AIR Airbus SE

SEATTLE—Boeing Co. started to make money on each 787 Dreamliner it delivers just this spring, but thanks to a unique accounting strategy the jet has been fattening the aircraft maker's bottom line for years.

Boeing is one of the few companies that uses a technique called program accounting. Rather than booking the huge costs of building the advanced 787 or other aircraft as it pays the bills, Boeing—with the blessing of its auditors and regulators and in line with accounting rules—defers those costs, spreading them out over the number of planes it expects to sell years into the future. That allows the company to include anticipated future profits in its current earnings. The idea is to give investors a read on the health of the company's long-term investments.

Boeing calculates its Dreamliner earnings based on 10-year forecasts of supplier contracts, aircraft orders and options, productivity improvements, labor contracts and market conditions, which are reviewed by its auditors. The company, which delivered its first Dreamliner in 2011, estimates it will sell 1,300 Dreamliners over the 10 years ending in 2021. So far, it has delivered nearly 500 of them.

The problem, analysts and other critics say, is that Boeing's approach stretches its profit per plane on the Dreamliner into such a distant and uncertain future that it isn't clear if it will ever recover the nearly $30 billion it has sunk into producing the plane and validate years of projected profits.

"Any estimating process that looks this far out in the future and has this many moving parts and assumptions is almost certainly destined to be wrong," said Carter Copeland, aerospace analyst at Barclays Capital.

Boeing rivals Bombardier Inc. and Airbus Group SE use a different accounting system. Both aircraft makers report losses on new aircraft programs as they accrue during development and production.

If Boeing similarly accounted for its planes, including the 787, the $22.1 billion in commercial-aircraft group earnings it has booked since 2012 would be an $1.85 billion loss, its disclosures say.

The Securities Exchange Commission, which has broadly supported Boeing's accounting technique in the past, began investigating whether the company overstated elements of its accounting for the 787 project, people familiar with the matter revealed early this year. Details couldn't be learned. Such investigations often take years.

An SEC spokeswoman declined to comment.

Boeing, which hasn't confirmed or denied the investigation, has defended its accounting—which complies with generally accepted accounting principles—and says its profit expectations are realistic. Though the Dreamliner has proved much more costly to make than expected, the company says its cost for each 787 fell below the selling price in the second quarter as it reaped greater production efficiencies.

Deloitte & Touche LLP, Boeing's auditor, said it couldn't comment on client matters.

To recover production, tooling and other one-time costs of the Dreamliner program, Boeing's costs would have to fall fast enough and the price it charges airlines remain high enough for the company to make an average of $36 million profit on each of the next 800 Dreamliners it manufactures, including 233 planes that haven't been sold. The list price of a 787 is between $225 million and $306 million, but airlines typically negotiate big discounts.

If Boeing and its auditors determined that it couldn't recover its costs over the life of its forecast, accounting rules would require the company to declare that the program was operating at an overall loss, and force it to take a write-off.

"They have to defend that 787 curve very tightly," said Robert Spingarn, aerospace analyst at Credit Suisse. "You can either find more profit...or go out and change your cost structure to get you back on the curve."

"We continue to believe [the 787] will be a significant contributor to Boeing's success for decades to come," Boeing said.

Boeing, which initially expected to invest $5 billion to design and build the carbon-fiber Dreamliner, ended up spending 10 times that sum, after holdups and hurdles stemming from extensive outsourcing and design issues. Compensating customers for delays and the bargain-basement prices Boeing used to spur sales weighed on its per-plane revenue.

Boeing originally estimated its average cost per plane would be around $40 million, excluding engines and custom interiors, say two former Boeing employees. Today, the 787's average production cost is more than double that, say analysts, a sum that is only now coming in line with the current unit cost per plane.

Boeing declined to disclose its original target for the plane, but said its business case "anticipated correctly its overwhelming market success."

Though it is facing a slowdown in orders for twin-aisle jets like the 787, Boeing assumes it will continue making a dozen 787s a month over the next decade, most of them larger and pricier versions of the jet, and that its production costs will drop over time. Boeing has said it is weighing the idea of making as many as 14 of the planes a month later in the decade.

The International Institute for Strategic Leadership, an independent group of academics and executives that includes analysts and former Boeing consultants, recently concluded that Boeing wouldn't be able to bring down the costs of each 787 without squeezing suppliers and would face significant pressure from Airbus to lower the price.

In the end, whether the 787 delivers the profits Boeing has promised may depend on how many planes it uses to average out its costs and profits. Boeing could choose to expand that block beyond the current 1,300 jets.

"I don't think we'll ever know because the block size will not be static," said Mr. Copeland of Barclays.

Boeing says decisions about the block size are based on its reasonable expectation of future sales.

Aruna Viswanatha contributed to this article.

Write to Jon Ostrower at jon.ostrower@wsj.com

(END) Dow Jones Newswires

October 04, 2016 08:05 ET (12:05 GMT)

Airbus (EU:AIR)
Historical Stock Chart
From Mar 2024 to Apr 2024

Airbus (EU:AIR)
Historical Stock Chart
From Apr 2023 to Apr 2024