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Stitch
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UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 2:23 pm

While much has been written of late on how Boeing is giving "unprecedented" discounts to their best customers (or even any customer) on their 737 MAX purchases, UBS Securities yesterday released a note stating that they believe Boeing will break-even on the program with their 200th delivery.

UBS estimates Boeing is booking margins on 737 NG around 20% on a pre-R&D basis and that while that initial 737 MAX deliveries will be booked at a lower margin, within 1000 frames the 737 MAX should be booking the same 20% margin.

Of course, this is but one analysis and they could be totally wrong. But then again. they could be totally right. I guess we'll know when Boeing announces their financial results in the quarter they deliver their 1000th MAX.

Leeham.net has reproduced the note on their blog.
 
ikramerica
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 3:47 pm

I don't believe it. May frame 200 is cash positive, but can't see all the development and ramp up costs recovered by 200.
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cuban8
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 4:08 pm

I think it could very well be true. The 737 MAX is supposed to get most of its evolution through the new engines. Since this is not a clean sheet project and most of the changes will come through structure reinforcements and lighter materials, I don't expect the 737 MAX to become a huge investment project.
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bringiton
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 4:11 pm

I guess this is given they are selling it at their advertised price since know one really knows how much discount the first 200 frames are going for ??
 
BMI727
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 4:22 pm

Quoting ikramerica (Reply 1):
I don't believe it.

I don't either. It's either cash flow positive like you say or it's at list prices, which Boeing would do well to get 50-55% for actual sales.
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FlyingAY
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 4:41 pm

Let's assume a list price of 100 million dollars. Let's assume Boeing sells them for 50% discount. We're left with 50 million USD per plane. 200 planes makes 10 billion USD. If the margin is 20%, B is left with 2 billion USD. All these numbers are highly optimistic and this is simplifying many things. How large is the investment to develop the 737 MAX?

"in March 2010, Mike Bair, vice president of business strategy & marketing for Boeing Commercial Airplanes, said in an interview the estimated cost to re-engine the 737 would be $2bn-$3bn, including the portion for engine development contributed by CFM, said an industry source"

http://www.flightglobal.com/news/art...ax-development-cost-report-367504/

Considering the track record of airline manufacturers when it comes to estimating project cost, I would be highly surprised if a number given more than 2 years ago would still be valid. Also, Boeing has decided to implement other improvements as well, not just a re-engine that Mike Bair talks about.

Thus, I doubt that Boeing has recovered their development costs at the moment when MAX #200 is going out the door. Nevertheless (and despite the name), the MAX will be a highly profitable airliner.

[Edited 2012-06-15 10:23:28]
 
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airmagnac
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 4:53 pm

Quoting flyingAY (Reply 5):
Let's assume a list price of 100 million dollars. Let's assume Boeing sells them for 50% discount. We're left with 50 million USD per plane. 200 planes makes 10 billion USD. If the margin is 20%, B is left with 2 billion USD. All these numbers are highly optimistic and this is simplifying many things. How large is the investment to develop the 737 MAX?



So let's be wildly pessimistic and put the program cost at $4B. Discount 60% on the list price ($95M for the 737-8 as per the Boeing web site). Margin of 10% on the first 1000 frames.
So the net margin for each frame is about 4 million dollars, meaning B needs to deliver only 1000 frames to recoup their costs in an overly pessimistic scenario, based on my simplistic calculation.

Why "only" ? Because this is not the 787 or A380, but a mature program already pumping out frames at 40/month, so even 1000 planes is just 2 years worth of production.
So whatever the case, Boeing (and Airbus with the NEO) should be making money with every delivered frame within two years of the first delivery. And more probably within mere months. And as both manufacturers have chosen not to make new designs, and as demand is high and supply is capped, these upgrades should sell very well for years and years beyond that.


So while I agree 200 for breakeven is on the optimisitic side, I don't think it's really important to argue whether the programs will break even* after 200 or 1000 deliveries (meaning 6 to 24 months of production). Because both companies are set to make a fortune with these programs in a very short time !


*(even if I know that program breakeven arguments are an a-net favourite  )
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astuteman
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 4:55 pm

Quoting flyingAY (Reply 5):
"in March 2010, Mike Bair, vice president of business strategy & marketing for Boeing Commercial Airplanes, said in an interview the estimated cost to re-engine the 737 would be $2bn-$3bn, including the portion for engine development contributed by CFM, said an industry source"

The thing is, we don't know how much of the bill will actually be borne by Boeing.
If CFM have put up all bar say $1Bn, 200 could well be an achieveable break-even.

Certainly as far as the A320 NEO goes, its pretty clear that the engine makers have stumped up the bulk of the development cost (Pratt in particular), and that the cost of the wing work around the sharklets is being borne by the A320 classic.
(It'll probably break even for Airbus when the first one is on its delivery flight   )

Certainly, unlike the new programmes (like A380, 787, A350), I don't see a big capital investment programme associated with the development of either the A320NEO or the MAX.

In truth, it matters not. The b/e of the MAX could be 400 frames, and yet will still be printing cash for Boeing from early on in the programme for many years to come   

Rgds
 
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Stitch
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 5:07 pm

Airbus estimates developing the A320neo airframe at one billion Euro, so Boeing estimating double that for the 737 MAX airframe does not strike me as a wild underestimation.

The 737NG is a very mature platform that both Boeing and their suppliers understand intimately and therefore R&D costs will be significantly lower than for a new plane (on the order of a factor of 10 per Boeing's CFO). Boeing and their suppliers will also will be able to leverage current 737 facilities, so there will not be the infrastructure costs of the 787.

Based on those margin figures and Average Sales Prices, Boeing could be making around $10 million on each 737NG delivery. As Boeing increases the production rate towards the current 42 planned in 2014, that will lower the production cost and increase the margin.

By the time the 737 MAX starts production, even with lower margins, if it brings in $10 million a frame on delivery, 200 frames would be $2 billion and that would indeed cover the costs.
 
astuteman
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 5:14 pm

Quoting Stitch (Reply 8):
By the time the 737 MAX starts production, even with lower margins, if it brings in $10 million a frame on delivery, 200 frames would be $2 billion and that would indeed cover the costs.

The margin on those first 200 frames could be $5M per frame, and it might still cover Boeing's portion of the costs of the programme - assuming things track ok of course

Rgds
 
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Stitch
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RE: UBS Estimates MAX Break-even At 200 Frames

Fri Jun 15, 2012 5:19 pm

Quoting astuteman (Reply 9):
The margin on those first 200 frames could be $5M per frame, and it might still cover Boeing's portion of the costs of the programme - assuming things track ok of course.

Indeed it may. It's all speculation at this point.

But as you - and others - have noted, both of these programs will be licenses to print money because whatever the final costs end up being, they're going to be minuscule in the face of the revenues the delivered products will bring their respective OEMs and partners.
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 1:41 am

This all assumes they don't f.... it up like they did with the last revamp of the 737 in the 90s and end up booking a billion or two in charges for their poor execution ramping up production of the new model!
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 3:08 am

Are we talking versus just offering the 737NG? Boeing would still have sold another 200 at some profit each... But that just extends the number a year or so...

Quoting astuteman (Reply 7):
The thing is, we don't know how much of the bill will actually be borne by Boeing.
If CFM have put up all bar say $1Bn, 200 could well be an achieveable break-even.

That is an amazing business case. It could be quite possible. Of course if GE is putting the money up front, they'll make more on each pair of engines sold.  

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travelhound
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 3:32 am

I thought an element of the analysis was based upon the assumption the max is simply an extension of the NG program and as such some of the development costs can be costed against the profit margins on current NG sales.
 
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Stitch
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 3:44 am

Quoting travelhound (Reply 13):
I thought an element of the analysis was based upon the assumption the max is simply an extension of the NG program and as such some of the development costs can be costed against the profit margins on current NG sales.

UBS does believe that the 737 MAX will be part of the 737NG accounting block, so Boeing might only need to add 200 units to that accounting block to...account...for the MAX costs.
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 7:09 am

As others have pointed out, it would be important to understand the investments and margins for the different players (airframe and engine manufacturers), as they likely are different. The engine manufacturer is surely in a large role in a "re-engine" project. For all we know, there may also be agreements between the airframer and the engine manufacturer that change the flow of money between the players.

Quoting astuteman (Reply 7):
In truth, it matters not. The b/e of the MAX could be 400 frames, and yet will still be printing cash for Boeing from early on in the programme for many years to come   

  
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 9:53 am

To be honest I do not understand the point of this analysis. It is an absolute no-brainer that 737MAX will more than pay for its cost (and much more than that, unless Boeing royally screw up its production) and will become a cash cow for Boeing just as 737NG did. It is like saying a new generation iPhone or Android flagship phone will sell a lot and will justify investments in them.
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 12:03 pm

I think we are looking at this wrong: For accounting purposes, every plane gets allocated a certain amount of the development cost. That amount per plane goes down as there are more orders, bringing down the cost per plane.New tooling and new processes have a learning curve as well. The first planes will then get lower prices because of launch discounts. So what this is saying is that Boeing shareholders should expect to have a negative contribution margin on the first 200. And by the delivery of nr 1000, we have the same margin per plane we have today.

Nr 1,000 will not have a $0 development cost allocation. It will just be lower than nr 1-200. But you have to count training of engineers, changing of production facilities and the speed at which the new planes can be made initially as well. It does not start @ $10 million per. It may start @ $60 million for the first 5 development planes. Then go to $30 million for the next 5, then $25 million for the next 40, $22 million for the next 50...

"We expect initial MAX production to come through at lower margins than Boeing is currently booking on NG, diluting BCA (Commercial Airplanes) margins. The inclusion of lower margin initial MAX production in the 737 block will also negatively impact EPS relative to expectations as Boeing will need to book a lower average (program) margin on its current 737 deliveries. We expect MAX costs to improve at a fairly rapid pace with our assumed breakeven program quantity at 200 implying that unit margins approach 737 NG type levels near the end of our assumed 1,000 unit accounting quantity (two years of production)"

Quoting Cerecl (Reply 16):
To be honest I do not understand the point of this analysis

So you can run a model to see how much profit to expect in the future for Boeing, giving you an earnings forecast. That's what analysis are supposed to do. So you know if Boeing shares are cheap or expensive given the amount of earnings to expect.
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 1:06 pm

Quoting Cerecl (Reply 16):

I think their analysis is intended for the large institutional investors such as pension funds, funds managers, etc. The relevance of the analysis is simply a statement or opinion that the 737MAX program is relatively low risk. I think it would be fair to say that UBS had been briefed by Boeing before undertaking the analysis and as such their assumptions are properly qualified.

The flip side of the relatively rossie outcomes of the program are that in it's development years Boeing's earnings could be materially affected.

Another positive is in the years beyond 2020 the program will probably fully paid for and as such Boeing should have a fair amount of financial flexibility to undertake other NB programs.
 
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 5:35 pm

Quoting sharktail (Reply 17):
That amount per plane goes down as there are more orders, bringing down the cost per plane.New tooling and new processes have a learning curve as well. The first planes will then get lower prices because of launch discounts. So what this is saying is that Boeing shareholders should expect to have a negative contribution margin on the first 200. And by the delivery of nr 1000, we have the same margin per plane we have today.

Good point. However, I think Boeing will be doing very well with the margin by ln# 1000. I would expect very well. You probably have it correct.

Lightsaber
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airportugal310
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 7:02 pm

It amuses me on how everyone on a.net is smarter than UBS or the other banks/financial institutions that make this their business...

Let's not let their analysis get in the way of a good discussion, ya?  
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tdscanuck
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 8:55 pm

Quoting airportugal310 (Reply 20):

It amuses me on how everyone on a.net is smarter than UBS or the other banks/financial institutions that make this their business...

Although I certainly concurr that the a.net (and the internet) may have an over-representation of armchair experts, the specific case of industry "experts" at banks/financial institutions is not the general case. You'd probably be surprised how many of them know less than your average a.net member. These are the same geniuses who were "experts" on the mortgage sector.

Tom.
 
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lightsaber
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 11:20 pm

Quoting tdscanuck (Reply 21):
You'd probably be surprised how many of them know less than your average a.net member.

I wouldn't be. I had friends who were the analysts at banks just after graduation. They were smart individuals who are now far richer than I. But they had little time with each business to analyze and then they went on to the next. They would switch industries every 3 to 6 months based on the newest focus of that bank. They worked hard and developed a fine understanding of money, financial risk, and such. But few if any understood how manufacturing really worked (none were from 'hands on the tools' families).

So in terms of aircraft financing, if I get to pick the names, I would pick a team of a.netters over *one* analysis. Our bonus isn't on the line.  

Lightsaber
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RE: UBS Estimates MAX Break-even At 200 Frames

Sat Jun 16, 2012 11:34 pm

Quoting airportugal310 (Reply 20):
It amuses me on how everyone on a.net is smarter than UBS or the other banks/financial institutions that make this their business...

Good to be an expert when ghovernments the world over are puring massive billions in to cover your mistakes  
Quoting travelhound (Reply 18):
I think their analysis is intended for the large institutional investors such as pension funds, funds managers, etc. The relevance of the analysis is simply a statement or opinion that the 737MAX program is relatively low risk.

IBM was once regarded as a safe bet in stocks, perhaps folks are also looking at Boeing?
 
Cerecl
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RE: UBS Estimates MAX Break-even At 200 Frames

Sun Jun 17, 2012 2:49 am

Quoting sharktail (Reply 17):
Quoting travelhound (Reply 18):

Thank you! I guess I wasn't expressing myself properly. I understand that the report is supposed to provide investment information etc. I was just perplexed why UBS chose to analyse such a slam-dunk case rather than something less certain, such as when the next financial crisis is going to hit (The rate it is going, next Monday would not be a bad guess!).
 
sharktail
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RE: UBS Estimates MAX Break-even At 200 Frames

Sun Jun 17, 2012 6:48 pm

Quoting Cerecl (Reply 24):
I was just perplexed why UBS chose to analyse such a slam-dunk case rather than something less certain, such as when the next financial crisis is going to hit

Just like you need police looking at murder investigations as well as people looking at traffic violations. For UBS, they make money off all analysis, so they have different people assigned to different types of analysis.