MIAMI — On October 26, 2016, the Boeing 787 Dreamliner will complete a tumultuous five years in service, marking an important milestone in 21st century aviation. To honor the occasion, we have penned an extensive history and analysis of the 787 program’s history, present status, and future.

The First part of this piece, it was explored the beginnings of the 787, and how the outsourced design engineering, and the composites technology, were some of the reasons behind its delayed entry into service (EIS).

The Boeing 787 at Five (Part One): The Dreamliner Effect

Teething concerns

Despite EIS, the 787 wasn’t out of the water. The early 787 models were problematic to say the least. The poor performing engines missed fuel burn targets and most of the early planes were substantially overweight. As a result, Boeing had to pay out hundreds of millions of dollars in compensation due to performance guarantees it had signed in the early 2000s.

Early airline operators had good things to say about the 787 and the passenger experience was clearly excellent, but the Dreamliner struggled with its initial dispatch reliability to some extent.

Despite teething issues, 2012 and early more or less passed without a hitch – at least until a Japan Airlines 787 caught on fire at Boston Logan. Soon after, ANA and US launch customer United Airlines discovered similar issues and on January 16, 2013 the Federal Aviation Administration issued an airworthiness directive (AD) that more or less grounded the 787 fleet worldwide.

It turned out that the 787’s lithium-ion batteries were designed with too much inherent risk of inflammation, and it took the FAA and the airlines nearly three months to tease out this issue and settle on a solution.

This was soon followed followed by a high profile fire in July of 2013 on a parked and empty Ethiopian 787-8 at London Heathrow. That fire was caused by an entirely separate issue with the emergency locator transmitter (ELT) made by Honeywell. While less volatile than lithium-ion batteries, the lithium-manganese ELT caused another set of issues for Boeing to rework on the 787 and once again damaged public perception. In many senses, the 787 program bottomed out in mid-2013 with the grounding and the fire.

Turning the corner and commercial success

The first step in its resurgence was launching 787-10, a stretched 787-9 seating 290-310 passengers in a two-class configuration. Launched by Singapore Airlines at 2013 Paris Air Show, the 787-10 was intended to supersede the A330-300 on the latter’s medium-haul missions, and offered better economics than the A350-900 on routes within the 787-10’s performance envelope.

The 787-10 has already sold 153 aircraft two years before its EIS, and many expect the largest 787 variant to find a niche in the intra-Asian market as a superior replacement for the A330-300. It is also competing for a blockbuster order from Emirates to satisfy its regional widebody needs, an order widely expected to encompass more than 100 and potentially 150 planes.

Despite all of its woes, two things about the 787 have never been in doubt. First and foremost, the underlying technical design is superb. Boeing may not have actually aligned with that design until well into the 787’s second year in service, but that doesn’t change the fact that the 787 is a technically innovative airplane.

Furthermore, on the top line at least, the 787 is an unabashed commercial success. It was the fastest selling widebody in aviation history after it launched, and is nearly 400 orders ahead of rival Airbus’ A350XWB. It has now ascended to become the fourth best-selling widebody program ever, and will likely ascend into the top two within the next decade.

As of October 24, 2016 there have been 1,191 787s ordered and 462 delivered including 431 787-8s, 607 787-9s, and 153 787-10s. On the top line at least (revenue and orders), that is an unqualified success.

A program that may never break even and issues that emerged

The problem for Boeing is that the 787’s financial contribution to the bottom line is no where near as rosy. In fact, at least on paper, the 787 may never break even despite its sales success.

Without diving too far into technical financial explanations, the reason is a practice known as deferred production costs. While Boeing paid development costs for the 787 in cash as soon as they were incurred, these expenses were deferred into the future on the profit loss statement.

The idea was that as Boeing turned a profit on future 787 deliveries, those profits would be taken out of the deferred cost base, with each subsequent delivery drawing down the deferred cost base further until it hit zero (in Boeing’s parlance this is when an aircraft program is “paid off”).

Deferred production costs are one mechanism of reflecting the fact that in aerospace much of the investment is up front whereas the revenues and profits are realized on the back end. So we are not as aggressive as some in deriding the practice of deferred production costs.

The problem for Boeing is that thanks to cost overruns, the 787’s total deferred production cost base totals more than $28 billion. And it has to re-coup that amount over another 838 aircraft, yielding an implied profit of nearly $33.4 million per aircraft. Given that Boeing only just began to turn a profit on the 787 in Q3 of 2016, that is an unrealistic figure to attain. So Boeing will probably have to write down some of the deferred production costs (or extend the accounting block further beyond the current 1,300 aircraft).

All of this says that the 787 will not be generating actual net cash for Boeing for some time.

Beyond the finances, the 787’s turbulent history highlighted a lot of issues in Boeing, ranging from its increasingly rancorous labor relations (opening the Charleston plant to reduce strike risk of employees in Seattle) to an over-reliance on outsourced suppliers and pie-in-the-sky production targets and price guarantees.

Some of the teething problems were inevitable given the high percentage of new technologies used (the 787 is probably the most innovative airplane since the 747 in that respect). But the flaws in Boeing’s design process and planning were inexcusable.

Delivering on the promise of revolutionizing airline route networks

The sad irony of the 787 program is that at this moment in the fall of 2016, it has delivered on everything that Boeing promised it would do. The economic performance guarantees are now exceeded on every delivery of the 787-8 and 787-9. And both variants have revolutionized airline networks, enabling routes around the world such as London Heathrow – Austin, Tokyo – Boston, or Vancouver – Delhi that absolutely would not have been economically viable with any other aircraft in commercial aviation history.

The 787-8 is truly an incredible long-and-thin aircraft, though it has been more or less killed off by the 787-9, which offers more or less the same trip costs with 30 more seats.

Three big categories of airlines have benefited uniquely from the 787. The first is carriers with global mega-connecting hubs (think British Airways at London Heathrow) that have been able to add thinner and thinner spokes to their route networks (Austin, San Jose, New Orleans, etc.) thanks to the 787’s powerful combination of economics and range.

The second is a subset of the first type of carrier, namely airlines with high origin and destination (O&D) traffic in their home hub(s) or country that is mostly of a tourist and visiting family and relatives (VFR) nature.

The archetype of this carrier is Air Canada, who has been on an expansion spree to new destinations like Delhi, Mumbai, and Taipei empowered by both the 787-8 and 787-9. The final type of airline is perhaps the most exciting – the Dreamliner may be the plane that finally unlocks the low cost – long haul model once and for all.

Long haul LCCs around the world, from Australia to the United Kingdom, have massively grown their networks thanks to the 787. The financial hit rate of these ventures has been hit or miss: Jetstar is profitable, Scoot’s financials are opaque, and Norwegian’s international operation is losing money. But for the first time ever, there are serious and credible long haul low cost route networks dotting the globe. In the end, that may turn out to be the biggest innovation precipitated by the 787 of them all.