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.
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
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
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 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.
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.
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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.