Boeing 787

Here’s a fun one with some big numbers. Boeing started development of the 787 around 2003 and launched it in 2011. While Boeing doesn’t break out R&D spending by project, a study by the Seattle Times estimated the total cost to be around $32 billion. (Clearly, this is not an industry for the faint of heart, or for those with a short term perspective.) So the R&D cost curve was at negative $32 billion in 2011.

So how long did it take Boeing to recoup that cash? There was one problem. Boeing was discounting the planes and not reducing its manufacturing costs fast enough, so for five years, until 2016, it sold each plane at a loss. It delivered about 325 planes at an average loss of $30 million per plane. So at the end of 2015, the R&D cost curve was at a negative $42 billion.

How many planes will Boeing need to sell to get out of that hole? The company estimates making an average profit of $50 million, over 30%, per plane for the next several years. At that rate, the company will need to sell roughly 840 planes to break even. This is about six years of production for the 787. So assuming that demand remains strong, the project will break even in 2022. That’s 11 years after launch. Some analysts think the program will never break even.

Does this matter? Boeing’s stock remains strong, and it recently released strong financials. And a purely financial analysis doesn’t consider all the spinoff benefits of developing a new product. The 787 pioneered the use of new materials (carbon fiber), engines, electronics, ventilation and lighting systems, and much more, that Boeing has then applied to other planes. It also brought along a whole new supply chain of key partners around the world and new information systems for managing all the data involved in developing new products across that supply chain. 

The moral is that financial return is important, but it’s not everything. Also, beware business cases presented at the start of new product development programs that estimate break even time and return on investment. Many things can change, especially the longer the development time. Do multiple iterations of sensitivity analysis (higher R&D cost, higher product cost, lower sales) to assess the risk. I’m sure Boeing does all of this. But even they sometimes get it wrong.