Moon of Alabama Brecht quote
October 26, 2011

Boeing's 787 Balance Sheet Scam

Boeing profit lifted by commercial, defense sales says Reuters. But that isn't true. Boeing was only profitable by using an accounting trick that may risk its long term survival.

Boeing's new 787 airliner has sold well as discount pricing was introduced even before the first machine was flying. But it turned out that the jet had construction problems and was first late, then later and then even later.  The first few dozens of those machines, three years after they were supposed to be flying, are still sitting on the tarmac in Seattle and will have to be reworked.

It is normal to make losses on the first few hundred machines of a new commercial jet model. The development costs and new tools have to be accounted for and their cost usually gets spread out over the first few hundred sales of a new model. These sales thereby to not produce a large profit. But every additional machine hopefully sold after that will not have to carry the burden of being accounted against the then paid off development and tool costs. It will thereby likely be very profitable and it will provide cash for the development of future products.

The usual production quantity used for such amortization calculation of commercial airplanes is 300-400. As the Aviation Week Flightblogger points out that 300-400 number was what the 1998 Boeing Annual Report argued and was, so far, used in every Boeing program even when the total sales number was reasonably expected to be much higher.

But for the 787 and this years "profit" Boeing used a much different number. From the Reuters report:

Boeing said on Wednesday it would calculate the profitability of the program based on 1,100 planes.

Boeing has some 800 orders for the 787 plane on its books though some of those may get canceled. The production rate is supposed to be 10 machines per month but only starting in 2013, and likely later, onwards. The new calculation then spreads out the amortization costs over more that the next ten years.

What will happen when by then a competitor - Airbus, the Chinese, Russians, Brazil or Japan - come up with a competitive product? What will happen if a new global economy slump leads to more cancellations of orders? What happens if the plane turns out to burn more fuel than expected or, being the first model with major carbon-fiber structures, turns out to have less longevity than expected?

Usual accounting would limit those future balance sheet risks by putting all the development and tool costs onto the first batches of the model. Stretching those costs over a much larger number of planes, as Boeing does now, creates short term book profits but puts serious risks to the future survival of the company.

Using the established calculation Boeing would have had to report a big loss for this quarter and this and probably the next year. By changing the amortization base that loss was turned into a book profit.

The CEO and the top management of the company get their bonuses paid for the short range balance sheet results. Putting the amortization costs of the product development onto a larger, probably unrealistic, number of sales will increase their short term personal income. But it does risk the companies long term survival.

Creative destruction, in the neoliberal sense, at its best.

Posted by b on October 26, 2011 at 19:13 UTC | Permalink


Boeing is too big to fail. Don't worry. Just look at GM. If you're an investor, especially a bondholder, you're covered. There's no downside. Employees and their pensions and healthcare, well....that's another matter.

Posted by: Morocco Bama | Oct 26 2011 20:13 utc | 1

Sorry for Daily Mail Link

He revealed that the airline is in talks with US, Chinese and Russian plane manufacturers over the purchase of 200 to 300 new aircraft.

I wonder if O'Leary's announcement is coinciding with the 787 first commercial flight? After all he has a lot of cash.

Ryanair's balance sheet remains one of the strongest in the industry with €3bn in cash

His fleet is all Boeing 738's at the moment, getting him on board might give him a very good price, smart fucker, but I don't fly Ryanair.

Posted by: Cloned Poster | Oct 26 2011 20:37 utc | 2

Boeing tries to outsource production of Dreamliner's parts to all ends of the earth, with final assembly occurring in US. The result is tons of technical problems rattling production all over, delaying things for past 3 years. Some airlines, such as American Airlines and Virgin, don't expect to get the plane until 2013.

Idiot execs should realize designing and building planes is an arduous task; they shouldn't complicate matters by adding more wheels to the machine. In their quest for short-term profits, they instead footed the company billions of dollars in bills.

Edwards Demings listed fixation on short-term profits as one of his 7 deadly sins of business. Toyota and Honda did well listening to him.

Posted by: Cynthia | Oct 26 2011 21:38 utc | 3

This is the foreseeable future of Aviation. Air Travel for the Masses was a window of fleeting luxury that is quickly Antibiotics. Unmanned Aircraft to patrol from the skies and reign terror on the increasingly unruly Masses....well, that window is now just opening.

Posted by: Morocco Bama | Oct 26 2011 22:23 utc | 4

Wartime Contracting Commission Classifies Findings for Next 20 Years

Although the Commission on Wartime Contracting was created to expose waste and abuse, their records are sealed until 2031
by John Glaser, October 25, 2011

The Commission on Wartime Contracting in Iraq and Afghanistan has decided to not reveal its full findings and materials to the public for another two decades, despite its stated purposes of investigating and exposing government waste.

The Commission has been at work for three years, revealing that up to $60 billion in US war funds were lost due to waste, fraud, and abuse. One report concluded that “criminal behavior and blatant corruption” were directly responsible for much of the waste in the expensive “reconstruction”projects in Iraq and Afghanistan since 2002. It also found that one in every six contracting and grant dollars spent in Iraq and Afghanistan has been wasted.

But the Commission now says it won’t allow its full records to be opened to the public at the National Archives until 2031, because, according to one official, some of the documents contain “sensitive information.” Evidence of government theft, profligacy, criminality, and waste is indeed sensitive information. That revealing these things was the purpose of the Commission seems lost on those deciding to hide important information from Americans.

Throughout United States history, that information which has been withheld from the public has primarily been withheld to prevent voters from having the chance to make informed decisions about their political leaders. The Obama administration came in promising unprecedented transparency in government, but this is yet another example of keeping the workings of government secret so as to insulate Washington bureaucrats from accountability.

Posted by: Uncle $cam | Oct 26 2011 23:58 utc | 5

For someone knowledgeable about corporate finances it's probably possible to put a figure on Boeing's looming dilemna, if any. There's are a few unmentioned factors in this narrative.

The first is Boeing's cash reserves, which I understood were so large, circa ten years ago, that Boeing had begun to think of itself as some kind of self-funding venture capital outfit with the potential to outsource a significant proportion of its manufacturing and act as a designer-cum-coordinator. I believe the 787 is the inaugural test for this change of culture.
If Boeing is a public corporation then one imagines that its true financial status can be gleaned from its (public record) Annual Reports to the stock market and shareholders.
A couple of things to look for would be the costs associated with two abandoned projects - the competitor to Airbus's Super Jumbo and the Sonic Cruiser (or whatever their Mach 0.9 airliner was called). If no prototypes were built, then the costs probably wouldn't have been overwhelming.

The second factor is income from Boeing's sales of weapons and aircraft to the M-I Complex. If someone told me Boeing loses money on its weapons sales I'd be 'skeptical' - to put it mildly.

A third factor would be penalty payments for late delivery. A year or two ago Qantas only made a profit because of tens of millions of Boeing cash forked out as penalty payments for late delivery. It is usually the case that, in business, customers would rather receive timely delivery than penalty payments. It seems highly unlikely that Qantas is the only airline receiving such payments.

If one believes Boeing's 787 blurb then it has the potential to dominate the civil airliner market for a couple of decades. But Boeing's apparent silence on the delay suggest a significant hiccup somewhere along the path to mass production.

Posted by: Hoarsewhisperer | Oct 27 2011 2:31 utc | 6

I find it hard to believe that Boeing has a monumental 787 stuff-up on it's hands. It is more likely, imo, that its books are so full of orders for drones and other such paraphernalia that it's more profitable to put the 787 on the back burner for a few years (in these uncertain times) and cough up some loose change in penalties.

Posted by: Hoarsewhisperer | Oct 27 2011 3:18 utc | 7

@6, there's one other possibility, and that is Boeing knows the future for commercial air travel is grim, and so they are stalling on delivery and helping to subsidize the soon to be defunct airlines with penalty payments until the day of reckoning for many of these carriers. Military Applications will be the lion's share of their business in the next 10 to 20 years, comprising upwards of 80% of it. Air Travel will increasingly be relegated to a smaller and smaller percentage of the total population, so there will much less demand for commercial aircraft.

Boeing is very much a pert of the MIC, so it will not fail. It is a strategic instrument of the future Global Security Network. It will not fail.

Posted by: Morocco Bama | Oct 27 2011 11:39 utc | 8

"Creative destruction, in the neoliberal sense, at its best." -- "b"

You can say that again. (and again)

Posted by: Joseph | Oct 27 2011 11:55 utc | 9

@ 8
there's one other possibility,..

There are umpteen possibilities. Here's another one I like...

Announcing a lift in the payback period from 400 to 1100 units is probably more a (smart) marketing ploy than a scam. It will help persuade the 800+ customers-in-waiting that the 787 will be more affordable than would normally be the case. If it boosts confidence/optimism it will preserve the customer list.

800 orders in hand is a pretty safe place from which to push the payback point out to 1100 units. If the ploy works it will greatly reduce the risk of competitor encroachment on that market niche.
My recollection is that the 787 promised vastly reduced costs for servicing, routine maintenance, major airframe overhaul, and fuel per passenger mile, and the airlines are clearly falling over themselves to buy them. Some canceled and deferred orders with other manufacturers to get on the 787 waiting list.

Posted by: Hoarsewhisperer | Oct 27 2011 13:15 utc | 10

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