Analysis: Airbus A350 production and accounting strategy

By Bjorn Fehrm

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Introduction

Oct. 12 2015, ©. Leeham Co: Airbus is ramping up the A350 program at a rather slow pace. For the first year of production, 2015, it plans 15 deliveries and “a little more than double that” for 2016. Airbus is also introducing “contract accounting” for the first A350 deliveries.

As initial costs for producing a new aircraft model can be 400%-500% higher than the ultimate run-in production cost, Airbus introduces this novel accounting principle to maintain 2015 and 2016 profits “at about the same level.”

We use our aircraft model to understand why Airbus is ramping the A350 as it is and why it uses “contract accounting.” We also show what would be the effects on Airbus profits should A350 not ramp slowly and Airbus use special accounting to keep group quarterly results from surprises.

Summary:

  • The ramp of production of a new aircraft type is extremely expensive. Initial costs exceed what the customer pays for the aircraft with 400%-500%. This can generate company losses if no special actions are taken.
  • We use our aircraft model to show what has been done for the A350 program and why.
  • The wish to have a steady quarterly profit has forced Airbus to use the same accounting practices that is Boeing’s way to keep profits looking good, but with a shorter duration.
  • We explain how this accounting works and what it will mean for Airbus profits.

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