A Bright Spot In Boeing's Results: The Boeing 787

| About: The Boeing (BA)

Summary

Boeing cut costs faster than I anticipated.

Costs are likely to increase in Q2.

Despite being a challenge, Boeing is on track on reaching flat year-over-year deferred costs.

In my previous articles, I had a look at the deferred costs on the Boeing (NYSE:BA) 787 Dreamliner program for Q4 2015 and estimated the cost development during the first quarter of 2016.

Click to enlarge

Back then, I expected deferred costs to rise to $32.6bn (this included the deferred production costs and unamortized tooling costs) or approximately $6.7 mln per aircraft. In this article, I will have a look at how deferred costs developed and how this affects my expectations.

Deferred Costs

Click to enlarge

Figure 1: Development of deferred costs (Source: www.AeroAnalysis.net)

The unamortized tooling costs account for 11.6% of the total costs, the remaining 88.4% are deferred costs. By Q1 2016, total deferred costs reached $32.4bn, whereas I expected deferred costs to rise to $32.6bn. So Boeing did a 0.6% better job in cutting costs than I predicted, although this is quite an accurate prediction, expressed in dollars this still is a $183 mln difference.

For Q2 2016, I expect deferred costs to rise to $28.75bn and total costs of $32.47bn.

Deferred Costs Increase

Click to enlarge

Figure 2: Development of increase in deferred costs (Source: AeroAnalysis.net)

As can be seen, deferred costs have been dropping sharply and I expect this trend to continue in 2016. Especially in Q3 and Q4, I expect costs to come down sharply. The increase in costs basically is the piece wise gradient of the graph in Figure 1. A lower increase naturally implies that the deferred costs are growing at a lower rate. Once the increase turns into a negative figure, the total deferred costs will start declining.

Currently Boeing expects the deferred balance to be flat year-over-year, this implies that Boeing will need to lower deferred costs by $120 mln per quarter in the second half of 2016. With the current progress of bringing costs down (30% quarterly), Boeing will not be able to keep deferred costs flat year-over-year. In the second half of 2016, Boeing needs to swing from losing money to generating money on the 787 production. This is a challenge but given the progress the jet maker made in 2015 it should be doable.

Costs per unit

Click to enlarge

Figure 3: Development of unit costs (Source: AeroAnalysis.net)

Looking at Figure 3, it can be seen that the average loss per unit was $.6 mln, whereas I expected a loss of $6.7 mln per unit. This is quite a big difference, but is actually the 0.6% difference between expected and realized deferred and unamortized tooling costs expressed on a per unit basis. Especially unamortized tooling costs were lower than expected, while deferred costs didn't grow as much as expected.

Looking forward

Looking at how deferred costs have developed, I expect deferred costs to increase to $32.4-$32.5bn in Q2 2016. Mapping the decelerated growth rate of deferred costs from 2015 onto 2016, it is indeed possible for Boeing to keep deferred costs flat year-over-year.

Conclusion

Despite facing an SEC probe and having an accounting method that skews results that most investors and analysts question, Boeing actually is meeting the targets it set. Boeing did a better job on the Dreamliner than I anticipated. Cutting costs remains a challenge, but if the company is able to stick to the 2015 pattern of cutting costs, reaching flat deferred costs for 2016 should be possible.

If you would like to receive updates for my upcoming articles, please click the "Follow" text at the top of this page next to my profile.

Disclosure: I am/we are long BA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.