing’s strive to get the bottom line back to plan. 1bn is the equivalent of roughly 8,000 man years in engineering!
On what facts do you base your assessment that the ramp-up to 10 a month is or will be smooth?