The Potential Boeing 777X Loss

  • Boeing 777X faces a variety of pressures.
  • The pandemic threatens timeline as well as demand and future production rates.
  • Changes to program footprints in Boeing’s facility in Everett threaten Boeing 777X profitability.
  • Boeing recognizes pressure on potential profits stemming from a variety of factors and continues assessing the situation.
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For the commercial aircraft industry, near-term demand for new aircraft is virtually zero. For the longer term growth will still exist and for me that is a major reason to keep my shares of Boeing (NYSE:BA) and Airbus (OTCPK:EADSF), but that also means that I am keeping a close eye on how the prospects of certain programs are changing. In this report, I want to have a look at why the Boeing 777X is under significant pressure that could potentially trigger reach forward losses for the program. It’s a subject that has been a focal point for many of my readers, some of whom are expecting a reach-forward loss announcement soon.

Program accounting

To understand the potential of reach forward losses and how that impacts earnings, we have to start by looking at the program accounting method that Boeing utilizes. Boeing does not use a unit-cost accounting method where revenues and costs for a certain aircraft delivery are recognized upon delivery of that particular aircraft. Instead, the company sets an accounting quantity, mostly looking five years out within a framework where it can estimate the costs and revenues of multiple blocks of aircraft and those costs and revenues are averaged to calculate an average program margin. The risk with this method of course is that the cost estimates are not correct and in that case Boeing will be forced to recognize charges when the program margin drops below zero.

For the Boeing 787 program, this is a big deal as the gap between what Boeing believes is the average margin and what it so far has realized in profits differs by billions of dollars. For the Boeing 777X program, that same accounting method could potentially trigger a loss even before a single Boeing 777X has been delivered to customers.