4 May 2016
There were many articles highlighting Airbus’ latest earnings – the European consortium reported a big fall in 1Q profit as a result of delivering fewer aircraft compared to Jan-Mar 2015.
On 28 April Airbus reported a 50% year-on-year (YoY) plunge in 1Q net earnings to EUR399 million (USD450 million) from EUR792 million in the same period in 2015. Read here.
CEO Tom Enders said: “2016 turns out to be the challenging year we anticipated”. The aircraft manufacturer said it delivered 125 planes in the first three months of 2016, nine less than a year earlier. Shipments of A320neo and A350 will lag.
The problem lies mainly with the companies Airbus is working with, including Pratt & Whitney (engines for A320neo) and Zodiac (cabin equipment for the A350XWB). But while it’s not entirely Airbus’ fault, they bear responsibility. When one buys an iPhone one doesn’t really want to take into account the problems faced by Foxconn, for example, one of the iPhone’s major component makers. As far as one is concerned, it’s Apple’s duty to ensure all is well.
Let’s take a closer look at Airbus…
In our view Airbus’ business profile remains solid. It is, together with Boeing, the world’s largest makers of commercial aircraft with over 100 seats. Airbus also makes helicopters and is a major provider of military planes such as the Eurofighter and A400M transport carrier.
Here’s the thing: Airbus has over USD1 trillion worth of aircraft in its order book (backlog). But that doesn’t help or matter unless those planes are delivered on time. There’s also the euro – it has gained against the US dollar in the first three months of this year – making Airbus’ planes less competitive in price compared to Boeing.
Margins are very much exposed to forex volatility. A huge chunk of costs are euro-denominated while over 60% of revenues are denominated in greenback. This in essence means higher uncertainty in operating and financial performance.
We think the backlog is more a positive than negative although we admit it presents challenges to Airbus’ customers. Qatar Airways’ outspoken boss Akbar Al Baker told CNN recently he wasn’t making idle threats by talking about taking his business to another planemaker. Watch Al Baker’s interview.
Compounding Airbus’ woes is the fate of the A380; we have always maintained it was unlikely to be profitable as the market for such ultra large aircraft is just too small. It plans to deliver 27 of these planes in 2016 – but only 20 in 2017 (down from 25). Airbus reckons it will break even in 2017. Let’s see…
Fortunately for Airbus, the launch of the A350XWB in December 2014 is partly mitigating the negativity surrounding the delays of the A320neo and lack of interest in the A380. The A350XWB in our view is the best widebody aircraft in the world today and for the foreseeable future, given its remarkable economics and sheer comfort. On 29 April China Eastern Airlines ordered 20 of these while Philippine Airlines has placed six orders, plus six on options.
The company’s shares understandably have taken a bit of a hit. Airbus’ profitability looks below average compared to its peers in the sector. In 2015 Airbus said it would go into a EUR1 billion share buy-back programme; that’s not a big deal as it’s less than the EUR1.7 billion it had generated from disposals, including the partial sale of a stake in Dassault Aviation.
That said, there’s likely increasing volatility in 2016, mostly in the development of the neos as well as more money needed to ramp up production.