We achieved... a record order book and strong operational performance in most areas. We delivered more commercial aircraft than ever before, including the first A350, and our net orders were, once again, more than twice the number of deliveries."
So wrote Airbus Group Chief Executive Officer Tom Enders in a Feb. 27 press release describing Airbus' (NASDAQOTH: EADSY)financial performance in 2014. And in those few words, he summed up both the opportunity and the risk for Airbus shareholders.
Opportunity and peril
On one hand, yes, Airbus' performance in 2014 was truly impressive. Sales grew 5% at the European airplane builder, while earnings per diluted share soared 61% year over year -- twice the earnings growth seen at archrival Boeing(NYSE: BA). According to S&P Capital IQ data, Airbus is now earning more than a 6.2% profit margin on its commercial aircraft -- nowhere near Boeing's impressive 10.7% Commercial Airplanes operating margin, but a vast improvement over the mere 4.1% margin Airbus pulled down in 2013.
And yet, the comparison to Boeing is even more telling when you consider that, after multiple years of strong airplane sales, both Boeing and Airbus now suffer from the same existential dilemma:
Too many planes on order. Not enough time to build them.
A "nice" problem to have...
A couple of months back, we reviewed Boeing's backlog situation for you, describing how a monster tally of 5,789 planes remaining to be built left Boeing with a backlog of work to be done stretching out, for at least one model of plane, as far as 7.4 years. But if you think that's a "nice" problem to have -- a 7.4-year-long guaranteed revenue stream -- you're going to love Airbus' problem. As described in the company's recent earnings release for 2014, Airbus' backlog now stretches past "> 10 years of deliveries." It's probably even longer than that now -- Airbus says it received a net 28 new orders for aircraft in February, and now has customers awaiting delivery on 6,332 planes.
Addressing this gap between order backlog and order delivery (which grew just 0.5% last year), Airbus announced plans to increase production of its most popular plane, the A320 single-aisle commercial jet, to 50 planes per month in 2017. If that doesn't solve the problem, the company says it may have to up the production rate to 60 per month -- two planes per day.
...but a problem nonetheless
Of course, the A320 is just one of Airbus' plane models, and only one part of the dilemma Airbus faces. Let's take a look at the rest, calculating from what we know about Airbus' order backlog, its current plane production rates, and its announced plans for future production rate increases:
Swipe left/right to view wide tablesPlaneOrder BacklogCurrent Production, in Planes per Month (ppm)Ramping to... Then ramping to...Backlog in Months (approx.)A3205,0854250 ppm in 201760 ppm [maybe?]105.2*A330305106 in 2016**--44.2A3507791.2510 ppm in 2018--107.5A3801632.5----65.2
*A320 backlog will shrink faster with a production rate increase to 60 ppm.
**This is actually a slowdown in A330 production.
Now, there are at least a couple of different ways to look at this data. On one hand, you can see at a glance that Airbus' boast-slash-worry about a "> 10 years" -long backlog is already being put to rest by planned increases in the production of A320 regional jets, and of the new A3250 long-haul airliner. Still, at projected 105 and 107 months' backlogs, respectively, Airbus has a lot more planes that need building than does Boeing. (Boeing's 737 backlog is roughly 88 months long, while its larger 787 stretches out 65 months,)
This is both good news and bad news for Airbus. Good news, because its revenue stream looks longer, and more secure, and more "transparent." (Wall Street analysts love that stuff.) Bad, though, because the longer the time it takes Airbus to deliver planes to its customers, the more time those customers have to rethink whether they really need all those planes they ordered -- and to perhaps cancel their orders.
So the moral to this story? To fully capitalize on its enormous backlog, Airbus really needs to build its planes faster, and deliver them to its customers (and collect payment) sooner. That 0.5% growth in deliveries we saw in 2014 simply isn't going to cut it.
Time to kick it up a notch, Airbus.
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