A380: “one-off items” versus “accounting block”

Aviation analyst Richard Aboulafia recently published an opinion article at Aviation Week & Space Technology magazine, Airbus Twin-Aisles—Big Needs, Limited Means, in which he discussed strategic product portfolio options for Airbus. He was particularly critical to the A380. Let me bring a couple of passages from the article:

Historically, Airbus has spent more than Boeing on development as a percent of sales than. But during the past 15 years, the bulk of this heavy spending was squandered on the A380. Today, development spending is set to fall in line with the company’s new direction. Last year, it fell below 6% for the first time since the company was established (see graph). Given the requirements of funding the A350XWB and A320neo, Airbus isn’t likely to have the resources to fund both an A330neo and A380neo and a new large twin, too. Tough choices will need to be made. […]

In short, Airbus will be paying the price for the A380 for many years to come.

From these 2 paragraphs, the first assertions are factual: Airbus spends more on research and development than Boeing Commercial Airplanes and during the last years most of that spending was dedicated to the A380. In my opinion the last sentence overstates the issue of the current burden of A380 over the company’s future. If the A380 did not derail EADS during 2006-2010 it will not do so in the coming years. As numbers show and top management has indicated at investors events the A380 programme is expected “to emerge from the red by 2015“.

A380 MSN4 (credit: A. Doumenjou).

Today the A380 is a recurring cost issue, not more. The situation would be entirely different had Airbus (or rather EADS, now Airbus Group) applied the same accounting system that Boeing does (since the merger with McDonnell Douglas). EADS has passed in the profit and loss accounts in the previous years several one-off items related to the A380 valued in billions of euros (refer to yearly financial reports). What is left are R&D (mainly D) expenses to bring down unitary recurring costs and producing enough numbers of aircraft so that learning curve effects can be benefited from.

On the other hand, Boeing accounting system spreads the capital expenditures and research and development costs along what they refer to as an accounting block, which for example for the 787 now takes 1,300 airplanes to amortize those costs (previously were 1,100, see here a post on the 787 break even).

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2 Comments

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2 responses to “A380: “one-off items” versus “accounting block”

  1. Pingback: A380 sales compared to 747 sales at program start (update 2013) | The Blog by Javier

  2. RationalObserver

    Enjoyed the analysis! Just a quick note though about accounting blocks. It is incorrect that Boeing spreads R&D over the aircraft accounting block. R&D is expensed as it occurs. In fact, Airbus capitalizes and amortizes a small percentage of R&D, where Boeing is not allowed to by U.S. accounting rules. Both manufacturers amortize capital expenditures (which are facilities, tooling, land, etc).

    The accounting block issue at Boeing is also related to mainly recurring costs. Boeing estimates an average manufacturing cost and sale price over the 1,300 aircraft 787 accounting block, which is used to apply an average profitability level to each aircraft sold in the current year. The accounting block does not include R&D, flight test, factory, or non-recurring plant costs, but does include inventory, deferred production costs, and recurring tooling costs. It is true that Airbus does use this methodology, so actual recurring costs are recognized in the year they occur.

    Thanks for the detailed analysis, I see a lot of confusion about this issue on the web (and I am by no means a “fan” of any OEM in particular, so I feel that there is often a bit of bias in some of these types of analyses).

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