Boeing 787: a dream becoming reality & its road ahead

With Chicago-based aircraft manufacturer Boeing securing the type certificate and its production certificate 700 from the US Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA) certification, the first delivery to the revolutionary airplane’s launch customer, Japan’s All Nippon Airways (ANA), is finally in sight following a bumpy ride in the 787 Dreamliner’s production system which saw its global supply chain struggled on build quality and parts shortages as well as a more than 4,700 hours flight test programme that saw its test examples from being struck by lightning to suffering an in-flight fire caused by a foreign object debris (FOD) in the P100 electrical panel that grounded the entire flight test fleet last November.

“Certification is a milestone that validates what we have promised the world since we started talking about this airplane. This airplane embodies the hopes and dreams of everyone fortunate enough to work on it. Their dreams are now coming true,” Boeing Commercial Airplanes (BCA) chief executive Jim Albaugh said.

The first delivery of the Boeing 787 Dreamliner will take place on 26th September, with the contractual delivery taking place a day before and after which the airplane will arrive in the airline’s headquarters in Tokyo on 28th September.

The first ANA Boeing 787 Dreamliner will then make the debut of the composite airliner’s commercial operation on a chartered Tokyo Narita to Hong Kong route on 26th October, with domestic flights to Okayama and Hiroshima starting in November, in addition to international flights from Tokyo Haneda International Airport to Beijing and Tokyo Haneda to Frankfurt starting in December and January 2012, respectively.

Image Courtesy of Boeing

“The airplane is ready. ANA is ready. And, Boeing is ready,” Albaugh conceded, adding “this airplane begins a new chapter in aviation history”.

While achieving certification is undoubtedly a significant milestone for the game-changing airplane and investors may be partly relieved by this accomplishment which opens the door for first delivery, there is still a long road ahead of it, with challenging production ramp-up to 10 per month by the end of 2013 and the stretched variant 787-9’s entry into service (EIS) at or around the same time likely to keep the programme to be continuously under close scrutiny by investors and Wall Street aerospace analysts alike.

For instance, the early built examples on which rework took longer than expected to complete led to a reduction in the the combined 747-8 and 787 deliveries that Boeing expects to deliver from 25-40 to 25-30 with the balance heavily weighed towards the 747-8F freighters.

According to Boeing’s latest Z24 production plan, only 7 Dreamliner deliveries are scheduled for 2011, with LN7, 8 and 9 being the only examples in the first 20 examples, two sources confirm, citing heavy rework taking “significantly longer than anticipated” to complete.

Coupled with the rippling effect that the significant amount of rework has on the production ramp-up, a target by the end of 2013 which has not changed since the 787’s last couple of delays and Boeing’s president and chief executive Jim McNerney previously cautioned that margins on the production ramp-up have largely run out, a further delay in the production ramp-up and the 787-9’s entry into service (EIS) in late 2013 seems inevitable (“Boeing 787 makes progress despite delay risks“, 1st Aug, 11).

Aspire Aviation‘s source at the airframer says the 787 production rate will be ramped up to 3 in 2011 as Boeing revealed and then reaching 5 by mid-2012 and 7 by early 2013 before being raised to its ultimate target of 10 per month by the end of 2013. The margin for error, the source warned, is “virtually non-existent” in the production ramp-up process and that these targets are subject to change depending on the latest developments.

The entry into service (EIS) of the 787-9 is expected to have a delay of 3 to 6 months to the second-quarter of 2014 solely owing to the production ramp-up delay, which Aspire Aviation believes will be announced as early as Boeing’s third-quarter 2011 earnings call following the stretched variant’s critical programme review.

Furthermore, any longer than expected 787-9 entry into service (EIS) delay could have some rippling effect on the proposed 320-seat 787-10X which will feature improved Rolls-Royce Trent 1000 and General Electric GEnx-1B engines and have superb economics of a range of 7,000 nm while burning 20% less fuel than an A330-300 with an operating cost that Boeing’s vice president (VP) of business development and strategic integration Nicole Piasecki characterised as 10% lower than the A350-900 and 5% lower than the A350-1000.

With the 787-9 development progressing well and lots of the weight reduction opportunities being successfully realised, the 787-10X could very well incorporate any lesson learned on its sibling and further improve its payload/range capabilities. As the Airbus A330-300 ‘killer’ would have a good market acceptance and a very strong market appeal with potential customers such as Dubai-based Emirates Airline, International Consolidated Airlines Group (IAG)’s British Airways and Iberia subsidiaries.

Therefore a smooth 787 production ramp-up to 10 per month and the 787-9’s entry into service (EIS) with a revised target of mid-2014 would be vital in securing the authority to offer (ATO), which Aspire Aviation‘s source at the world’s second-largest aircraft manufacturer says will be in 2012, for the 787-10X whose foundation has already been laid and it bodes well for a 2016 EIS as most of the stretching development tasks have already been completed on the -9 and any additional engineering work and drawing would be minimal with the 787 programme’s steadily declining research and development (R&D) and the progressively freed up engineering resources would help.

Meanwhile, another significant challenge facing the Chicago-based airframer is the profitability of the 787 programme, whose accounting block is scheduled to be released in the company’s third-quarter 2011 earnings call. Initial accounting block affects the number of units on which the deferred production costs will be shared, thereby impacting the overall programme’s profit margin.

However, despite Boeing executives asserting that the company has control of the production cost and that the 787 programme is not in a forward-loss position, the aerospace analysts community continues to be sceptical of its ability to achieve profitability.

“After more than three years of delays, first delivery is about to take place (likely in September). While this will be an important positive step, we see challenges ahead as being as large as the challenges to date, with the need to rapidly ramp up production and deliver attractive margins,” New York-based Bernstein Research said in a 16th August note to its clients.

“It appears unlikely to us that Boeing will deliver a positive programme gross margin over an initial accounting block of 1,000 airplanes, if production inventory results so far can serve as a guide. We have evaluated scenarios varying price, baseline cost (cost of 45th airplane), and learning curve rates. We apply parameters that we see as optimistic, including average pre-escalated pricing of $120 million (50/50 787-8 /787-9 mix) and an 82.5% learning curve. Under these conditions, Boeing would need to lower the baseline cost of the airplane (e.g. cost of unit 45) significantly below our estimates to reach a positive gross margin over the block. We assume a slower production ramp than Boeing’s plan (10/month rate reached in late 2014, rather than late 2013), but this has relatively little impact on the result.”

Image Courtesy of Seattle Post-Intelligencer

In assuming the base cost of the 45th example, the first 787 to be delivered to the world’s largest airline United Continental Holdings’ United Airlines, to be US$164 million without engines, the 787 Dreamliner programme would have a -13.8% profit margin whereas a 10% lower cost at US$148 million will still result in a -6.2% profit margin.

A noteworthy point is, Bernstein Research has assumed a 9-month delay in both the 787 production ramp-up to 10 per month and the 787-9’s entry into service (EIS) to the third-quarter of 2014.

Notwithstanding these significant challenges, Bernstein noted that the 787 programme is nevertheless expected to deliver similar unit profit margin to those seen on the highly lucrative 777, of which the 777-300ER and the 777F freighter in particular, have become the cash cow of the company in terms of profitability.

“On the positive side, by the 1,000th unit, Boeing should be delivering unit gross margins that are reasonably close to those on the 777 today. From a unit margin or annual cash flow standpoint, we expect the programme to turn positive around the 2015-16 timeframe. Near that point, reported gross margins should rise as the accounting block is extended and based more on profitable deliveries in the future, rather than delivery of earlier negative unit margin airplanes. There are also events later in the decade that could add to margins. Production rates could be taken up above 11.5/month (our model), which we see as eventually likely – but, dependent on economic conditions.”

Moreover, the amount of travelled work arriving in Everett continues to dwindle and the average completion rate of new arriving parts is now close to 90%, if not more and is steadily improving, Aspire Aviation‘s sources say. And the learning curve of the programme seemingly exceeds those projected by the Wall Street consensus, the same sources say, without elaborating the extent to which the progress has exceeded the aerospace analysts’ estimates.

Further taking into account the better pricing as additional customers are expected to switch to the 787-9 from the baseline -8 variant, as well as the better pricing brought by the proposed 787-10X, the significant momentum seen on the programme lately is unquestionably in the right direction and it remains to be seen if the recent string of improvements and progresses can be further stepped up and enable Boeing to dispel the risks of further delay on the ambitious 787 production ramp-up and the 787-9’s entry into service (EIS).

“So is it a challenging ramp? Yes. Do we think we can do it? Yes. And it is because we analysed the data and tried to understand the amount of work and project we can make it,” Boeing chief executive Jim McNerney was quoted back then.

Last but not least, not only is “this airplane begins a new chapter in aviation history” as characterised by Boeing Commercial Airplanes (BCA)’s chief executive Jim Albaugh, it also opens a new chapter in the programme history as well, with the recent string of significant momentum has to be stepped up in order to achieve the ambitious 787 production ramp-up to 10 per month and the 787-9’s entry into service (EIS) by the end of 2013.

The infamous British leader Winston Churchill summarised the 787’s FAA certification and its September 26th first delivery the best:

“Now this is not the end.  It is even not the beginning of the end. But it is, perhaps, the end of the beginning.”

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