Industrials

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

A restructuring program announced Friday at Airbus was only the latest in a long list of headaches for Chief Executive Tom Enders.

The European group's recent troubles include slow plane orders, shrinking helicopter demand, production delays, one-off charges, a WTO ruling on illegal state aid, the suspension of government export credit guarantees and A380 superjumbo that almost nobody wants.

Gulp. 

With all that negative news around Airbus' shares have fallen 13 percent this year, compared to a 9 percent decline for Boeing. Its enterprise value stands at less than five times next year’s estimated Ebitda, compared to almost 8 times for its U.S. rival. 

Losing Altitude
Aerospace investors are less optimistic this year but Airbus shares have suffered more
Source: Bloomberg

That stock discount may be far too gloomy. Investors have lost sight of the transformation underway at Airbus: cashflows and earnings are poised to increase significantly in coming years and Airbus should outperform its fellow duopolist. 

Currently Airbus' cashflow doesn't come close to Boeing's because it's trying launch the A350 widebody and single-aisle A320neo jet at the same time -- a mammoth undertaking. 

The A350 required a big upfront investment, the first planes won't make any money but eventually the program should deliver plenty of cash, providing there are no major hiccups.

Fallow periods are to be expected in this industry, which is why aerospace companies should have patient, long-term investors.

Yet right now Airbus shareholders seem overly focused on the short-term -- in particular the production teething troubles affecting the A350 and A320neo.

Closing the Gap
Airbus is set to become much more cash generative as it ramps up production of new jets
Source: Bloomberg
nb. Shows Bloomberg consensus for free cashflow, defined as cashflow from operations minus capital expenditures. Boeing's revenues are much higher than Airbus so the performance gap looks larger.

The hold-ups -- which relate to cabin equipment and engines -- consume working capital because aircraft are stuck on the tarmac awaiting parts. Airbus had 3.2 billion euros ($3.6 billion) in negative free cashflow in the first six months of this year.

These issues are frustrating, but on a discounted cashflow valuation, it shouldn’t matter too much whether an aircraft is delivered in December or June, providing the money turns up eventually.

Moreover, the issues don't look anywhere near as serious as the production troubles that for years dogged Boeing's 787 Dreamliner (and which could yet force the U.S. company to book a big charge on that program).

Airbus' cashflows are projected to jump 50 percent next year and then double the year after, according to the Bloomberg consensus forecast. 

Yet investors don’t seem to have much confidence in those predictions. You can't blame them: Airbus sank about 25 billion euros into building the A380 superjumbo, whose sales have since been very disappointing. The A400m military transporter also continues to rack up "one-off" charges, which are in fact anything but a rarity. 

But by focusing on this pair of value-destroying but low volume white elephants, investors are in danger of overlooking some big positives.

Slim Win
Airbus is ahead of Boeing in the high-volume single-aisle jet segment
Source: Bloomberg Intelligence
nb. as of Q2 2016

For example, rather than commission a new narrow-body aircraft from scratch, Airbus decided to give the A320, its perennial profit generator, a new fuel-efficient engine. This sped up development and cost a fraction of a completely new plane.

That decision has helped Airbus pull well ahead of Boeing in narrow-body plane orders. 

In fact, in larger single-aisle jets Airbus is outselling Boeing 4 to 1, according to an estimate from analysts at Goldman Sachs. Boeing may be forced to spend heavily on a new plane design to eradicate that competitive disadvantage. 

But Boeing can't do anything about the euro's weakness versus the U.S. dollar, which gives Airbus a big pricing advantage in sales talks with airlines.  

Currency Tailwind
Many of Airbus' costs are in euros which is handy when you sell planes in dollars

Meanwhile, Friday's restructuring announcement is a sign Airbus is becoming more like a normal company. Cutting duplicate white-collar management jobs looks like an easier task than Boeing's battle to make suppliers lower their costs.

Boeing's reported operating profit margins at the plane division outstrip those of Airbus. However, that's also partly a function of Boeing's unusual, and what Gadfly has argued are distorting, accounting practices. If you compare apples with apples, Airbus' plane making operations are already more profitable. So Airbus is cutting costs from a position of strength. 

Accounting Fog
Airbus's commercial aircraft profit margins exceed Boeing's when using unit-cost accounting
Source: Bloomberg and Boeing data
Nb. Shows implied operating profit margin for the companies' respective commercial aircraft units (not the whole group). The two are not precisely comparable because Airbus capitalizes some R&D.

Goldman Sachs says "Airbus has a better-positioned product set [compared to Boeing], nearly across the board," and therefore expects Airbus' earnings per share to expand by two thirds by 2018 (whereas it says Boeing's EPS could decline).  

Airbus investors are so busy worrying about the storm clouds that they risk missing the dawn.

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

  1. Adjusted for M&A spending/proceeds

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

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net