Boeing 787 financial hit underscores cost of launching a new airliner
That Boeing has had problems with the three aircraft programs leading to the company taking a $2.1 billion hit in its second-quarter earnings was not a surprise. But the size of the hit was a shock.
The manufacturer announced Thursday it will absorb charges of $814 million against the 747-8 program and $393 million against the KC-46 military tanker (built on the 767 widebody airframe). But it’s the $847 million against a pair of flight-test 787 Dreamliners that really has you gasping. These were built in 2009 and Boeing originally planned to refurbish and sell them, but will now essentially write them off as $847 million in R&D.
The sluggish market for very large aircraft (Airbus A380 and 747-8) is long catalogued; the freighter version of the 747-8 was also affected by the sustained slump in the global air cargo market. Boeing previously announced its reduction of the 747-8 production rate; Airbus made a similar announcement about the A380 during the Farnborough Airshow earlier in July. So today’s news from Boeing related to the -8 program surprised no one.
But what the 787 charge makes crystal clear is just how eye-wateringly expensive it is today to design, develop and produce an all-new aircraft. And in most cases, the manufacturer must look years, if not decades, down the road before reaching breakeven on that massive investment.
This explains several things about Airbus’ and Boeing’s new-aircraft decisions over the past five years or so.
First, launching re-engined versions of aircraft that are proven technically and commercially is a far less risky and expensive than developing an all-new aircraft. Hence, the A320neo, A330neo, the 737 MAX and 777X.
Second, to paraphrase that real estate quip about location, location, location; in this industry, it’s all about aftermarket, aftermarket, aftermarket. It’s an uphill battle for OEMs to recoup their R&D investments in new aircraft directly from aircraft sales, especially when airlines demand hefty discounts to come in early. But package those sales with long-term training, MRO and other support services and the business prospects look brighter. The aero-engine manufacturers have mastered this with their support service, power-by-the-hour packages. The airframe manufacturers now play the same game; they have to.
And third, all that “fishing” by the OEMs that went on during Farnborough to see what size of new airliner, if any, most appeals to airline executives will be for naught if the manufacturers do not have sufficient, firm evidence that any investment will pay off. The cost of launching an all-new aircraft is simply too high to bypass the other customer that is at least as important as the airline: the shareholder.