Industrials

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

Tesla Motors Inc. gets a lot of flak for burning through prodigious amounts of investors' cash. But you don't have to be doing something revolutionary to do that. Look at Airbus.

In the Doldrums
Airbus's shares have been hit amid a succession of production difficulties
Source: Bloomberg

The plane-maker's net cash fell by almost half to 5.6 billion euros ($6.1 billion) at the end of September from 10 billion euros at the end of 2015. The decline is partly due to production problems ranging from engines not being ready to missing toilets. 

Airbus's free cash-flow, before M&A and customer financing, was a negative 4.2 billion euros compared with a mere negative 1.6 billion euros a year earlier. Ultimately, a company's ability to generate cash should be a concern, so should we be worried?

No, not really. Most of the cash flow shrinkage relates to a big increase in working capital. Inventories jumped to 33.5 billion euros at the end of September from 29 billion euros at the end of 2015.

This Cash is on Fire
Airbus' net cash pile shrank by more than 40 percent in the first nine months of this year
Source: The company

Launching new aircraft always consumes cash, but at Airbus there are too many nearly-but-not-quite-finished airplanes sitting on the tarmac awaiting engines (A320neos) and cabin equipment (A350s). Airbus won't get the money until they're delivered to customers.  

Awaiting Liftoff
Airbus has a working capital problem due to supply chain troubles
Source: The company

These problems, while vexing, look solvable. Airbus said teething troubles with a Pratt & Whitney engine were "largely over," although it conceded it will get some of that machinery more slowly than it would like. And it's still aiming to deliver 50 A350s by year-end, compared to 26 in the first nine months. The inventory increase is expected to slow from now on.  

It's therefore still forecasting 2016 adjusted free cash flow to be roughly the same as last year's total of 1.2 billion euros. That's going to need a turnaround in the fourth quarter. Airbus's confidence about the deliveries in the final quarter provides some reassurance. The company will need to make good on that pledge.

Poised for Takeoff
Airbus' cash flow should improve in coming years, providing it fixes supply chain issues
Source: Bloomberg
nb Free-cash flow is defined here as operating cash flow minus capital expenditure (hence it's different from Airbus' guidance)

Airbus shares have been in the doldrums as the company struggles to get to grips with supply chain problems. Unlike Tesla, an end to the burn at least looks to be in sight.

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

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

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net