There are signs that Boeing has been making significant progress with 787 production and deliveries.  We took a look at publicly available data and extrapolated that data to develop the following chart comparing orders and production rates.  Examining the order history provides a few years of data on which to base projections.  If Boeing continues to sell the 787 at or near historic rates, we see total program orders approaching 1,800, including all three models, by 2020.  started slowly, but have accelerated.  Assuming that Boeing’s production plan for the two factories can be met, Boeing will begin to close the large gap between orders and as we approach the end of the decade, and still have a significant backlog.

One might consider the production acceleration to be too rapid, but bear in mind that Boeing needs to recover its considerable investment in the development of the 787, which includes horrendous cost overruns.  The incentive to produce aircraft faster generates cash flow even as they are in a dog-fight with Airbus for every future sale in the segment.   Delivery slot availability is a powerful marketing tool.  If sales do not reach or exceed the blue dashed line, Boeing can dial down production as needed.

We anticipate -9 and -10 sales to accelerate, with fewer orders for the -8 and believe sales will be within 10-15% of the curve.  The key to whether it will be above or below the line is how Airbus competes with the A330neo and prices the aircraft.  Airbus has made it clear the A330neo’s role is to spoil 787-8 sales.   The incentive to push 168 787s out the factory per year is compelling – as there is nothing as comforting as positive cash flow – but sales must be made at profitable prices. Boeing has not yet amortized the development costs of the 787, as Airbus has with the A330, with modest neo development costs. As a result, Airbus has tremendous flexibility in discounting the A330neo to price levels that dramatically reduce Boeing’s margins. Pricing strategies will drive orders one direction or the other in this segment.

2014-11-07_8-14-00Production costs are coming down

With any new aircraft, there is a significant learning curve. With the 787, introducing new technologies and new manufacturing techniques, that curve was steeper than for typical new aircraft. The initial impact of significant traveled work and delays likely resulted in the first 787 being sold at big losses. But Boeing appears to be working its way down the learning curve on 787 production. The following chart illustrates how the number of days in final assembly have declined.

2014-11-07_8-21-20

Based on the data we have, the 787s built in Charleston this year are down to an average of 56 days while Everett takes about 40 days in final assembly.    Company wide, the 787 in 2014, on average, needed 45 days in final assembly.  By comparison, a takes 49 days from start to being pushed out the factory door.

We anticipate 787 production times to continue improving and production to accelerate according to Boeing’s plan, in particular Charleston catching up with Everett.  The supply chain is becoming less stressed and now has a rhythm.  Boeing’s plan to increase production appears achievable.

Moreover, Boeing wants the line stable to ensure they can keep moving towards increasing unit profitability.  The quicker they deliver 787s the better, because the company will soon need to fund the -X implementation as well as a 737/757 replacements to combat the increasing success of the A321neo against the over-matched and -9MAX.

The Bottom Line

The trauma of the 787 entry into service and initial production glitches appear to be coming to an end. While much later than planned, Boeing’s operational efficiency in producing the 787 appears to have reached stability in Everett at efficient levels, and Charleston, while not there yet, is rapidly moving down the learning curve.

We expect, once Charleston equals the 40 days Everett production rate, that the 787 program will be stable and profitable. While this is five years behind schedule and resulted in delaying a new narrow-body that would have improved competitive position against Airbus, it is welcome relief in Seattle.

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