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airmagnac
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 7:09 am

Quoting frmrCapCadet (Reply 147):
Boeing does not owe anyone that $28 billion

I'd say it owes itself. Under program accounting concept & associated rules, Boeing used its own future revenue from the accounting block to account for its current losses. Which is fine...but requires that Boeing stick to the rules of the game. As the money has already been used, I suspect that using it for anything else than servicing the deferred costs would be considered fraud and the SEC would be knocking on Boeing's door in no time.
Otherwise capitalism would be too easy ! Defer any costs, then forget about them, and hey presto ! here are the profits  

So basically, a large chunk of the 787 revenue is tied down (on paper, but still tied down) until the end of the accouting block, which is around 2024 at present production rates. Now the next question is : does that leave any "free" cash for Boeing to launch a program ?

With 28B$ to go, and 1000 aircraft remaining in the accounting block, that's about 28M$/aircraft.
At sales prices probably around 120-150M$ (1/2 list prices of the -9 and -10, coherent with numbers reported by Karel), that's about 20%.
A 20% margin is not unfeasible for a mature program (I think the 737 and 777 peaked at 20-25%), but it's likely already near the limit. For Boeing to generate significant "free" cash, they would need a profit margin well beyond those 20% which doesn't seem realistic.
So I'd say that till circa 2024 the 787 will provide a "gross" cash inflow (in the real world), but hardly any "free" cash to be used for a new development. Unless the delivery rates increase, as PW100 said.

Meanwhile other programs (MAX, 777X) will not generate much cash themselves before 2020, and the MoM business case is not obvious. This does not prevent Boeing from launching the MoM, it's just that the financial aspects will have to be compromised if the launch happens before around 2022-2023 I'd say. If there are compelling strategic reasons to launch the program which compensate the increased financial costs, that may be acceptable nonetheless.
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seahawk
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 7:17 am

The cash income is real and you can defer the costs of the new project as well. So Boeing has the cash to launch a new program and they will remain profitable doing this.
 
dare100em
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 8:43 am

Quoting hilram (Reply 104):
My thoughts: When it comes to updating avionics, they are already there with the B767-2C. This airplane features a full 787-like flight deck. Now, what if they

1) Hung some new engines on it
2) Made it a passenger plane and sold it with the winglets (already developed, and available as retrofit as well)
3 Somehow managed to shave 2 - 3 tonnes from the frame

Would it still be unable to compete in the marketplace?

Add one important thing: 4) Lower the main deck to make it capable of 8-abreast. And 5 would be nice in the long run) CRFP-wing.

However, like the Mad-Max 737 wouldn't really be an MOM but more like an A321/A322 "me too" solution this plane would be the opposite, it would be more of a direct A330 killer from below well up to the 787-8 size and above the (original) discussed MOM-size. However it could work better (as 8-abreast) than many other options, especially with an new high-aspect wing.
 
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enzo011
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 9:33 am

Quoting roseflyer (Reply 142):
You could just listen to what management is saying. Airbus and bombardier are aggressive with price and Boeing needs to cut costs to protect profit margin. I don't think that I have read anywhere objective that expects a big program charge on the 787 coming.

But who should I listen to? Greg Smith, CFO or Ray Connor? Both seem to believe different things about pricing pressure. We won't know about a charge to the program until it is announced, this is not something like a new model that Boeing will be speaking to outside sources to and that can leak the news.

Quoting tortugamon (Reply 145):
Yes it does. It Conner who said he wants to do something new and and the cuts are coming from his group.
Also, trying to get the 787 in order to more than take up the slack the 777 program will eventually be losing makes sense.

You have more faith in Boeing management and their words than I do. Your second sentence makes no sense at all. Are you saying the 787 will eventually take up the slack left by the 777 in terms of profit? Sure, but it will have to pay back its own cost first after the current accounting block. That will only be into the next decade. By 2025 Boeing will be in great financial position, but it may be too late by then.

Quoting seahawk (Reply 149):
Say EIS for the large version by 2032, medium version 2034, small version by 2036 and even then there might be a market for the MAX.

The poster said EIS for 2025 and clarified it as well. He is thinking about a launch in the next few years.

Quoting seahawk (Reply 149):
Only as long as you do not reduce them in your balance sheets. The deferring of expenses does nothing but even out your balance sheet over the duration of a program. It is a fully legitimate and realistic way of accounting.

No-one is doubting whether it is legal, more about how it impacts the company and its future decisions. Seems like some are saying it will not impact it at all as it is more just paper shuffling, others are saying these are costs that need to be paid back and will impact future decision, including the launch of a clean sheet MOM or a 737/757/767 derivative to save money.
 
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 10:06 am

Quoting Boeing778X (Reply 140):
I doubt the 737 MAX would even be a 15 year program at this point, not with how the A320neo is performing in the sales realm. 20 years (2036!) is far to optimistic.

Back in 2006 people believed the A320 clean-sheet replacement would be flying in 2016.

I wouldn't be surprised if A320 and 737 last longer than people today believe.
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enzo011
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 10:27 am

Quoting KarelXWB (Reply 154):
Back in 2006 people believed the A320 clean-sheet replacement would be flying in 2016.

I wouldn't be surprised if A320 and 737 last longer than people today believe.

And the decision about whether a new clean sheet design can be launched depends on a lot of factors, including the financial ability and resources of either OEM. Once one of them moves with a clean sheet the other has to decide what they will do, either counter with a clean sheet themselves or enhance their current offering. I think Airbus won't be thinking of a new design as they are in a a strong position with the A320. Boeing doesn't seem to have the appetite or the resources to launch a new design right now. In a few years this may change but will the market wait for Boeing.
 
mjoelnir
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 12:14 pm

Quoting Enzo011 (Reply 153):
No-one is doubting whether it is legal, more about how it impacts the company and its future decisions. Seems like some are saying it will not impact it at all as it is more just paper shuffling, others are saying these are costs that need to be paid back and will impact future decision, including the launch of a clean sheet MOM or a 737/757/767 derivative to save money.

Exactly, it is legal. But some extreme Boeing fan boys, think it is only paper shuffling and has not effect on financial positions. They also believe it will have no influence on future cash flow.

Program accounting has an effect on financial positions and regarding cash, deferring provides extra cash when you defer, that you have to replace in the future when you decrease the deferrals.

Program accounting provides early cash flow and increased early earnings, and decreases future cash flow and future earnings.

What you have already taken out, you can not take out again.
 
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seahawk
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 12:22 pm

Quoting mjoelnir (Reply 156):
What you have already taken out, you can not take out again.

But that money is effectively already spent. It has no influence on the cash flow, it only has an influence on the profit.

Say you run a program for 30 years and you increase your cash by 1B each year and have 30B deferred costs, and you decide to end the program and its accounting, you will have a big loss in your balance in that year, but you still have the 30B in cash, you just got the -30B out of your balance sheet.
 
Someone83
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 12:29 pm

Quoting mjoelnir (Reply 156):
Program accounting provides early cash flow and increased early earnings, and decreases future cash flow and future earnings.

Please explain how program accounting affect cash flow?

Cash flow has nothing to do when the company recognize the profit (or loss), but when the bills and wages are actually paid and when the customer pays.
 
Amiga500
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 12:39 pm

Look - if Boeing did not program account the 787, they would have made virtually no paper profit in recent years.

They have had to drop 30 odd billion in cash (that they would otherwise have had in their bank account from 737/777 profits) into the 787 program. They are banking on the program giving them this 30 billion back as manufacturing costs drop down. If they write it off, they then will not expect to get it back.


Boeing don't owe anyone for the 30billion (excluding their regular bond turnover), they took from the 777 and 737 to give to the 787 - so you could say 787 owes 777 and 737 the 30billion.


It just leaves Boeing with less cash than they would have had to build a new MoM, NSA and/or 777X.
 
mjoelnir
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 12:47 pm

Quoting Someone83 (Reply 158):
Please explain how program accounting affect cash flow?

Because you do not have the cash you are using early in the program.You pay out dividends, bonuses and buy back shares build on earnings. You spend extra cash you have not yet received, that cash you have to take on loan.
I do not mean just official declared loans, but prepayments, retirement funds, everything that increases your liabilities.
You can increase your liabilities because it is balanced by the program cost written to assets through inventories.
Than when you reduce the deferred positions, you either have to take it out of equity, 9 billions covering 28.5 billions or you have to reduce your liabilities, that means paying back loans. Paying back loans reduces cash.
 
Amiga500
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:15 pm

Quoting mjoelnir (Reply 160):
You spend extra cash you have not yet received, that cash you have to take on loan.

Boeing took that "loan" from the 777 and 737 programs.
 
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seahawk
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:15 pm

Quoting mjoelnir (Reply 160):
You pay out dividends, bonuses and buy back shares build on earnings.

But that is a decision not directly connected to the deferred costs. They could do the same without deferring the costs, if they dig into the cash reserve or take on more loans. They could not do this with their current accounting system as well and just increase their cash reserve instead.
 
mjoelnir
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:28 pm

Quoting seahawk (Reply 162):
Quoting mjoelnir (Reply 160):
You pay out dividends, bonuses and buy back shares build on earnings.

But that is a decision not directly connected to the deferred costs. They could do the same without deferring the costs, if they dig into the cash reserve or take on more loans. They could not do this with their current accounting system as well and just increase their cash reserve instead.

If Boeing would not have used the cash Boeing would show a much higher equity in its books. Why use program accounting for cost, if you do not want to use the increased early earnings, to pay out cash for dividends, bonuses and share buy backs.

The simple rule extreme Boeing fan boys do not want to except, you can not eat your cake and still have it.
The cash you take out early you can not take out again later.
 
roseflyer
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:30 pm

Quoting Someone83 (Reply 158):
Please explain how program accounting affect cash flow?

Cash flow has nothing to do when the company recognize the profit (or loss), but when the bills and wages are actually paid and when the customer pays.

You are not going to get a good answer to your question from the fervent Airbus supporters. Program accounting does not markedly affect cash flow unless you think that excess profits were reported and Boeing wasted all its cash paying its owners dividends and stock buybacks or unless big write downs are imminent. They also all seem to ignore that once the 787 gets cash positive on each delivery, it will be bringing in cash that can be used to fund more development work even if the accounting puts that money towards deferred cost. You can't debate with these guys since they are set in their opinions.

Quoting Revelation (Reply 114):

Now can we turn off accounting.com and turn back on airliners.net?

I would love to do that. I miss the days of discussing technical aspects of airplanes and what markets and airlines would be interested. It's rather disappointing that this thread has devolved into bashing Boeing over program accounting and promoting the A320 since it is more modern or discounting derivatives of the 737 since it is grandfathered, etc.

Let's discuss the middle of the market segment. I'll start right now. Who would be interested in this segment? Ideally the transatlantic 757s are where there is opportunity. 4000nm range with 200 seats would be a great market to help United at EWR, DL & AA at JFK, DL at DTW and ATL, AA at PHL and CLT etc. There is potential for more transatlantic routes linking the core US hubs to Europe. There also is opportunity to provide routes with decent O/D out of New York nonstop flights and make money. Such a plane would also be useful to South America. I believe that Brazil would benefit from some right sized airplanes to offer service to cities other than GRU and GIG. Bolivia, Ecuador, Peru, Paraguay, etc all could be served by such a plane from MIA. I think UA, AA and DL would all be interested in such a plane. Middle of the Market would also be perfect for many routes to Hawaii. A320s and 737s can fly from the west coast, but other than Alaska who focuses on serving Hawaii from smaller mainland cities, UA, DL and AA would benefit from a larger plane. 4-6 737s or A320s a day from LAX to HNL is a waste, yet flying expensive large widebodies may not make sense either.

Europe would be interesting. It think such a middle of the market plane would be perfect for European flights into Central Asia and Africa. Air France, Swiss, Brussels, KLM, etc all have flights into Africa that are a bit beyond the range and seating comfort of their short haul A320/737 fleets. While some use specially configured A320s or 737s for long range flights, a Middle of the Market plane could do well since it would have enough range to carry cargo and have decent load factors with daily flights. A330s & 777s are too big for flights into much of Africa. Central Asia is also interesting. Russia, Turkey, Egypt, Israel, Iran, Dubai, Qatar, etc are all long enough flights where a larger plane with an appropriate seating configuration may maximize revenue. Larger widebodies may be too big. They also could penetrate smaller cities in the United States. I could see some European airlines ordering the airplane, although not necessarily in large quantities like US airlines.

Asia would be interesting. I don't know how well the range and payload would work in Asia. Such a plane would do great flying from Japan and Korea to Southeast Asia and South Asia. Japan to India is underserved. Japan and Korea to cities in Southeast Asia could work well. Lots of Koreans vacation in warm beach locations like Phuket and Bali yet an A330 may be too big. Korean has some long 737 flights to places like Cambodia.

A middle of the market plane would do well for Qatar and Etihad in my mind. Those airlines probably have some cities in Europe where the A320 is too small or doesn't have enough range to get to. Cities like Dublin, Lisbon, Hamburg etc could fit into the networks at Qatar or Etihad but the 787 and A330 are too big. There are also cities in China that the airlines could better penetrate.

What do others think? Airbus is trying to market the A321neoLR. It's got potential, but I see opportunity for something bigger with more range yet keeping costs low.

[Edited 2016-03-16 06:31:37]

[Edited 2016-03-16 07:17:01]
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seahawk
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:39 pm

Quoting mjoelnir (Reply 163):

The simple rule extreme Boeing fan boys do not want to except, you can not eat your cake and still have it.
The cash you take out early you can not take out again later.

But the money they spent, was not money spent for the deferred costs, it was money spent for bonuses and dividends. And in the end it does not matter for the balance, although I admit that the Boeing system looks better for investors, but in the end they could do normal accounting, and that would still not stop them from paying the same dividends, bonuses or buying shares by reducing the cash reserve or taking loans.
 
mjoelnir
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:39 pm

Quoting roseflyer (Reply 164):
You are not going to get a good answer to your question from the fervent Airbus supporters. Program accounting does not markedly affect cash flow unless you think that excess profits were reported and Boeing wasted all its cash paying its owners dividends and stock buybacks or unless big write downs are imminent. You can't debate with these guys since they are set in their opinions.

You can not expect a fervent Boeing fan boy to understand the simple rules regarding cash flow, earnings, assets, liabilities and equity.
It would destroy there view of the world and there believe that everything is better at Boeing and that program accounting produces miraculous earnings and cash flow early in the program without having influence on financial positions and what happens later in the program.
The blinkers used by extreme Boeing fan boys are just to good.
 
Amiga500
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 1:45 pm

Quoting roseflyer (Reply 164):
You are not going to get a good answer to your question from the fervent Airbus supporters. Program accounting does not markedly affect cash flow unless you think that excess profits were reported and Boeing wasted all its cash paying its owners dividends and stock buybacks or unless big write downs are imminent. You can't debate with these guys since they are set in their opinions.

You shouldn't get up on a high horse when your not correct.

Program accounting **may** not markedly affect cash flow if you have other programs within the company that are compensating for it.


Taking Boeing as an example.

If Boeing were doing nothing else but the 787 (so no 737, 777 etc), then the actual money flow would directly reflect real-world spend on 787. Deferrals of costs would stop at their various creditors who would (rightly) tell them to f__k off and pay up.


Luckily for Boeing, they do more than just build 787s, and the 737 and 777 were turning in great numbers parallel to the 787 production issues. So the 787 program had to "loan" money from the 777 and 737 programs.

In the future, when the 777 and 737 renewal costs bite in, Boeing won't be in such a great position as their real-world cash reserves have already been depleted paying for the 787 (unless they can fix production costs and start to turn big per-unit build profits).

*Unless they write-off the loan from 737/777 to 787 - which would affect company profits for that year and thus investor confidence/dividend and probably more pertinently, executive bonuses.

In around 2018-2020, its going to be really hard for Boeing to turn a profit, they've just stored the trouble up and I expect it'll come to a head around then. Not fatal, not at all - but the investors are gonna be pissed. It may also mean taking out loans at that time to cover cashflow, which brings us back to where you are incorrect.

So get down off that high horse!
 
roseflyer
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 2:07 pm

Rather than getting sucked into a debate about program accounting, I recognize not everyone agrees and won't.

How about some other middle of the market ideas? I would think that it would be hard for a MOM to compete in the 2 class 180 seat segment. The A321 and 737-9 have very low CASM. The wing and engine combination to be able to carry 250 people 4000nm is going to make it hard to efficiently compete against stretches of the existing narrowbodies. On short flights stretches are always more efficient than shrinks. If a 180 seat MOM plane was conceived, then I would think that it would be the long range version having 5000nm of range. I'm not sure if such a plane has a market or not.

200-220 seats in a 2 class configuration with 4,000nm of real world range would be a better starting point. It is sufficiently bigger than the A321 that it should be able to compete on CASM if used on 2000nm routes. The problem with this plane is that if it has higher CASM than the A321 or 737-9 on short haul, airlines won't want it. It has to beat those airplanes on CASM. Smaller planes have higher RASM than larger planes, so if CASM is equal many airlines will chose the smaller plane and add frequency (assuming that there isn't a big pilot shortage or slot controls). If the MOM can efficiently compete in that segment then I think a larger version with 240 - 250 seats in a 2 class configuration with 3000-3500nm range would be a good stretch configuration. The plane is starting to compete with the 787. On regional routes, it should have lower CASM than the 787 or A330. I believe that demand will dry up for the 787-8 around the 2022 time frame. The airplane will also have been in service for more than 10 years so natural weight and efficiency evolutions will push it up market. This would be a great plane for the Asian operators. They would love low costs plane for regional flying. It would be able to effectively replace some A330 CEOs used in short haul flying as they approach their replacement cycle.

What do others think about capacity? CASM is king and they'll have to find a way to be competitive with both the A321 on the lower end and 787 on the upper end. A family of three planes makes sense, but I think the smallest is going to have a tough time getting traction. The largest also may have some performance limitations as they attempt to make comprises to keep weight down.

[Edited 2016-03-16 07:08:44]
If you have never designed an airplane part before, let the real designers do the work!
 
JHwk
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 2:24 pm

Quoting mjoelnir (Reply 156):
Program accounting provides early cash flow and increased early earnings, and decreases future cash flow and future earnings.

You are missing one very important distinction: program accounting does not impact cash, it impacts profit. Cash is cash, which is why evaluating free cash flow gives you a better indication of how a company is doing than "profit."

Future cash flow is always what it would be: delta between cost and sale. It plays zero role in program accounting.

What Program Accounting DOES do is overstate profits in years with negative cash flow. The benefit to the company for program accounting is that it pushes taxes down in the future as profits are understated in years with positive cash flow.

Now, there is one area where it negatively impacts Boeing now: if they launch another new program it will reduce their profits below historical values and likely have a negative impact on the stock, as they don't have as much cash coming in as they did 10 years ago (assumption on my part).

The last area it impacts a company is if they close down a program. There is no* impact on cashflow, but they would realize the whole deferred cost as a loss at once. (*obviously there would be some cash costs to closing down the line, but that is separate from a program accounting impact) We will likely see this happen in a couple years on the 747.
 
mjoelnir
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 3:25 pm

Quoting JHwk (Reply 169):
You are missing one very important distinction: program accounting does not impact cash, it impacts profit. Cash is cash, which is why evaluating free cash flow gives you a better indication of how a company is doing than "profit."

To make it now really easy. Yes cash flow is not impacted inside the program. The cash inside the program is spend and you do not spend it a second time. What you spend for wages, materials and so on inside the program stays exactly the same, for program for cost accounting or unit cost accounting.

But program accounting does produce increased earnings in the beginning. If you want now to use this increased earnings on increased dividends, increased bonuses and buy shares back, you need cash. Where do you thing this cash for using the increased earnings is generated? Do you think that is free?
Again if you do not use the increased earnings you do not spend extra cash, but than you would generate extra equity.
And when you do not want to use the extra earning why bother with program for cost accounting anyway?

You Boeing fan boys should really take down your blinkers.
 
flipdewaf
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 4:33 pm

Quoting Enzo011 (Reply 133):
But John Wojick has said the 737 MAX will be a 20 year program at least

He would be unwise to say anything different, even if he believed it wasnt' a 20 year program.

Quoting tortugamon (Reply 145):
Note these actions do no impact to cash. Boeing has plenty of cash and the current plan is to generate at least $28 Billion of net cash from the 787 going forward or they will have to book a charge to earnings. Which virtually no one is suggesting.
Quoting scbriml (Reply 144):
a bit like hiding one's massive post-Christmas credit card bill in the bedside drawer and admiring the bank balance

Except you pay interest on a credit card.
What would be the rate at which Boeing puts interest on the 28bn? or at least how would they calculate it? 28bn is worth a different amount in 2024 than it is now.

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PW100
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 4:49 pm

Quoting seahawk (Reply 151):
and you can defer the costs of the new project as well

My understanding is that that actually is not legal: only production cost can be deferred. Development cost of new programs can not be deferred; they would be booked as R&D if I'm not mistaken.

Quoting tortugamon (Reply 137):
What is important to note is that the deferred production cost / cost of goods sold adjustment is an accounting move and does not impact cash. So from a cash perspective the 787s will be made with less and less cash but more and more actual cash will be coming in

So back tracking a couple of years ago, when the 787 program was heavily deferring cost. 787s were being delivered for much less than the cost to produce them. How did things look then, from a cash perspective? How did that affect cash flow, and profits?

Quoting tortugamon (Reply 137):
hey haven't been reducing this 'deferred production cost' account much in the past because they haven't been making much profit. Now they are


Same questions as above. This suggests that a couple of years ago, when the 787 program was heavily deferring cost, they would have been making losses. But did that show as a loss in their financial statements at the time?

Quoting roseflyer (Reply 164):
You are not going to get a good answer to your question from the fervent Airbus supporters. . . . You can't debate with these guys since they are set in their opinions.

I do hope that wasn't aimed at me. In my mind I take great care in choosing the correct English words (recognizing that English is not my mother language), and avoiding statements that can't be support. In stead, in this thread I have asked questions, trying to understand the effect of the $28B deferred cost. The relevance to this thread is that I can see that may be an important factor going forward for future Boeing investment possibilities. At this point I remain inconclusive as it's effect on future Boeing financial position and investment possibilities, and if it may affect investment required for MOM development.
BTW . . .

Quoting roseflyer (Reply 164):
You can't debate with “these guys” since they are set in their opinions.

. . . could also be said about (some of) “those other guys”.
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speedbored
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 5:00 pm

Quoting flipdewaf (Reply 171):
What would be the rate at which Boeing puts interest on the 28bn? or at least how would they calculate it? 28bn is worth a different amount in 2024 than it is now.

Well that is one of the benefits of program accounting - it allows you to pay (on paper at least) today's costs with future-valued (i.e. less valuable) money. Another (and I personally believe this is the primary reason for program accounting at Boeing) benefit is that profits can be brought forward into periods where tax breaks save the company a fortune in tax that might otherwise be payable in the future.

Quoting mjoelnir (Reply 170):
And when you do not want to use the extra earning why bother with program for cost accounting anyway?

Despite what many people think, Mjoelnir is quite right that program accounting is allowing Boeing to spend a lot of cash now on things like dividends, bonuses, and share buybacks. If you actually take a moment to think about it, they really do amount to payments of cash to shareholders and management that are financed by "borrowing" out of shareholder equity.

If Boeing were not using program accounting, the markets and analysts would be frowning very heavily upon things like dividend and bonus payments, or share buybacks, during periods of low profits, or losses. Program accounting is, very definitely, allowing Boeing to do things with their cashflow that they would not otherwise be able to get away with without adversely affecting their share price.

But, regardless, I still don't personally have any problem with Boeing using program accounting. Yes, it could be argued that they have pushed it well beyond the bounds of credibility with the 787 program, but it's still within the rules in place in their country of registration. Other countries also have accounting and tax rules that are similarly pushed by local companies to maximise shareholder value.
 
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 5:25 pm

Quoting PW100 (Reply 172):
At this point I remain inconclusive as it's effect on future Boeing financial position and investment possibilities, and if it may affect investment required for MOM development.

The accounting method being used will have absolutely no affect whatsoever on Boeing's ability (or inability) to invest in future programs. With the possible exception of the relatively minor (as a proportion of turnover) amounts that they might have brought forward in cash dividends, bonuses and share buybacks.

What might make things slightly more difficult for Boeing is the fact that they have made such a huge ($30bn) loss on 787 production so far. Even though they probably still have more than enough cash on hand and/or cashflow to go ahead with a MOM project, I would be very surprised if they are not far more cautious in their approach to their next clean-sheet project. They are very unlikely to want to make the same mistakes again - their shareholders will not allow them to get away with it twice.

Quoting PW100 (Reply 172):
In my mind I take great care in choosing the correct English words (recognizing that English is not my mother language),

Please don't ever worry about the standard of your English (and I say that to everyone who does not have English as their first language). I've only ever noticed one poster who feels superior enough to add a "[sic]" to quotes - almost all of the rest of us totally understand how difficult it is to write in a second (or later) language and, most of the time  , are perfectly able to understand what people mean.

I really wish that I could write French or German (both languages that I consider myself fluent in) even half as well as many French and German nationals are able to write English here. And English is definitely not an easy language, even if you ignore the many variations (US, AUS, etc.).
 
tortugamon
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 5:36 pm

Quoting Matt6461 (Reply 146):
The Revelation has shown that Tortugamon is the right leader for this movement. I congratulate him.

If I have seen further, it is by standing on the shoulders of giants.   Just the most recent, naive torch bearer.

Quoting airmagnac (Reply 150):
So basically, a large chunk of the 787 revenue is tied down (on paper, but still tied down) until the end of the accouting block, which is around 2024 at present production rates. Now the next question is : does that leave any "free" cash for Boeing to launch a program ?

The program, by definition, is expected to produce ~$30 Billion in the next 10 years or so (~1,300 accounting block) so yes, that means there will be a ton of 'free cash' but it won't show up as profit on the income statement because they didn't show it as a loss at the beginning of the program.

Quoting seahawk (Reply 151):
The cash income is real and you can defer the costs of the new project as well. So Boeing has the cash to launch a new program and they will remain profitable doing this.

Yes.

Quoting mjoelnir (Reply 156):
Program accounting provides early cash flow and increased early earnings, and decreases future cash flow and future earnings.

There is a difference between not listening and trying to understand which I can accept...but actually distributing false information like this is irresponsible. The conviction of your incorrect stance is something that I won't engage in any longer.

Quoting Someone83 (Reply 158):
Cash flow has nothing to do when the company recognize the profit (or loss), but when the bills and wages are actually paid and when the customer pays.

Another person that gets it.

Quoting Amiga500 (Reply 159):
They have had to drop 30 odd billion in cash (that they would otherwise have had in their bank account from 737/777 profits) into the 787 program. They are banking on the program giving them this 30 billion back as manufacturing costs drop down.

...costs drop down and average selling price goes up...yes, another person that gets it.

Quoting Amiga500 (Reply 159):
It just leaves Boeing with less cash than they would have had to build a new MoM, NSA and/or 777X.

It has in the past drained cash from Boeing but the program is now cash positive so it will no longer be a drain but will start generating that $30 Billion in cash.

Quoting flipdewaf (Reply 171):
Except you pay interest on a credit card.
What would be the rate at which Boeing puts interest on the 28bn?

They paid for the program wish cash. Some of that cash surely came from the long term debt that they carry but the point is that operations generates the cash. It was not 'put on a credit card'. Now that the 787 is generating cash that cash will be used to pay for the next aircraft they are investing in.

Quoting PW100 (Reply 172):
So back tracking a couple of years ago, when the 787 program was heavily deferring cost. 787s were being delivered for much less than the cost to produce them. How did things look then, from a cash perspective? How did that affect cash flow, and profits?
Quoting PW100 (Reply 172):
This suggests that a couple of years ago, when the 787 program was heavily deferring cost, they would have been making losses. But did that show as a loss in their financial statements at the time?

The 787 was a major drain on cash - that $30 Billion! But from a P&L perspective it wasn't as bad because those costs didn't go through the income statement because they were listed as an asset on the balance sheet. Like paying for inventory that you have not sold. So until Boeing produces ~1,300 of these things (the accounting block) at the anticipated cost bases then the program won't be having that much impact on the income statement one way or the other. Now the moment where they don't think they will make the $30 Billion back they will need to take a charge against earnings for that anticipated amount as seen in the 747 program. There are some costs that usually have to go through the income statement (like research and development useually) so those would have been a drain on net income and cash as opposed to deferred production costs which is just a drain on cash and not on net income.

You may disagree with my perspective on it but I am appreciate the mature open dialogue of ideas.

tortugamon
 
mjoelnir
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 6:28 pm

Quoting tortugamon (Reply 175):

Just one simple question. What cash was Boeing using when in the last years, when they used the increased earnings produced by the usage of program accounting for paying the dividends, bonuses and share buy back?

Quoting tortugamon (Reply 175):
There is a difference between not listening and trying to understand which I can accept...but actually distributing false information like this is irresponsible. The conviction of your incorrect stance is something that I won't engage in any longer.

exactly Tortugamon distributing false information that is what you do

I can only tell you once again speak to an accountant and get it explained.

They used the 28.5 billion to pay wages, materials and so on building the 787 frames, what cash was used in using the earnings produced by using program accounting for the 787?

[Edited 2016-03-16 11:32:06]
 
Amiga500
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 6:50 pm

Quoting mjoelnir (Reply 176):
Just one simple question. What cash was Boeing using when in the last years, when they used the increased earnings produced by the usage of program accounting for paying the dividends, bonuses and share buy back?

Cash from the 737 and 777.


BOEING didn't spend cash it didn't have.

The 787 PROGRAM ALONE consumed cash in build costs it wasn't producing in sale prices.
 
flipdewaf
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 7:13 pm

Quoting tortugamon (Reply 175):
They paid for the program wish cash. Some of that cash surely came from the long term debt that they carry but the point is that operations generates the cash. It was not 'put on a credit card'. Now that the 787 is generating cash that cash will be used to pay for the next aircraft they are investing in.

That's exactly what I figured they did, so they can only defer costs without impacting their P&L if they defer less than the other projects make in profit. Sounds very logical way to do the accounting to me as you are able to get a project by project breakdown.

Fred
Image
 
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enzo011
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 7:35 pm

Quoting tortugamon (Reply 175):
Now that the 787 is generating cash that cash will be used to pay for the next aircraft they are investing in.

Isn't it a case that the cash being generated by the 787 now, after finally producing a profit for each frame delivered, will be used for the deferred production cost of the 787 program. This allows the cash being produced by the 737 and 777 to pay for any new programs.
 
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enzo011
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 7:43 pm

Quoting flipdewaf (Reply 171):
He would be unwise to say anything different, even if he believed it wasnt' a 20 year program.

Nope, we take executives word as gospel. When a airline CEO says he doesn't want to order a type of aircraft it ends discussion, so if Ray Connor says it is for 20 years at least it is for 20 years!*


*This is sarcastic, executives will say what will protect their company and their own arses at the time. This includes stating the 787 will fly in a couple of weeks when not even a deity would have gotten that frame in the air in that time frame.
 
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airmagnac
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 7:58 pm

Quoting Amiga500 (Reply 177):
Cash from the 737 and 777. BOEING didn't spend cash it didn't have.

No, indeed in the real world Boeing paid its bills. But it did not book those losses ; if the losses had been booked in real time as "real cash" losses, that would have been unit accounting.
And that's my issue with the "real cash" arguments : it's basically switching from a program accounting view in times of unit losses, to a unit accounting view in times of unit profits. The deferred losses get conveniently erased in the switch.

Nobody is objecting to the fact that the 787 is set to generate a heap of $$ in the future, but it has generated an equivalent amount of losses in the past. At some point, somehow, those losses have to impact Boeing's financial position, which has not happened so far ; or with a more optimistic view, it has to be recognized that over a period of 20 years up to 2023, the 787 is merely cash neutral and cannot contribute in real time to the financing of a new program.

Either way, as I said, I do not think this reduces Boeing's investment capabilities to 0, far from it. It's a strong company with strong assets. And interest rates are low. But I do not think it is possible to state at the other extreme that Boeing is about to receive 3B$ of extra cash every year, with which it can do anything it wants.
All this really would not matter if there was a clear-cut business case with low risk. The thing is, the MoM is not such a project, so investors are going to be careful.

Quoting PW100 (Reply 172):
My understanding is that that actually is not legal

The principle of program accounting is simply to smooth out recurring costs which vary over time, to generate an equivalent, constant average cost over a given period. It comes down to an integration of the gross margin curve over the time period.
Development costs are one-shot non-recurring costs, i.e by definition they do not vary over time. So there is no smoothing to be done, therefore cost deferrals for program accounting has no sense. "Deferring" such costs is simply "cooking the books" ; mathematically, it's an integration over a segment of zero length, which equals zero whatever the amount of costs (unless they are infinite of course, then you get a Dirac function, as well as 20 threads on a-net discussing the metaphysical meaning of infinite costs...but I'm getting carried away)
My goal as an engineer is to fill my soul with coffee and become immortal
 
WIederling
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 10:48 pm

Quoting JHwk (Reply 169):
Now, there is one area where it negatively impacts Boeing now: if they launch another new program it will reduce their profits below historical values and likely have a negative impact on the stock, as they don't have as much cash coming in as they did 10 years ago (assumption on my part).

A new program would again show early profits via program accounting ( at least for the production/delivery side ).

A brilliant idea to ( by way of well reasoned arguments   expand the accounting block to even out excess profits.
Only beginning with McD it effected the pushing of excess cost into the future.

And note: program accounting as used by Boeing is only legal in the US. .. and it is a known issues of dissonance targeted for removal. and not only for being incompatible with globally accepted rules.
Murphy is an optimist
 
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Boeing778X
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 11:08 pm

Quoting KarelXWB (Reply 154):
Back in 2006 people believed the A320 clean-sheet replacement would be flying in 2016.

Pardon my language, but whoever thought that was probably an idiot. 737, maybe, but A320? Absolutely not. The A320 family can evolve much further. The 737 is, for all intensive purposes, perfected, therefore, MAXed out.
United Airlines: $#!ttin' On Everyone Since 1931
 
packsonflight
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RE: New 757 Replacement NMA Information - Part 5

Wed Mar 16, 2016 11:36 pm

Mods

How about special thread about accounting?
 
sv11
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RE: New 757 Replacement NMA Information - Part 5

Thu Mar 17, 2016 3:54 am

Any MoM would face pressure from cheaper A321NEO/737MAX.
Kind of like Delta ordering A330Neo due to lower acquisition cost when 787 was also available.
So BA wouldn't be able to price it much higher than 737MAX. And A321NEO/737MAX could be priced well due to volumes and low dev costs. Maybe if BA does a composite wing for 737-9 they can reduce enough weight to carry more fuel and use the current engines and add double bogey landing gear.

sv11
 
dare100em
Posts: 278
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RE: New 757 Replacement NMA Information - Part 5

Thu Mar 17, 2016 7:25 am

Quoting roseflyer (Reply 168):
I believe that demand will dry up for the 787-8 around the 2022 time frame.

The demand for the 787-8 did already dry up in 2016. Only about 100 planes left for delivery. The 787-8 is finished and shouldn't play a big roll in Boeings future planing until it is heavily overworked.
 
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enzo011
Posts: 1850
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RE: New 757 Replacement NMA Information - Part 5

Thu Mar 17, 2016 8:07 am

Quoting sv11 (Reply 185):
Any MoM would face pressure from cheaper A321NEO/737MAX.
Kind of like Delta ordering A330Neo due to lower acquisition cost when 787 was also available.
So BA wouldn't be able to price it much higher than 737MAX. And A321NEO/737MAX could be priced well due to volumes and low dev costs

Agreed, and this is why there is a discussion about how Boeing accounts for the 787 on this thread. If they were able to launch a new design MOM and price it competitively to the A320/737 or even a A322 it would be an easy decision. But Boeing have to maintain their margins on all programs (737, 777 and 787) to deal with the mess that is the 787 right now. Why would they look at job cuts if it wasn't to protect margins, or complain (internally) about pricing pressure if all was well as others seem to want to tell us?

The options for Boeing seem to be the worse on the table right now. Extend the 737, or do a 757MAX, neither of which is ideal and could easily be countered by Airbus with either a A322 or pricing pressure from the A321. Rock, meet hard place.
 
WIederling
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RE: New 757 Replacement NMA Information - Part 5

Thu Mar 17, 2016 8:09 am

Quoting dare100em (Reply 186):
The 787-8 is finished and shouldn't play a big roll in Boeings future planing until it is heavily overworked.

That won't help afaics.

like the A332 has lost interest to the A333, the 788 has lost interest to the 789 ( and started earlier aided by
other things ).
the higher capacity types both are above a "trigger" level of "quite enough" payload/range.
plot the recently released range development of the A330 family against the A332/A333 sales distribution.
this should show the decission range.

You see the same developement in the NB arena. with growing range of the larger models the
smaller ones fall by the wayside. ( forex A319 used to be on par++ with A320 deliveries. couple years
ahead and A321 will have reached or surpassed A320 deliveries with the A319 reduced to BBJ interest.
Murphy is an optimist
 
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KarelXWB
Topic Author
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RE: New 757 Replacement NMA Information - Part 5

Thu Mar 17, 2016 9:53 am

Quoting packsonflight (Reply 184):
How about special thread about accounting?

Feel free to start a new thread about accounting in the non-aviation section.

In the meantime this thread will be locked. We have reached five threads with almost 1,000 posts and the last thread is not about the MOM anymore. We can start a new thread when Boeing releases more information.
What we leave behind is not as important as how we've lived.

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