What does 16.2 billion dollars worth of inventory look like?

So last week the Lariviere clan was on vacation in the Pacific Northwest. One of the highlights of the trip (to my mind) was a visit to the Future of Flight in Everett, Washington, which features a tour of the Boeing factory that makes 747s, 767, 777, and 787s. How cool is that?

According to my kids (ages 10 and 11) not so cool.

They began whining about this outing back in May when I bought tickets. “But it’s the only public tour of a plane factory in the country,” I said. “Who cares?” they said. “It’s the biggest building in the world by volume,” I said. “So?” they said. “You could play 75 simultaneous football games there!” I said. “We don’t like football,” they said.

Sometime I feel I have failed as a parent.

In any event, having just been at Everett, the following headline from Bloomberg (Aug 23) caught my eye:

Boeing’s 787 Glut Casts $16.2 Billion Cloud Over FAA Approval

And I said to myself, I’ve seen that inventory!

Here is how the article describes what is going on:

Boeing amassed $16.2 billion worth of inventory related to the 787 through June 30, with so many almost-finished jets the company ran out of room to park them. There are 35 scattered outside the Everett, Washington, plant, in leased space across an adjacent airfield and in a facility in Texas. Many lack seats and lavatories and have black plastic over the windows and concrete blocks hanging from the wings to keep them from tipping over before engines are installed. …

Even with U.S. Federal Aviation Administration approval expected Aug. 26 and first delivery due next month, most of the planes will sit for weeks and months more — boosting production costs because each needs different fixes and eating into returns on the capital invested. Boeing had to build a temporary factory inside a leased hangar in Everett to handle the extra load.

As the picture shows, $16.2 billion worth of inventory is truly an impressive sight. The 787s are the “little” planes towards the front. The ones in the back with the familiar bulge at the front are 747s. (Boeing has also been awaiting approval for the next generation of the 747.)

Now obviously, that amount of inventory is more than enough to send a CFO into convulsions but as the article notes (and we have posted about before), Boeing has some help on this since the various suppliers with which it has contracted don’t get paid until the planes sell.  But still they will be happy these babies are out of Everett and in service.

There are some challenges in making that happen. Most of the planes are only partially finished. Airlines pay for the engines separately from their contract with Boeing and they do not want millions of dollars in engines sitting in Everett while waiting on the FAA. So Boeing will have to get all of these planes finished to complete delivery. On top of that, the planes are in different states depending on when they were produced relative to issues discovered in the test process.

They have undergone waves of repairs based on testing discoveries, and numerous jobs remain on “various and sundry components” before they’re ready for delivery, said Scott Fancher, Boeing’s 787 chief.

One of those jobs has been to install new condensation- collection systems to handle “rain in the plane” found in flight tests, a byproduct of the extra moisture in the air allowed by the composite fuselages. Workers also have had to replace electrical power distribution panels with redesigned parts after the fire grounded the test fleet at the end of 2010.

A final point is that inventory considerations aside, Boeing may not make money on these planes for a while:

The Dreamliner is Boeing’s fastest-selling jet, racking up more than 800 orders before it even flew. The planes have an average catalog price of about $202 million, and Boeing plans to assemble 10 a month by 2013 — a record for wide-body jets.

The program has the potential to be the company’s most lucrative ever, say Barclays Plc analysts Joe Campbell and Carter Copeland.

The problem is that Boeing has probably spent $300 million to build each 787 and will realize revenue of as little as $50 million apiece for the early models, the analysts estimate.

The 45th plane to be built — in the factory now — will probably cost Boeing at least $184 million, Harned estimated after analyzing inventory figures. That would make the average cost over the first 1,000 jets, including a learning curve, at least $116 million per plane, he projects. FAA approval this week after a flight-test program that began in December 2009 would set the stage for delivery of the first 787 to All Nippon Airways Co. next month.

I’m a little curious about these projections and how the learning curve fits in. Given the novelty of the program, I would expect that the chance to learn by doing would be high. That is, on more conventional aircraft like the new 747s, I would expect that Boeing could anticipate what issues might arise and address many of them in the design stage. The 787s is a different beast and Boeing would be harder pressed to identify issues upfront (we have already seen this in the design and production ramp up). That means more problems are to expected as they move ahead with higher volume production but it also suggests there is more low-hanging fruit to be found.