MIAMI — Airbus provided several major updates on commercial aircraft programs at its Global Investor Forum this week, sparking major worries from investors over cash flows and margins at the European aircraft manufacturer. At its annual investor event held in London on December 10-11, Airbus provided a slew of updates on its widebody programs, most notably signaling an end for production on its A380 superjumbo Wednesday then reversing course on Thursday. These are a few of our key takeaways from the event.
A330 Production Rate Cut to Pressure Cash Flows
Airbus had already confirmed a production rate cut for its A330 classic widebody to 9 aircraft per month in the fourth quarter of 2015 in October, but presentations by CFO Harald Wilhelm and other Airbus executives signaled that further production cuts would be necessary, with some analyst’s projecting rates as low as 6.5 or even 5 aircraft for month between late 2015 and late 2017, when the re-engined A330neo enters service. As of December 5th, Airbus had firm orders for 217 A330 classic aircraft, leaving the airframer a substantial production gap to fill through the A330neo’s entry into service (EIS).
As the slide above indicates, we believe Airbus will have no choice but to cut production, which will have a substantial impact on Airbus’ profit figures and cash flows for 2015 and 2016. At present, Airbus’ only two profitable and cash-flow positive aircraft are the A320 and A330. Airbus had been counting on both programs to drive cash flow as the A380 broke even in 2015 and A350 moved towards break even in 2016 or 2017. Now 2015 and 2016 profit figures (the latter in particular) appear very much in doubt.
Airbus has struggled to sell A330 classics since the neo’s launch, and much-hyped sales prospects for the 242-ton maximum take off weight (MTOW) A330 and the A330-300 Regional have largely fizzled. One big help could be an order for 60 aircraft rumored from China, however negotiations on the purchase appear to have stalled since a near announcement in October. Moreover, given current economic conditions in China, it may make sense for Chinese airlines interested in the type to delay orders out past 2018 and instead acquire the more efficient A330neo.
One other interesting tidbit emerged from the event, lost amidst the hullaballoo about financial issues. John Leahy, Airbus’ Chief Operating Officer – Customers, noted that Airbus was investigating the possibility of “sculpting” the A330neo, expanding the interior of the aircraft to allow 9-abreast seating while maintaining seat width of 18 inches. Current 9-abreast A330 seating offers a seat pitch of 16.5 inches, so Airbus would need an additional 13.5 inches of space to allow for the extra seat pitch. However, it’s unclear if current technology for “sculpting” would allow for that much reclamation – a similar project undertaken by Boeing for its 777X is only expected to yield 4-5 inches of additional space. Ultimately we project that Airbus will settle for something in the range of 17.2 – 17.4 inches, gaining 5 inches from the fuselage and a couple inches from narrowing the aisles.
Key Takeaway: Airways projects that Airbus will have to reduce production to around 5.5 aircraft per month.
A350 EIS Delay a Minor Issue, Cost Accounting Shift
Even as it fielded tough questions over its other two widebody programs, Airbus used the platform to boast about the smooth certification process for the A350-900, which was achieved in a record time of 14.5 months. Airbus also summarized key production and reliability initiatives for both A350 variants. Airbus CEO Fabrice Bregier also indicated that Airbus was planning a further boost to A350 production beyond 10 aircraft per month, though no specific number was given.
But the key takeaways from the event came in the form of Airbus’ announcements and commentary on accounting and production costs for the A350 program. First, for several early A350 deliveries, Airbus will be shifting from unit accounting to IAS 11 accounting, which uses average costs over an entire contract for aircraft deliveries. The change is mostly a minor cosmetic one (Boeing uses IAS 11 accounting for all of its aircraft programs over their lifetimes), but it will boost Airbus’ profits by about 600 million Euros in 2015 and 2016 at the expense of the same figures in 2017 and 2018. Airbus likely shifted the accounting in this manner as a subtle cover for lower than expected profitability and cash flows in 2015 and 2016 as noted earlier. Still, this is mostly a minor change.
The Qatar Airways delivery issue isn’t one. Qatar Airways CEO Akbar Al Baker is notably finicky about aircraft deliveries (most famously delaying delivery of his airline’s A380 superjumbos earlier this year) and mercurial in his public commentary, which has prompted many in the industry to privately dub him “U-Turn” Al Baker. Chances are, the issue with the delivery has been generated by Al Baker’s personal opinions and wishes rather than any significant problem with the aircraft itself.
Key Takeaway: We project that Airbus will boost production of the A350 to 12.5 or 13 aircraft per month in 2018.
A380 Cost Challenges; Mixed Signals on Program’s Future
On Wednesday, stories emerged that Airbus was weighing an end to A380 production, largely on the basis of comments by Wilhelm that the A380 would break even in 2015, 2016, and 2017, before once again failing to achieve profitability in 2018 due to sluggish sales. Indeed since Amedeo firmed its order for 20 A380s in February, Airbus has yet to win another order for the type, likely failing to reach its target of 30 A380s sold in calendar 2014.
On Thursday, Bregier said that the A380 had a definite future at Airbus, and that it would eventually be stretched and re-engined. Mixed signals indeed.
There is a lot to digest here, so rather than a quick-hitting analysis, we will provide a thorough analysis of the A380’s present and future on Monday.
Key Takeaway: We will publish a full-length A380 program analysis on Monday, December 15th.
A320neo a Powerhouse; A321neoLR Market Substantial
The A320neo is a powerhouse and the A320 family will be a clear profit driver for years to come. The A320neo has outsold the 737 MAX, and while the figures are equal if you compare the two aircraft since launch and exclusively the base models (737 MAX 8 and A320neo), the A321neo’s edge over the 737 MAX 9 will help Airbus maintain its sales lead. Leahy thinks that Airbus will continue to hold 60% market share, in our view a more realistic number is 54-56% (still not anything to sneeze at).
Leahy also noted that Airbus sees a market of about 400 airplanes for the A321neoLR, about three and a half times the number of 757-200s currently used on long range routes world wide. Airbus expects to have a customer for the A321neoLR soon (perhaps an existing customer converting a portion of an outstanding A321neo order)
Key Takeaway: Airbus’ narrowbody program is in solid shape.