Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

At the Dubai air show this week, Airbus SE and Boeing Co. are once again renewing their sparring over who's booked the most orders.

For Airbus, this year's show has added poignancy. Sales head John Leahy, who's been instrumental in securing thousands of jet orders for more than two decades, is poised to retire. In addition, Airbus is about to kiss goodbye to roughly half a trillion dollars of aircraft orders.

Let me explain: After new accounting rules, called IFRS-15, take effect in January, Airbus will have to restate the value of its order book. Until now, the manufacturer has recorded the aggregate value of plane orders using its own list prices. In future, it will use the future minimum revenue it expects to recognize on those contracts.

The change won't have any impact on the number of jets in the Airbus order book -- which is what analysts pay attention to -- or the cash flows these will generate. Compared to the impact IFRS-15 will have on jet engine-maker Rolls-Royce Holdings Plc, Airbus's backlog issue is pretty minor.  Even so, the new rules will bring an end to an accounting fiction that gave Airbus an artificial edge over Boeing.

In its annual report, Airbus trumpeted 6,900 commercial aircraft in its backlog worth a cool €1 trillion euros ($1.2 trillion) at catalog prices. In contrast, Boeing valued its more than 5,700 commercial jet orders at about $416 billion. The discrepancy is explained by Boeing's book-keeping. The U.S. company uses the actual prices customers agreed to pay. Airbus uses prices it wishes they'd paid.

Order Confusion
Airbus and Boeing have thousands of aircraft orders. Airbus's appear more valuable, on paper
Source: Airbus, Boeing
Data show values of the commercial aircraft order backlog at year-end, according to each company's annual report. Airbus values are based on "catalog prices". Airbus values are also inflated by the stronger U.S. dollar spot rate, which it uses to convert the non-hedged part of the backlog into euros.

Airbus hasn't completed its assessment of IFRS-15 and plans to update investors early next year. Credit Suisse estimates the order book will be revised down to about 500 billion euros (from 945 billion euros at the end of September).

While this sounds dramatic, it shouldn't surprise investors. As a rule of thumb, analysts halve the list price of plane orders to get a saner idea of what sales revenue a manufacturer will actually receive. Still, if you find yourself wondering why half a trillion dollars of Airbus plane orders have suddenly gone up in smoke, now you know.

There are sensible competitive reasons Airbus and Boeing use list prices when announcing contract wins (at Airbus, catalog prices start at about $75 million for the petite A318 and top out at more than $430 million for a double-decker A380). If you disclosed what a good deal one airline had received, everyone would demand the same. 

Nevertheless, the Airbus practice of using aggregate list prices in its annual accounts was clearly a bit daft. Even Leahy seemed to think so.

At an Airbus press event in Paris last year, the company claimed more than $1 trillion in orders for the first time. Leahy held aloft a piece of paper with the new catalog prices. "It surprises me to see some of these numbers," he said, with a wry smirk. "It's a very, very impressive set of numbers." (Here's the video -- fast forward to 1 hour, 7 mins, 45 seconds)

Indeed it was. But now, like Leahy, Airbus's over-inflated order tally is on the way out.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. IFRS-15 will also affect Airbus' accounting for A400m and A350 launch contracts, but it hasn't provided full details yet. 

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net