Actions of Airbus (OTC: EADSY) jumped 9% on Thursday, after the European aircraft manufacturer told suppliers to prepare for a rapid rebound in aircraft production. In fact, Airbus plans to increase production of narrow-body jets to record levels in as little as two years.
Boeing (NYSE: BA) the stock also rose 4% on Thursday. Investors appear to believe that Airbus’ aggressive production plans imply a strong recovery in the aviation industry which will also increase demand for Boeing jets. Still, while demand for narrow-body jets is expected to fully recover by 2024, Airbus’ plan also involves gaining market share over its US rival. Thus, Boeing shareholders should not celebrate production increases at Airbus.
Planning a record production of narrow bodies
Airbus cut production of commercial aircraft last year as the COVID-19 pandemic crushed demand. By the end of 2020, it was building around 51 planes per month: 40 A320 Family jets, four A220s, two A330s, and five A350s. Earlier this year, it increased the production rate of the A220 to five per month.
On Thursday, Airbus confirmed plans to increase production of the A320 Family to 45 per month by the fourth quarter of 2021. However, it called on suppliers to prepare for production of the A320 to reach a record pace of 64 per month in the second trimester. 2023. In addition, Airbus has told its suppliers that it hopes to increase the production rate of the A320 to 70 per month in early 2024 and up to 75 per month in 2025.
Airbus has also confirmed that it will increase production of the A220 to six per month at the start of 2022. So far, annual deliveries of the A220 have never exceeded 48 (or four per month). Yet Airbus plans to build up to 14 A220s per month “by the middle of the decade”.
Gain market share on narrow bodies
In a sense, Airbus’ plans should come as no surprise. The production of the A320 Family reached 60 per month before the pandemic, but by 2018, the aircraft manufacturer wanted to increase its production to over 70 per month. Meanwhile, Airbus has been planning to ramp up production of the A220 for years, with a slew of orders from U.S. airlines that will be fulfilled from a new production line in Mobile, Alabama.
Nonetheless, aerospace analysts expected a much slower recovery in production rates. After all, most experts believe that global air travel demand will not return to 2019 levels until 2023. Since growth planes typically account for more than half of all commercial aircraft deliveries, many analysts expected aircraft demand to remain well below pre-pandemic levels by at least 2024.
Still, demand doesn’t have to return to 2019 levels for Airbus to boost fuse production to record rates. Instead, it can count on gaining market share at Boeing’s expense. Indeed, Airbus ended April with 6,187 narrow-body jets in its order book, including more than 5,600 A320neo family aircraft. In contrast, the Boeing 737 backlog fell to just 3,239 units.
For the moment, Airbus’ target of increasing the production of the A220 to 14 per month is ambitious. At this rate, its current backlog of 494 unfilled orders would only last three years. In contrast, Airbus has enough orders for the A320neo family to last seven years at a rate of 70 per month. With such a long backlog, it’s no wonder the aircraft manufacturer is considering even higher production rates.
Boeing hopes to restore production of the 737 to 42 per month by the end of 2022. This level of production – 26% lower than the rate of 57 per month that Boeing applied before the 737 MAX was grounded in 2019 – should be durable. But unless there is a huge jump in orders that is unlikely to materialize, Boeing will never come close to building 63,737 each month, as it expected at the end of 2018. Its current order backlog would last just over four years. at this rate of production.
Demand for large bodies remains low
As Airbus is poised to convert its backlog advantage over Boeing into a production advantage in the narrow fuse market, the backlogs of large aircraft from both aircraft manufacturers are tied. Unfortunately for Boeing, demand for large aircraft remains quite low and may never fully recover, due to the disruptive potential of the Airbus A321XLR.
In its recent production update, Airbus said it plans to continue building just two A330 widebody jets per month for the foreseeable future. And while it plans to increase A350 production from five per month to six per month next fall, it had built 10 A350s a month before the pandemic.
In short, Airbus’ aggressive production plans for narrow fuses position it to capture market share from Boeing in this high potential segment. Meanwhile, Airbus sees the current widebody recession continue indefinitely. Together, these developments suggest that Boeing’s revenue, earnings and cash flow will remain well below the highs reached in 2018 for the foreseeable future.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.