- Company is ramping up production to meet demand
- Rival Boeing has a backlog of 737 Max narrowbodies and 787 widebodies to clear
The fortunes of the aerospace industry’s two main manufacturers continues to diverge, with Airbus (FR:AIR) declaring a record profit of €4.2bn (£3.5bn) for 2021 a month after Boeing (US:BA) revealed another year of heavy losses.
Toulouse-based Airbus had a “remarkable” year, chief executive Guillaume Faury said.
Free cash flow of €3.6bn was also “well ahead” of analysts’ expectations of €3.1bn and the company’s guidance of €2.5bn, according to Jefferies. This allowed it to declare a dividend of €1.50 per share, its first for two years.
Airbus, which enjoys a near-duopoly alongside Boeing in terms of supplying major airlines, finished last year with net cash of €7.6bn, up from €4.3bn at the end of 2020.
In contrast, Boeing’s net debt has spiralled since the start of the pandemic to $58.1bn (£42.6bn) at the end of last year, after it declared a $5bn pre-tax loss for 2021. This followed a $14.5bn loss in 2020 when its 737 Max fleet spent most of the year grounded after two fatal crashes.
Airbus’s improved earnings were driven by higher sales, as the number of planes it delivered increased by 8 per cent to 611. Although Boeing managed to more than double its deliveries to 340 from a nadir of 157 in 2020, it still has a long way to go to catch up.
It seems unlikely to do so until its Chinese customers begin accepting Boeing’s narrowbody 737 Max planes again.
Chinese aviation authorities were the first to order the grounding of the 737 Max following the second of two fatal crashes involving the Max in Ethiopia in March 2019. They are also among the last to maintain a ban, which is an issue for Boeing given that Chinese airlines make up around 20 per cent of the backlog of orders for the plane, according to Jefferies.
The disruption caused to airlines by the pandemic has led to the aviation industry posting heavy losses, tempering the demand for new planes. Airlines are forecast to lose $11.6bn this year, which would bring the cumulative total since the start of the pandemic to more than $200bn, according to International Air Transport Association (IATA) estimates.
The size of the commercial global aircraft fleet has shrunk by about 8 per cent since January 2020 to 25,578, according to consultancy Oliver Wyman. It is not expected to recover until next year, but is forecast to grow at a compound annual rate of 4.1 per cent over the next decade, to more than 38,000 by 2032.
Manufacturers are focusing on narrowbody planes as long haul routes that fly widebodies are taking longer to recover. The narrowbody share of the global fleet is expected to increase to 64 per cent by 2032, compared to 58 per cent in 2020.
Airbus has stolen a march in the narrowbody market, where it now has a share of more than 60 per cent, according to Romain Pierredon, an analyst at AlphaValue. Although Boeing secured more orders than Airbus for new planes in the last 12 months, it may have been discounting to shift inventory, Pierredon added.
Boeing had a stock of 335 Maxs as of last month, chief executive David Calhoun said on a recent earnings call. It also had a store of 110 787 widebodies after it suspended deliveries of this plane last May when the US Federal Aviation Administration flagged an issue over the plane’s noses.
Airbus, on the other hand, is ramping up production to meet demand. At the end of last year, it was producing 45 A320 family narrowbody jets – the main competitor to the Max – a month. It has a target to increase this to 65 a month by the middle of next year and 75 by 2025. Of the 7,082 planes it has in its order book, 83 per cent are A320s.
The company is forecasting an 18 per cent increase in deliveries to 720 planes this year but for cash generation to remain flat at €3.5bn.
This is because the company has fewer part-finished planes to turn around and needs to build inventory, UBS analysts said in a note.
However, higher throughput should be positive for Airbus’s near-term earnings and its credit position, said Stanislav Duquesnoy, a senior vice president at Moody’s Investors Service. He expects Airbus to stick to a stated target of building its net cash position to €10bn and to use any excess to reduce the company’s €7bn pension deficit, which fell by about €3bn over the course of last year as higher interest rates increased the value of plan assets.
Analysts at Jefferies believe the declining pension deficit may mean a €10bn cash buffer might not now be necessary, which would give Airbus the opportunity to return more cash to investors in the form of buybacks.
It may find other uses for the money, though. This week, Airbus said it was partnering with aircraft equipment maker Safran and private equity firm Tikehau Ace Capital on a €500mn acquisition of engineering company Aubert & Duval from parent firm Eramet.
The deal allows Airbus and Safran “to secure the strategic supply chain for themselves and other customers” and support the manufacturing sector in France, it said in a statement.
It also signed an extremely ambitious agreement with a joint venture between Safran and General Electric (US:GE) to develop a hydrogen-powered jet engine. Liquid hydrogen tanks prepared at Airbus plants in France and Germany will be used with A380s as Airbus targets the introduction of its zero-carbon emission aircraft by 2035.
Airbus is in such a position of strength that it took the unusual step of cancelling a $6bn order for from Qatar Airways for 50 A321 planes last month, following a long-running dispute between the pair over the quality of finishes to wide-bodied A350s.
Qatar Airways recently filed a claim in London’s High Court arguing that paint on A350s delivered by Airbus was flaking. Qatar’s aviation authority has grounded 21 jets and the airline refused to take new A350 deliveries. Faury said on Airbus’s earnings call last week that cancelling the A321 order “followed many attempts to find mutually beneficial solutions”.
Qatar Airways subsequently signed an agreement with Boeing for up to 50 737 Max planes and 50 777-8 freighters.
Speaking at a media briefing last month, the director-general of the IATA, Willie Walsh, said the industry needs “to ensure good, healthy competition” between Boeing and Airbus.
“I would hate to think that one of the suppliers is taking advantage of their current market strength to exploit their position,” he said.
Mr Walsh, a former chief executive of International Airlines Group (IAG), in which Qatar Airways has a 25 per cent stake, said relationships between airlines and their suppliers often go through phases, “but I don’t think anybody has seen an issue quite as bad as this and the industry will be watching very carefully” to see how it plays out.
Given the strength of long-term demand, analysts believe both Airbus and Boeing will prosper. The consensus forecast for Airbus is for earnings per share to grow from €5.36 last year to €6.82 by the end of next year. Boeing is forecast to recover from a loss per share of $7.15 to earnings of $9.02 over the same period.
