Airbus Trims Production Plans As Air Travel Slump Continues

The COVID-19 pandemic has decimated global air travel over the past year. Signs of a nascent recovery finally emerged in the second half of 2020. However, a recent surge in COVID-19 cases (particularly in the U.S. and Europe) and the emergence of a new, more contagious strain in the U.K. have led to new travel restrictions, undermining the recovery's momentum.

These setbacks are forcing Airbus (OTC:EADSY) to trim its production plans for the second half of 2021. However, by 2022, market conditions will likely allow the European aircraft manufacturer to begin ramping up production in a meaningful way.

Production has fallen – a lot

As the global aviation market seized up last year, Airbus was forced to slash production by about a third from its prior plans. Boeing (NYSE:BA) has had to cut its widebody output even further following a period of overproduction. The crisis also severely crimped demand for the Boeing 737 MAX, complicating that model's return to service.

Airbus has been building about 51 commercial jets per month recently: 40 A320-family jets, four A220s, five A350s, and two A330-family aircraft. Encouragingly, the company delivered 225 jets to customers last quarter: an average of 75 per month. This allowed it to clear out a sizable chunk of its backlog of undelivered jets, which stood at around 135 entering the fourth quarter.

With inventory returning to more normal levels, Airbus has been able to think about production growth again. (By contrast, Boeing has about 500 undelivered jets in its inventory, primarily because it halted 737 MAX deliveries for more than 20 months while that model was grounded.) Last fall, Airbus' management suggested that the company might boost production on its A320 lines to 47 per month as soon as the summer of 2021. Prior to the pandemic, it was building 60 A320-family jets per month, with plans to increase output further.

Tweaking the plans

Most aviation industry executives expect the recovery in air travel demand to begin in earnest this year. The optimists expect improvement as soon as the spring; pessimists think demand might not improve much until the summer or fall. One thing is clear, though: Demand remains muted for now.

As a result, most airlines still have lots of temporarily grounded aircraft. Generally speaking, as demand improves, they will pull those jets out of storage to increase capacity. Furthermore, numerous airlines have gone out of business or permanently downsized their operations over the past year, putting lightly used jets on the secondary market. These two factors will restrict demand for new jets until utilization of the existing fleet returns to more normal levels.

Recognizing these realities, Airbus now plans to increase A320-family production more gradually than previously anticipated. On Thursday, it said that it will increase output to 43 per month in the third quarter and 45 per month in the fourth quarter. It still plans to boost A220 production from four per month to five per month later this quarter, though. Wide-body demand will take longer to recover, so Airbus plans to hold production at two aircraft per month for the A330 family and five per month for the A350 throughout 2021.

Next year could be much better

Airbus expects the commercial jet market to return to pre-pandemic levels between 2023 and 2025. However, it should be able to increase its production significantly during 2022, especially for narrow-body jets.

Indeed, Airbus ended 2020 with a backlog of 6,372 narrow-body orders. Some airlines have ordered way too many jets, inflating that figure. But even after making some adjustments to account for that, there is clearly abundant underlying demand for the A220 and A320 families (particularly the latter).

With vaccines likely to tame the pandemic in the world's biggest air travel markets by the end of 2021, airlines are poised to benefit from pent-up leisure travel demand in 2022. Even business travel could return in a meaningful way, albeit not at 2019 levels. That will drive airlines to start replacing older planes (including those that they retired last year). Some leisure airlines will even be able to grow beyond their pre-pandemic size.

This puts Airbus in great position to start converting its impressive backlog into deliveries -- and, more importantly, revenue -- at a faster rate beginning next year. It will probably be able to increase A320-family output to at least 50 per month by mid-2022, with further growth in 2023. Meanwhile, A220 output will continue rising as Airbus ramps up production on a new assembly line in Mobile, Alabama that opened last year.

Wide-body demand won't recover nearly as quickly. That will make life tough for Boeing, which has a weaker position in the narrow-body market due to the 737 MAX's limitations. But the recovery in narrow-body demand should drive rapid improvement in Airbus' financial results over the next couple of years.

This article originally appeared in the Motley Fool.

Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.