Why you don’t want to run an aircraft manufacturer
“I always invest in companies an idiot could run, because one day one will,” is a great Warren Buffett quote.
It may also explain why he does not own an aircraft manufacturer.
On the one hand, now is a great time to be making planes. Customers are desperate for your products and backlogs are growing. Last week Bombardier and Gulfstream both announced book-to-bill ratios of 1.7 to 1. (They are bookings orders for 1.7 aircraft for every one they deliver).
Textron Aviation’s backlog has hit $3.5bn – it was $1.9bn at the same time in 2019. Scott Donnelly, CEO of Textron, last week said that one-in-five orders are coming from people that have never owned aircraft before.
Bombardier has grown its backlog by $500m to $11.2bn in the past quarter. Gulfstream’s is up 22.8% since the third quarter of 2020 to $14.7bn.
But CEOs face a tough choice on how fast to increase production (just 18 months ago after cutting it). Whatever decision they make, they will upset someone.
Customers are desperate for aircraft and do not want to wait (especially as almost everything else in the world is available the next day). Donnelly says that Textron is aiming to keep its backlog at between nine months and a year.
Sales teams are also keen to have product. The same is true for investors and analysts who always want everything this quarter. Short term investors are not worried about aircraft values in five years’ time. Although we are seeing lots of stories about supply chain problems in other industries, aircraft OEMs are not facing the same problems as car makers. But building aircraft is never easy.
“We have got this nice, strong backlog. We’ve got a very good demand, continuing demand. But as we ramp up – and we will be ramping up – there are some challenges. We can manage those challenges and manage through them,” said Phebe Novakovic, chairman and CEO of Gulfstream parent General Dynamics on an investor call this week. “But I thought it was important that you guys understand that.”
Textron’s Donnelly is also confident that suppliers can deliver. “I don’t feel like we’re going to be supplier constrained at this stage of the game,” he told analysts. “It’s more around managing and making sure that we’re doing the right thing here in terms of production rates versus long-term demand and again, managing to a backlog that works for us and works for our customers.”
Getting that balance right is key. Aircraft financiers would like manufacturers to stay disciplined. “All of the OEMs have spent a lot of time saying that they care deeply about aircraft values. This is their time to show they really mean it and not go crazy.”
There is no sign of OEMs going crazy in 2021. Next year’s deliveries are set to be slightly above 2019 (when manufacturers delivered 809 aircraft). This is significantly up on 644 in 2020 but feels sensible.
But OEMs are now starting to make decisions about 2022. They are having to decide if this demand will continue while remembering what happened in 2008. Buffet once said that a “ham sandwich could run Coca-Cola”. Aircraft OEMs need clairvoyants.
Gulfstream and Bombardier have both revealed book-to-bill ratios of 1.7 to 1.
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