Pontifications: Deliveries matter, so do orders

Hamilton KING5_2

By Scott Hamilton

Jan. 11, 2015, © Leeham Co.: Boeing out-delivered Airbus last year by a wide margin. Airbus obtained more orders than Boeing by a wide margin.

Behind our paywall today, we look at some of the reasons for this as we update our annual production forecast. The principal reason Boeing out-delivered Airbus is that production for the 787 is going full blast and production for the A350 is only beginning to ramp up. By 2018, we forecast Airbus will slightly surpass Boeing in production and therefore deliveries.

With Boeing trailing Airbus dramatically for orders this year, an old refrain has resurfaced from years ago when Airbus began outselling Boeing. Phil Condit, then the CEO of Boeing, dismissed the Airbus gains by saying orders don’t matter, only deliveries matter. There have been a few similar statements in recent times.

The reason this is silly is really quite basic: without orders, there won’t be deliveries.

The situation today is, of course, very different than it was during Condit’s era.

The backlogs then were far smaller than they are today, and if memory serves, at the time Condit made his statement, Boeing had the greater backlog.

What Boeing officials today are really saying is that their greater number of deliveries means more revenue, more cash flow and presumably greater profits than Airbus is pulling in.

In this context, the statement is true.

The fact that Airbus and Boeing each have backlogs of more than 5,000 airplanes does make reliance on orders less important in any given year, when economic and sales cycles might occur.

While some analysts and institutional investors worried whether Boeing would achieve a 1:1 book:bill last year (it did, barely), we shrugged off the concern. With the record-setting backlogs extending to 2020 and beyond for the 737 and 787, our view was, “Who cares?” if the book:bill didn’t hit one in 2015. The same is true this year. (Boeing will give guidance on its Jan. 27 earnings call.)

The same philosophy applies to Airbus. Although Airbus looks like it could be close to a 2:1 book:bill (final data will be revealed tomorrow at the annual Airbus post-year press conference), we would have been unconcerned if Airbus fell short.

Equally, there is constant hand-wringing over the possibility of cancellations or deferrals as economies change. With oversales a feature of the huge backlogs, some cancellations and deferrals will actually relieve the pressure off the OEMs and the supply chain.

Our somewhat cavalier attitude drives some of our aerospace analyst followers crazy. So be it.

 

 

29 Comments on “Pontifications: Deliveries matter, so do orders

  1. “The principal reason Boeing out-delivered Airbus is that production for the 787 is going full blast ”

    Extremely important deliveries / revenues & I congratulate the Boeing organization with it!

    Airbus certified the A320NEO and A350XWB and started up production. Meanwhile it’s putting the A330NEO and A350-1000 together and closed A320 & A330 CEO/NEO production gaps. While building Mobile A320 FAL & China A330 Completion center.

    A320NEO’s /A350XWBs/ A330NEO’s will be unleashed on the market for the next 5 years. The backlog is unprecedented and 2015 was key in the preparations. If we ignore that in Airbus 2015 results, we’re missing perspective.

    If I look at the 737-9, 787-10, 777-8 and 747-8 positions, I think, despite excellent short term results, Chicago has some homework for 2016.

    Keeps things lively here at LNC anyway!

  2. Early massive orders are a hinder to more orders later on. The dynamics of the sales effort is feeding on available slots. A handful of available early slots is the angling bait to catch the bigger fish. When you’re outsold at the front end, the dynamics of sales comes to a halt. Your sales team is idling, there is no juice in their speach, they rather stay home than fool around, they lose the touch, the secretaries in the executive offices move on, the people themselves move on and you realise you’ve lost insight/access … Selling away your production massively too early gives the illusion of success but is really leading nowhere. You need to keep 15-20 % of your slots at 36 months call open for the sales team to play with, that’s where the battles are won or lost.

  3. Here is a simple question – with probably quite a complicated answer.

    Do Airbus/Boeing sell themselves short by booking out the line for 5 years (selling planes too cheaply) or are they capitalising on panic among the airlines (if I don’t pay whatever they are asking now, it could be 8 years before I get new frames)?

    I suppose, further clouding the matter is the length to which the big two will go to bury BBD. Suggesting that they maybe have sold themselves short now to prevent more heartache later.

    • We have two cats.
      Individually they will take in food until sated. Usually there are some leftovers. The bowl might even stay untouched for some time.
      If both are present around available food they both will not stop until their common bowl is empty. 🙂

      Don’t go for quips like “we have less but better customers”.

      • Indeed – definitely not the worst analogy I’ve seen!

        Now the question is – should the sales teams be getting much in the way of praise for jamming up the production line for years with cheap sales?

      • Having cats I vouch for the accuracy of that statement 🙂 That being said it’s not necessarily a zero sum game A-B are playing.

  4. When it comes to homework, they ALL have homework to do. BBD with the C series, Boeing with the 739/MOM/NSA and Airbus with the A350 ramp up, etc. And just in the commercial sector.

    The orders are in theory predicated on deliveries but you also have to include factors behind cancellations. For example, the outlook for oil is that it is supposed to fall even further than where it currently is. This to me translates to lower prices when it come to JetA and a reason, among others, to delay the purchase or defer the delivery of fuel sipping jets, WB or NB , either from BA or Airbus. To the point that the former Boeing CEO was making, anyone can take an order. It’s a sales contract that can be cancelled and adjusted but as soon as the metal has been cut for the plane and it enters the prepayment stage, now they’re on the hook. The orders of 100, 150 200 and 250 airplanes is impressive but what is even more impressive is that you can carry all of those orders from contract signing to delivery fly away. Backlogs only impress the uneducated investor.

    Frequent, I agree with your statement 100%.

  5. I saw an Airbus presentation where it was expected that Airbus should break-even on A350 sales (on a unit basis) “…before the end of the decade” Well…that’s about 325 aircraft if I’ve go my estimates down right…maybe less if Airbus does real well. Anyways, a lot of the problem I have read seems to stem from the fact that the first bunches of A350s sold were sold at a …very competitive price, so-to-speak. Consequently, as later orders are built that were sold at a higher price, then profit should be realized on each sale.

    As a result of all this, I think Airbus could benefit from some more A350 cancellations – especially for those aircraft sold around ~2006-2007. That guy from Emirates – that annoying Brit – probably thinks Airbus is going to offer him the same deal on the A350-900 Regional that he got for the original 70 A350-900 orders. Fat Chance! I think Leahy is going to tell him something like “For the A350-900, $155 million is the price…take it or go see the Boyz in Seattle! (and don’t think we’re gonna’ waste any more money on that A380 albatross, either!)”

    Likewise, it would be a Godsend to Boeing if every 787-8 on order were cancelled….or better yet converted to a 787-10 order. It would be like Christmas.

    Imagine a world where there are no more A380s or 787-8s to be built, what a wonderful world that would be!

    • Flipping the above upside down on response, 787-8 is rapidly winding down as 787-9 is taking over. Some are conversions to the -9, a lot of the orders are filled and its history. Still not wasted as it took a long time to get right and all the problems were on the -8 and did not spread to the more important long term -9. -10 should be fine as well as nothing new there.

      As for Emirate and Airbus on A350:

      Well I suppose Leahy is capable of almost anything this side of illegal, but telling Emirate to pack sand I don’t think is in the cards.

      As the big E is their only bread and butter on the A380, there is a dance there but a polite one.

      $6 billion dollar question is Emirates toying with Airbus to get a better deal on the 787-10s? That’s what Delta did but in reverse and some outright lies out of Anderson on that one.

  6. “Without orders, there won’t be deliveries”.

    Well said, Scott. While the order backlog is always subject to future changes, based on a variety of factors beyond OEM’s control, deliveries mean little without a substantial order backlog supporting them. So both are important. These considerations apply to both A and B equally well. IMHO, it would be foolish for either company to dismiss the other, based on a temporary advantage it enjoys at a particular point in time.

    • IMHO it is interesting to see the “public” evaluation ( orders vs. deliveries ) change with the year to year changes in participant performance 🙂 And it appears to be a preparatory process, even! Gravity on deliveries started to appear in fall already.

  7. Not sure if this is appropriate here but I was profoundly taken by the research done by Benkard on the L1011 program (2000). He focused on the ability to benefit from the learning curve but also that in the event that production slowed or stopped the benefits gained are lost and have to be relearnt. This would have the effect of increasing costs.

    What I am trying to get is that having a cushion of orders takes the risk out of the project in terms of ramping up. This has the effect of making the whole programme more like a military programme where there is some ‘guarantee’ that the overall programme will cover costs at some point in the future over the government guaranteed volume.

    As soon as there is some degree of uncertainty, slowdown or stop in the number of frames produced per month (747-8, a380, Cseries) then the potential to benefit from the learning effect is compromised and may even go into reverse.

    The enormous improvements in the labour efficiency of the Dreamliner programme illustrates the benefit of being able to churn out frame after frame at an increasing rate (and initial inefficiencies and rework). Without that backlog both OEMs would have to be more circumspect in their ramp up and the consequent savings they could make.

    There are of course trade offs as suggested above but given the choice I would be inclined towards a backlog.

    • “Not sure if this is appropriate here but I was profoundly taken by the research done by Benkard on the L1011 program …”

      I think it is perfectly appropriate – thanks for mentioning it! Anyways, the L1011 research you mentioned indicates (as well as some DC-9 production research I’ve seen) that slowing an aircraft production line adds a lot of cost/unit to the building of an airframe as workers “forget” how to build it: hence the title of the research you mentioned – “Learning and Forgetting”. As a result, if Boeing sold all those 767s to Fedex at a steep discount this year, then that was still a pretty wise decision for it allows Boeing to keep the 767 line “warm” so-to-speak so they can more smoothly (and profitably) transition into producing tankers latter on.

      • Yep, and like Airbus, they can sell pretty cheap and still make some money as its all in place and not tooling or other costs needed.

        You want to up production the tools and line are there and just a matter of dusting off.

        What may be missed in the ramp up and down is that as long as you have a core of experienced workers, they can ramp up new people and not the same as an all new program.

        I think we saw that with the 787 when they canned the contract workers (thank you McNenearny) and found out that they had killed the core that was making it work (in this case the all new workers were the local hires)

        For a 3 month gap he caused major issues and cost the company dearly. they hired them right back and things began to smooth out, not as good as you would like but back to vastly better.

      • “forget how to build it” … Yes but most of the cost when one slowdown is in fact amortizations per aircraft of tooling, building and cost of people to administrate the whole thing but not producing etc …

    • defense contractors are guaranteed a profit whether or not the product ever gets bought in quantity, because the development cost is all paid for before a single jet or tank is bought due to cost+ contracting (usually, kc-46 is an outlier with its FFP development contract). so contractors run up the development bill as much as possible to get that tasty profit.

      then, when fiscal reality hits during procurement, and the government decides to buy 20 instead of 120 (B-2) or 183 instead of 752 (F-22), sure, they lose profit, but nothing like what they would have lost if they had to operate on the same terms as commercial aircraft builders who only make money on the end product and cost of R&D has to be figured in and they delivered a dud like the A380 (great airplane, but wrong for the market, likely to never see a positive Net Present Value)..

      • I think you mean to say that a margin is built in to the pricing. Whether that margin is enough to keep the programming going is another issue. No government program is created to ensure all program costs are covered. Goverment procurement assumes a supplier has ample history and other customers to support the overall organization. In commercial sales the mrgin might be 20% while the margin in government programs might be 5%. The 5% might be enough to sustain the company but not enough to grow the company and its product offerings.

    • I think you are taking the wrong conclusions about the manufacture/assembly process. Its not so much about ‘learning’ around simplified assembly steps, as the investment in tooling , equipment, plant overhead. These are usually all fixed costs, so the more work flow the less overhead on each planes production cost. These days with more automated tooling than say was common in L1011 and DC9 day, this is more noticeable. As well, looking back in 70s and 80s production rates, they seemed to swing wildly from boom to bust and everything in between, that would have a big effect on production costs.

      • I am very interested in your comment re the reduced impact of learning curve and have very much the same opinion in terms of the processes that have become highly computerised. That said the FAL is still highly dependent on the learning effect and it is a consistent 82-87% through history. This is acknowledged by all OEMs and is fundamental to Boeing booking profits on the b787 programme and being able to defer costs.

        The way in which ‘learning’ appears to be occurring with the increased investment is the more intense or efficient use of those assets you mention ie complete the process in 4 days rather than 5. So it is vital to achieve the ramp up targets and increased production rates.

        Your second point is precisely the point I am getting at. Until recent history it has been a rar event that there has been such a massive order bank. Previously production on most programmes has been subject to cyclical demand and ebbs and flows of production. The stop/start nature of these ebbs and flows materially damaged profitability. The current backlogs reduce or even eliminate this risk

        • If you expect learning retention you have to have a mechanism that feeds any learning back into production documentation.

          If you depend on acquired worker proficiency only any workforce contraction will incur losses.

  8. Boeing’s 2015 deliveries total 762 and Airbus’s at 635. I’d be curious to know how many of those deliveries actually added black ink to the bottom line.

    • When Boeing has published their 2015 non GAAP ( and the regular Airbus data ) numbers a basic comparison should be possible.

  9. What counts short term is deliveries. And frankly that should be the metric the companies yearly performance is based on.

    Long term, it is indeed orders.

    Two metrics that are extremely important.

    But assume that Boeing is booked for the 737 max until 2025 and Airbus is booked for the A320 until 2025.

    Both are cranking up to deliver virtually the same number of aircraft in that area each year (Airbus is scattered, Boeing has a third line coming up to speed at Renton)

    The sale really don’t mean anything as far as single aisle go.

    A caveat is what they are sold for and there I believe Airbus has a good edge with the A321 as they can get better profits on it as Boeing has no answer.

    Boeing has no answer for an A380 either, but that does not help if the demand is not there (and has not been).

    It will be interesting to see what happens between now and 2018 when Airbus should out produce Boeing.

    I foresee an all new project coming up by next year could be MOM or it could be an all new single aisle replacements. If its an 737RS then all bets are off as that then gets the huge sales boost.

  10. Boeing seems always to have had the capability to deliver more aircraft then Airbus. The only times Airbus delivered more were when Boeing didn’t have that much to deliver or were ramping up. I personally don’t see Airbus ever surpassing Boeing on that capability, unless Boeing itself allows Airbus to increase their output without themselves taking some measures to match any such increase.

    But the good news for Airbus is that they are consistently increasing their output every year. The big question is where that number would peak.

  11. Hey Scott

    Thanks for finally trying to make the point I’ve been trying to get you to make, and that is, the product offering of Airbus might be its biggest competition. You seem to think its the A380 and I say it’s all that crap in the A330 world aginst the A350. When you have to drop the price so low on one to beat the competiton, it makes too much sense that the A350 will be impacted. And, if you keep doing it the Rolss guys are going to get pissed because they have to drop price on both engines to support the Airbus campign. A330 might be getting share, but it certainly is not to the impact of the 787. Man what a crazy strategy to put so much in the same space. A350 certainly did not do well in 2015, and at the rate sales are going slots will be wide open over the next 5 to 7 years.

      • keesje:

        Neither of those sales would have gone to Boeing. They are Airbus customers. Look at 787 sales this year, compare them to A350 sales. 787 is sold out too but they got sales. Airbus got sales too, but they were not for A350. They were for A330s, which should be at the end of its life. Think about, there are a boat load of A330s that are now on lease to customers who are 787 customers. Okay? Those current A330 customers are not moving to A330NEO, they are going to their 787s. That means that the A330NEO are not really competing with 787s but are competing with rather young A330CEOs. The cancelations of 787s are coming down, while the A350 orders are not capturing those sales, but the A330 sales are climbing? What gives? Airbus has an issue and it’s finally being shown in its widebody messy strategy. Anderson might have used the 777 as his example, but the number of available A330s coming off lease over the next 10 years will be young and looking for any form of home.

        • Delta even had 787 orders. Hawaiian flies Boeings much longer then Airbus. Both have A330CEO and are moving to NEO’s. Even the A330 CEO are ordered in good numbers. 2015 was a NEO/350 production ramp up year for Airbus. Just like Boeing had in the past. Somehow everybody is refusing to see.

          Looking at the overview I posted in the previous comment, everybody is free to judge who’s widebody strategy is messy at this stage.

          If you are looking for a rather complete list of past Boeing 777-200ER/300ER customers, take the A350 backlog. Will EK go for the 787-10 or more 777-8s?

          Boeing is still in a state of denial it seems. Now comes anger?

  12. “As this is not a brand new aircraft, customers expect the same level of maturity as their ceo aircraft; they expect it to fly 100% of the time with no problems at all. This is a new engine, a new generation. Technically, it was extremely difficult to develop and produce, so we can’t expect everything to be perfect from day one. What is perfect is the fuel burn performance. When we deliver the first aircraft to our first customer, it will already meet the performance guaranteed in our contract,” he said.

    The Airbus CEO statement about NEO is the real challenge for the program, customer expectations based on CEO and not accepting that NEO is new. Fuel burn might be easy but if the engine develops “new” issues customers will not be happy.

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