Re: Boeing in the WSJ

From: (Michael Jennings)
Organization: University of Cambridge DAMTP
Date:         04 Oct 95 22:57:23 
References:   1
View raw article
  or MIME structure

In article <airliners.1995.1533@ohare.Chicago.COM>,
Karl Swartz <kls@ohare.Chicago.COM> wrote:
>The "Heard on the Street" column in the Oct. 27 WSJ (p. C2) has an
>article on Boeing, debating whether or not Boeing's current stock
>price is too high.  Various interesting views.  The part I found
>most interesting was a comment that the 777 will make more money
>for Boeing in real dollars than the 747 -- a pretty remarkable
>notion considering the 747 has been the most profitable airliner
>program ever, and unlike the 777 has been without a direct compet-
>itor for its entire life.
	That depends to some extent depend on how you do the accounting.
Boeing came close to sending itself bankrupt whilst getting the 747
into production. Assume that all this money is a loan to the program
at the prevailing interest rate. The 747 didn't receive that many
orders in its first few years, at least partly due to the early
1970s oil shock. By our accounting, the program's 'debt' grows (in
real terms) through that period. Thus the number of aircraft sold
after ten years to make the program profitable is much greater
than the number that needs to be sold after five years to make the
program profitable overall. By this way of measuring, delays and
cost overruns have an enormous effect on overall profitability,
much more than many people would expect. By this reckoning, it is
easy to show the 747 program taking a very long time indeed before
becoming profitable. Of course the 747 is a cash cow of staggering
proportions for Boeing today but, still, the problems at the start
of the 747 program have a big effect on its overall profitability.
	On the other hand, the 777 has been built on schedule and
essentially to budget. Boeing has received lots of orders for
aircraft to be delivered in its crucial early years. Therefore,
the program becomes profitable much faster, and its 'cash cow'
phase lasts much longer.
	And of course, the aviation market is much bigger today.
I feel that competition or no competition, Boeing will ultimately
sell many more 777s than the total production run of the 747.

Michael Jennings
Department of Applied Mathematics and Theoretical Physics
The University of Cambridge.

Disclaimer: the opinions presented here are mine alone,
but they should be yours too because they're right.