kanban From United States of America, joined Jan 2008, 2459 posts, RR: 21 Posted (1 year 4 days 2 hours ago) and read 7063 times:
We seem to spend a lot of time comparing the manufacturer's products and recently processes, manuals design philosophies and now comes an article that looks at orders (sale philosophy) and profits.
I cringe at the way they describe the A380 position, knowing there will be darts thrown.. yet as a whole the article seems balanced.
Stitch From United States of America, joined Jul 2005, 26682 posts, RR: 83 Reply 1, posted (1 year 4 days ago) and read 6929 times:
This analysis trends with ones I have seen from major financial firms - Boeing sells less, but has a higher Average Sales Price.
Still, Airbus' backlog is healthy and even at their low margins and ASPs, when you're pushing that much product, you still bring in a good amount of cash.
astuteman From United Kingdom, joined Jan 2005, 9135 posts, RR: 96 Reply 2, posted (1 year 4 days ago) and read 6853 times:
Quoting kanban (Thread starter): I cringe at the way they describe the A380 position, knowing there will be darts thrown.. yet as a whole the article seems balanced.
Like all of these articles, it still misses some simple fundamentals, like Boeing accounts for its aircraft on a "programme" basis, and can hide, for example, the massive overruns that the 787 is undoubtedly experiencing over a good 10 years or more of future production, whilst Airbus has brought its losses out very visibly into the accounts as exceptionals.
It's also perhaps worth noting that in recent years the strong Euro has caused Airbus to take hits on hedging.
In 2005, when neither of these things were a factor, Airbus experienced double-digit EBIT - about 12%.
The observation that in the last decade Airbus have been growing market share, and may have used pricing in order to do so, is probably a fair one.
But in the last decade, Airbus took some E33Bn of development costs and cost overruns on the chin, up front, and still made a nominal profit, albeit not that large.
Boeing's alleged forecast of 325 A380 sales is interesting - that's only another 70 sales...
Stitch From United States of America, joined Jul 2005, 26682 posts, RR: 83 Reply 3, posted (1 year 3 days 23 hours ago) and read 6833 times:
Boeing has recorded many billions of exceptional expenses across the 787 and 747-8 programs over the years, so they're not able to hide the entire costs of the programs using Program Accounting.
PlanesNTrains From United States of America, joined Feb 2005, 4536 posts, RR: 28 Reply 4, posted (1 year 3 days 23 hours ago) and read 6802 times:
Quoting astuteman (Reply 2): Boeing's alleged forecast of 325 A380 sales is interesting - that's only another 70 sales...
Rgds
At some point we will finally move past the premise that the A380 isn't going to sell. It's already sold, is continuing to sell, and is a pretty young program.
70 more sales? That would seem very achievable. 170 would seem achievable. Add in the -900 if built and I'd say 270 is easily achievable. Or more.
rotating14 From United States of America, joined Jan 2012, 374 posts, RR: 0 Reply 5, posted (1 year 3 days 21 hours ago) and read 6553 times:
Considering the fact that the article is new, is Airbus including the -8F and the mythological -9 in the 1200 tally?? I ask only because the 747 had the SP, 100, 200, 300, 400, (ER's included) and now the -8 to come close to breaching the 1,500 mark. Seems like a lot of ground to cover in such a small window.
Ruscoe From Australia, joined Aug 1999, 1401 posts, RR: 2 Reply 7, posted (1 year 3 days 21 hours ago) and read 6422 times:
There are two interesting observations about the Airbus books:
First one is that the value of the backlog appears to be inflated. (each unit valued at 108 million, but Average unit delivery price is in the region of 81 million; compare this with Boeing Commercial where average backlog sell 80 million and average unit delivery price is 75 million.)
Second, Airbus recorded an EBIT (earnings before interest and tax) in 2011 of ~~ 534 million, but they sold 1419 craft.
So even if they only accepted 1 million per craft as deposit etc, it means no profit was generated on the sale of aircraft.
Same applies to 2010 (574 orders & 305 EBIT) 2009 (loss of 1.3 billion), 2008 (777 sales & 1.8 billion EBIT , so they made a profit on aircraft sales,2007(loss of 881 million), 2006 (loss of 572 million).
You have to go back before 2005 before things start to look better. What happened after 2005?
I speculate that Airbus is relying on low margin sales to generate cash flow to fund development, but cash reserves are unreliable by themselves in determining the financial state of a Company.
PM From India, joined Feb 2005, 6715 posts, RR: 66 Reply 8, posted (1 year 3 days 20 hours ago) and read 6395 times:
Does Boeing have the better product lineup?
These things are damned hard to assess but I suspect they probably do - just!
There's nothing much to choose between the A320 and 737. Both will rack up further huge numbers.
And at the top end I expect the A380 to outsell the 747-8 (in all guises) but neither seems likely to achieve great sales in the near future.
The real battleground will be the A330/A350 vs. 787/777 and if I had to bet I'd go for Boeing to come out ahead. Spectacular though the A330 has been, the 787 will surely eclipse it sooner or later. And if Boeing can get it right with the 777X, they'll give Airbus a pretty good run for their money on the A350.
In short, the 787-8, 787-9, 787-10, 777X should be a pretty formidable product line. I hope I'm wrong but I don't yet see Airbus matching it.
(No, I didn't forget the 767 but I don't see it being anything but a tanker in a few short years from now.)
astuteman From United Kingdom, joined Jan 2005, 9135 posts, RR: 96 Reply 9, posted (1 year 3 days 18 hours ago) and read 6114 times:
Quoting Ruscoe (Reply 7): First one is that the value of the backlog appears to be inflated
The backlog is quoted at list, and is stated as such
Quoting Ruscoe (Reply 7): Second, Airbus recorded an EBIT (earnings before interest and tax) in 2011 of ~~ 534 million, but they sold 1419 craft.
So even if they only accepted 1 million per craft as deposit etc, it means no profit was generated on the sale of aircraft
I'm not sure why you've elected to mix up cash and profitability here
Quoting Ruscoe (Reply 7): You have to go back before 2005 before things start to look better. What happened after 2005?
Lots of exceptional write-downs from the A380, A400M and A350 programmes coming off the bottom line, and a strong Euro impacting hedging
Quoting Stitch (Reply 3): Boeing has recorded many billions of exceptional expenses across the 787 and 747-8 programs over the years, so they're not able to hide the entire costs of the programs using Program Accounting.
I know it has. But "many" as far as I can see for the 787 and 748 "only" appears to be about $4Bn - $5Bn.
The overall impact of the delays to these programmes is clearly way more than has been written down.
Theres a reason Boeing moved the programme acccounting block on the 787 programme to over 1000 aircraft.
I'm not saying there's anything wrong with this either, by the way - my own business operates on this basis.
Just cautioning anyone who is daft enough to think we're comparing apples to apples.
I'm not necessarily commenting here on whether Boeing has better underlying profitability either by the way. That's a separate discussion to the topic of equivalency of data
If I remember correctly at the height of the 787 fiasco Boeing piled a whole heap of costs onto the 787's in production and as such was writing off "development costs" on a year to year basis. I'd suggest the 787 has had a fairly significant impact on Boeing's earnings over the last couple of years and it's not in Boeing's interest to defer losses for the sake of making paper profits.
I think one advantage Boeing has had over Airbus is that of being able to produce cash. Even though it's cash position has remained relatively stable over the last 5-6 years the value of it's inventory of 747's & 787's ($20 billion?) has risen considerably. Once these aircraft start moving into customers hands the cash should start rolling in.
It will be interesting to see what happens with this cash over the next 2-3 years.
cmf From United States of America, joined Jun 2011, 2475 posts, RR: 35 Reply 11, posted (1 year 3 days 14 hours ago) and read 5757 times:
Quoting travelhound (Reply 10): it's not in Boeing's interest to defer losses for the sake of making paper profits.
It is in Boeing's interest to show even profits year after year. Project accounting is the tool to do just that. It pushes some of the costs generated early in the project to later time.
Write offs are required when the costs are higher than can be absorbed in the number of planes in the accounting block. The accounting block is the number of planes that with high confidence can be expected to be sold and for which costs and revenues can be predicted. It is a lot of highly qualified guessing to avoid showing losses at the beginning of a project.
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BigJKU From United States of America, joined Feb 2007, 709 posts, RR: 11 Reply 12, posted (1 year 3 days 13 hours ago) and read 5607 times:
Quoting PlanesNTrains (Reply 4): At some point we will finally move past the premise that the A380 isn't going to sell. It's already sold, is continuing to sell, and is a pretty young program.
70 more sales? That would seem very achievable. 170 would seem achievable. Add in the -900 if built and I'd say 270 is easily achievable. Or more.
If I am at Airbus I think my biggest worry with regard to the A380 has to be about how I get the -900 out there if that is what is really going to get me more sales before I start to approach the end of the current production line. The backlog right now is under 5 years. While that is not short that does not give them a ton of development time to put together a new variant either unless they are able to move significantly more -800's. I would think an announcement has to come pretty soon.
But I think there are issues in that their engineers are tied up with the A350 and the A320 work right now. With the A350-1000 being pushed back things when is the earliest you could do the -900? Can you find enough sales of the -800 to bridge the gap and not have a production stoppage or slowdown in between the two models?
Program accounting numbers are very different to P&L numbers.
P&L numbers looks at total assets - total liabilities at the start of the financial year and compares the same numbers at the end of the financial year.
Program accounting looks at total profits - total investment over the program period. The value of the program (annualized ROI) is determined by dividing total profits by program duration and comparing it to total (initial) investment (at a certain point in time a program should become self funding).
With reference to the 787, Boeing's P&L numbers have been taking a hit for quite a few years now. With reference to program accounting Boeing's annualized ROI on the 787 have diminished over the life of the program. This may not be as bad as one expects as the order backlog (including deposits) has the potential to fund the extra costs associated with the program. In actual fact the success of the 787 sales campaign when compared to the A350 mk1 might mean the 787 program as a whole may still achieve similar ROI numbers as those envisioned at the start of the program (that might be stretching it a bit) because of higher market penetration and subsequently higher sales.
astuteman From United Kingdom, joined Jan 2005, 9135 posts, RR: 96 Reply 14, posted (1 year 3 days 12 hours ago) and read 5468 times:
Quoting travelhound (Reply 10): it's not in Boeing's interest to defer losses for the sake of making paper profits.
Which begs the question "Why do they engage in Programme Accounting"?
Quoting travelhound (Reply 10): I think one advantage Boeing has had over Airbus is that of being able to produce cash. Even though it's cash position has remained relatively stable over the last 5-6 years the value of it's inventory of 747's & 787's ($20 billion?) has risen considerably.
And in this sense Boeing are different to Airbus because?
They also sit on significant cash, and have also built up huge inventory, of a similar magnitude to the $20Bn you quote for Boeing (EADS Inventory is currently E24.5Bn or $31.2Bn, which, if split in proportion to revenue gives Airbus Inventory of $21.6Bn)
.
If there is one difference here, it's Boeing's ability to rely on the night-follows-day assurance of huge cash inflow from its defence activities, on top of the substantial amount generated by BCA - something Airbus doesn't enjoy to anything like the same degree.
Quoting cmf (Reply 11): It is in Boeing's interest to show even profits year after year. Project accounting is the tool to do just that
That's my understanding too. And there are mechanisms to regulate this throughout the programme - we do it.
As you say, exceptionals in this case account for things that can't be accommodated in the programme accounting
Quoting BigJKU (Reply 12): The backlog right now is under 5 years
Not at the current rate it isn't.
The 26 delivered last year would keep Airbus going for 7 years and 2 months to consume the 186 outstanding orders at the time - i.e. until Feb 2019.
If they really do achieve 30 this year (which is questionable), and sustain it, then those 186 outstanding orders will last until Feb 2018, or 6 years and 2 months.
With no further orders included.
By the way, one of the dampeners on sales is clearly the length of that lead time, and uncertainty over Airbus's ability to ramp up to reduce it
Quoting BigJKU (Reply 12): With the A350-1000 being pushed back things when is the earliest you could do the -900?
About 2019, I'd suggest, which, funnily enough is where the current production rate takes the backlog to. Without any additional sales in the next 6 - 7 years Airbus need to increase the A380 output !!!
Quoting BigJKU (Reply 12): Can you find enough sales of the -800 to bridge the gap and not have a production stoppage or slowdown in between the two models?
See above
Quoting travelhound (Reply 13): Program accounting numbers are very different to P&L numbers.
P&L numbers looks at total assets - total liabilities at the start of the financial year and compares the same numbers at the end of the financial year.
Must admit that I've never seen any accounting do that.
In all of the accounting I've ever seen Assets and Liabilites are the currency of the Balance sheet, and are nothing whatsoever to do with the P+L account. I'm open to being educated, though.
Stitch From United States of America, joined Jul 2005, 26682 posts, RR: 83 Reply 15, posted (1 year 3 days 12 hours ago) and read 5432 times:
Quoting astuteman (Reply 14): If there is one difference here, it's Boeing's ability to rely on the night-follows-day assurance of huge cash inflow from its defence activities, on top of the substantial amount generated by BCA - something Airbus doesn't enjoy to anything like the same degree.
But Airbus (Commercial and Military) is part of EADS and EADS is a major defense contractor with divisions like Cassidian, Eurofighter, Eurocopter and Astrium (to name just a few).
You must be working to a different set of accounting standards to me, because I've never seen a situation where "assets and liabilities are the currency of the balance sheet and are NOTHING WHATSOEVER to do with the P + L account"
For all intensive purposes they are linked. The same numbers that make up the P&L make up the balance sheet. There might be an element if creativity in there, but......
nothing whatsoever might be a bit of an exaggeration, but they are definitely once, or even twice divorced. The link is NOT direct. Assets and liabilites are what they are.
Profit or loss can be declared in a timeframe that is substantially different to when their second or third order consequences hit the balance sheet.
A company CAN declare a loss in a year and see its balance sheet improve in the same year, and vice versa.
Quoting Stitch (Reply 15): But Airbus (Commercial and Military) is part of EADS and EADS is a major defense contractor with divisions like Cassidian, Eurofighter, Eurocopter and Astrium (to name just a few).
EADS is. But if you'll pardon me saying so, not only is the Defence revenue of EADS a lot smaller than boeing's, it's margins are significantly lower.
The USA is still the place to do defence business, not Europe.
cmf From United States of America, joined Jun 2011, 2475 posts, RR: 35 Reply 18, posted (1 year 3 days 8 hours ago) and read 4460 times:
Quoting travelhound (Reply 13): Program accounting looks at total profits - total investment over the program period.
Sorry for using project accounting when it should have been program accounting in my previous post.
Program accounting is about production cost. Total investment is not considered, only product cost. Remember that R&D must be expensed in the accounting period it occur. Profit is only indirectly considered and then only to determine if a write off is required.
Slightly simplistic program accounting takes all production costs over the accounting block and then divided by the number of planes. This average* is used as cost each time a plane is sold without concern for what actual cost was. So if your accounting block is 3 planes and actual cost to produce the first is 300, the second is 200 and the third is 100, you would recognize the average 200 with each delivery.
( * For understanding average is close enough but since programs typically span long time periods there are some adjustments to compensate for typical cost escalation over time)
The accounting block is reviewed in each reporting period and if the estimated production cost is higher than estimated revenue the cost above revenue is written off. This is also where the size (number of planes) in the block is reviewed based on remaining backlog, quality of the backlog and highly likely future sales.
Don’t repeat earlier generations mistakes. Learn history for a better future.
kanban From United States of America, joined Jan 2008, 2459 posts, RR: 21 Reply 21, posted (1 year 2 days 23 hours ago) and read 2859 times:
The last line of the report says "Operationally, Airbus has more room to improve. If it can narrow the margin gap with Boeing, EADS's EV/Sales and stock should rise correspondingly. But its manufacturing location in Europe may make it difficult to reach its stated margin targets
I have noted before that the production plan Airbus uses seems to resist any improvement in the way of facility consolidation.
tdscanuck From Canada, joined Jan 2006, 12709 posts, RR: 81 Reply 22, posted (1 year 2 days 23 hours ago) and read 2841 times:
Quoting cmf (Reply 11): Quoting travelhound (Reply 10):
it's not in Boeing's interest to defer losses for the sake of making paper profits.
It is in Boeing's interest to show even profits year after year.
Yes, but it's impossible to hide if you're "padding" profits via program accounting because it shows up in the cash flow. Investors, especially those who actually pay any attention to the annual reports, aren't that stupid. Boeing gets a lot more value from accounting honestly than any "paper profit" they might get in the short term.
Quoting cmf (Reply 11): Project accounting is the tool to do just that. It pushes some of the costs generated early in the project to later time.
It's an attempt to match the costs to their equivalent revenues. If you spend $500 million on a tool that will last 20 years it really makes no accounting sense to take that $500 million hit the year you spend it and they have it be "free" for the next 19 years. That screws up the actual picture of the business P&L in all years (too low the first year, too high in subsequent years).
Cash flow captures the fact that you spent a ton of money that year, program accounting makes the P&L actually make some version of sense.
Quoting cmf (Reply 11): It is a lot of highly qualified guessing to avoid showing losses at the beginning of a project.
It's not to avoid showing losses, it's to correctly account for the fact that the program covers way more than one accounting period. Basic GAAP is to try to match costs to revenues; this is tricky when things you buy today are going to be attached to revenue decades from now.
Quoting astuteman (Reply 14): Quoting travelhound (Reply 10):
it's not in Boeing's interest to defer losses for the sake of making paper profits.
Which begs the question "Why do they engage in Programme Accounting"?
So that the P&L bears some resemblance to what's actually happening. People seem to be mixing cash flow and P&L up.
astuteman From United Kingdom, joined Jan 2005, 9135 posts, RR: 96 Reply 23, posted (1 year 2 days 21 hours ago) and read 2766 times:
Quoting tdscanuck (Reply 22): It's an attempt to match the costs to their equivalent revenues. If you spend $500 million on a tool that will last 20 years it really makes no accounting sense to take that $500 million hit the year you spend it and they have it be "free" for the next 19 years. That screws up the actual picture of the business P&L in all years (too low the first year, too high in subsequent years).
Don't disagree with that, Tom.
I believe the way that Airbus has "front-loaded" the exceptional losses on its programmes paints exactly the picture you describe - profits "look" too low now (and have done for the last 5 years), and will "look" much higher in years to come.
In reality, in future years they won't actually be as high as the P+L account suggests.
The reason I think they have done it is to offset corporation tax liabilities (by declaring low profits) in a period where it was clearly a policy to accumulate cash "just in case the A350 goes belly up, and we have to pay the WTO heaps of cash etc etc)
We operate programme accounting for exactly the reasons you describe, and with the sort of lead times we operate on, the logic for doing so is crystal clear
AngMoh From Singapore, joined Nov 2011, 317 posts, RR: 0 Reply 24, posted (1 year 2 days 21 hours ago) and read 2730 times:
Quoting Ruscoe (Reply 7): Second, Airbus recorded an EBIT (earnings before interest and tax) in 2011 of ~~ 534 million, but they sold 1419 craft.
So even if they only accepted 1 million per craft as deposit etc, it means no profit was generated on the sale of aircraft.
Airbus is legally not allowed to book these sales as turnover. Depending on accounting rules applied, these deposits can only be recognized as income if the plane is physically built and it reaches a specific state, or only when the plane is actually delivered. Pre-payments/deposits are considered "current liabilities" (effectively short term debts) under European accounting rules. What these deposits do is create a positive cashflow which helps to create working capital, but it is effectively a non-interest loan from customers.
Orders don't create income. Deliveries do.
Quoting travelhound (Reply 16): You must be working to a different set of accounting standards to me, because I've never seen a situation where "assets and liabilities are the currency of the balance sheet and are NOTHING WHATSOEVER to do with the P + L account"
For all intensive purposes they are linked. The same numbers that make up the P&L make up the balance sheet. There might be an element if creativity in there, but......
It is possible to make a profit and go bankrupt at the same time...
Cashflow determines if you go bankrupt. Profit and loss determines how much tax you pay. And although they are related, they are not the same, especially if a company is growing fast.
For example, I can spend huge amounts of money on buying buildings, and run out of cash. On paper, I am in a good shape because I have a lot of assets. But reality is different. I have seen something like this happen with (small) companies which were in trouble and needed to find an investor. They inflate assets like IP, goodwill to create a short term artificial profit. Stupid investors are then taken to the cleaners...
Also small fast growing companies often run out of cash even though they are profitable on paper. The profits they create are often not enough to fund the growth and because there is a time difference between paying for cost of sales and receiving payment for sales, belly up you go whale being profitable...
25 travelhound: As far as the topic goes Boeing values the 787 and 747 programs on a yearly basis. There are a number of mechanisms that allow Boeing to do this.....
26 cmf: Program accounting has nothing to do with padding. Accounting is about displaying an accurate picture of a companies financial situation. Program acc
27 astuteman: And I for one certainly aren't. Your excellent post thoroughly explains how this type of accounting works, with examples. And to reiterate, my busine
28 travelhound: We are getting into the nitty gritty here, but I am still of the opinion (and I could be wrong) that Boeing still records a loss when the costs (dire
29 cmf: Always happy to learn new things but I must admit that I have seen nothing to indicate what you state. From where do you have this information? As I
30 travelhound: CMF, I responded to your email this morning, but it didn't go through. I will try again. The topic is getting a little above me, so on the basis I'm
31 cmf: There is no assertion Boeing is massaging their books, NONE. They use program accounting which is established under US GAAP. For US companies US GAAP
32 astuteman: correct. And there never was. Only an illustration that the two entities might not approach their profit and loss accounting in quite the same manner
33 kanban: OK we've flogged that horse to death, how about the note that Airbus has the most room for improvement (I read it as manufacturing process improvement
34 cmf: Are they stuck with a factory here and there?
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