Boeing and Airbus:
Some financial realities April 2019

Fall-out from the 737 MAX crashes has intensified over the past month, with Boeing being subjected to a wide range of criticism, plus speculation about the financial implications, both for Boeing and Airbus.

Some of the financial damage suffered by Boeing was revealed with the first quarter results which saw a 13% fall in net earnings compared to the same period of 2018, though revenues were only down 2%. A relatively modest $1bn was attributed to the 737 MAX grounding but this number relates principally to the cost of reducing the output of the type from 52 to 42 a month while maintaining the previous level of resources at the Renton plant. It did not include compensation claims nor the retraining programmes at the 50 airlines that operate the MAX.

The technological criticism levied is that of over-reliance on the 737 design, which goes right back to 1967, that the 737 MAX was somehow a rushed response to the A320neo, and that the MCAS software was a “patch” to adapt the existing 737 NG airframe to the more powerful LEAP engines installed on the MAX. Some experts have opined that Boeing should, for example, have re-designed the wings of the 737MAX, and the MAX should have been certified as a new type.

Although, as pointed out in the March issue of Aviation Strategy, there appears to be a consensus among technical experts that three inter-related factors — one hardware, one software and one human — contributed to the crashes, but the exact causes, and the correct remedies, have yet to be finally determined.

Chairman and CEO David Muilenburg has started to repair the reputational damage, simply by drawing attention to the company’s history and re-emphasising its commitment to safety.

Importantly, Boeing has stated that extensive testing of the modified MCAS has taken place as have new transition programmes for flying crews. The date of re-certification by the FAA and other civil aviation authorities is unknown, but the timescale is generally referred to in terms of months.

The technology arguments have morphed into a criticism of Boeing’s investment and financial strategy, and some questionable comparisons with Airbus. The narrative is that while Airbus has invested in developing innovative types like the A320 neo (and the A380, it should be added), Boeing’s attention was diverted away from technological innovation (which certainly understates the importance of the 787 programme) to focus excessively on profitability and dividends. Richard Aboulafia of TEAL Group, who is a high-profile aerospace analyst and lover of a snappy soundbite, was quoted in The Economist as describing Boeing as a “legacy jet manufacturer and distributor of shareholder returns”

The Economist commented further: “Airbus’ shareholders are clamouring for it to follow Boeing in handing back more cash through dividends and buy-backs …. Airbus will be tempted to move in the same direction [but] the European firm would be wise to resist this urge and instead consider ploughing money back into the business”.

Among the many law suits that Boeing is facing is a class action from shareholders claiming that Boeing’s safety lapse caused them an unfair loss. While Boeing share price has fallen about 15% from it early 2019 peak, the longer term escalation in Boeing’s, and Airbus’, stockmarket valuation is remarkable. The graph shows a 1,200% increase in Boeing’s share price over the past ten years, while Airbus’ stock has tracked very closely.

Comparative cashflows at the OEMs

To return the Boeing/Airbus financial discussion to a more objective plane, we have carried out a high-level analysis of the published cashflow accounts of the two OEMs, both constructed under IFRS, for the period 2012-18. The picture that emerges is rather more complex than a trade-off between investment/capex and shareholder returns, and the alleged contrast between Boeing’s and Airbus’ financial priorities is not really sustainable.

The following comments relate to the numbers presented in the tables opposite (note that Airbus’s results have not been converted from euros to dollars, avoiding exchange rate distortions), which summarise the two OEMs’ cashflows since the depth of the global recession in 2012. The numbers may seem dry but they reveal an interesting story.

• In terms of total revenues, Boeing is by some margin the bigger company, with 2018 turnover reaching a record $101bn, 42% higher than Airbus’ (€64bn or $71bn). Also, Boeing’s top line has been growing a faster rate than Airbus’ — 6% pa against 2% pa during 2012-18. This is slightly surprising given Airbus’ reputation for super-aggressive salesmanship under the direction of John Leahy (who retired in 2018). The relatively modest growth in turnover of both companies is indicative of the discounting that both OEMs have used to win orders.
• Boeing has been a significantly more profitable company than Airbus, with a net margin averaging 6.8% during 2012-18, more than twice that of its European rival. The last two years have seen a marked improvement in Airbus profits — its 2018 net result was €3.1bn ($3.5bn), a margin of 4.9% but Boeing’s reached $10.5bn or 10.4%.

• Commercial aircraft account for 75% of Airbus revenues compared to 60% for Boeing. The Commercial EBIT margin at Airbus was 8.9% in 2018 while Boeing achieved 13%. It should be noted that these margins do not correspond to the profitability that might be expected from a profit-maximising duopoly.

• The major difference between the two OEMs lies in Boeing’s superior ability to generate cash. Operating Cashflow — ie, profits plus depreciation and amortisation, changes in inventories, creditors and debtors, etc — is huge at Boeing — $15.3bn in 2018, a margin on revenues of 15.1% in contrast to just €2.3 ($2.6bn) or a margin 3.6% at Airbus. Over the 6-year period under review Boeing produced almost three times as much cash as Airbus. It would appear that the “normalisation” of Airbus into a streamlined, commercial company from a complicated, heavily politicised, national work-sharing entity — the strategy instigated by Tom Enders — has some way to go. His successor as CEO, Guillaume Faury, took over in April, with a mandate to accelerate this strategy.

• Capex and investments include new and replacement manufacturing equipment, R&D, investments on other companies, such as Airbus’ purchase of a controlling stake in Bombardier and Boeing’s joint venture with Embraer, minus divestment income. This is where Airbus is supposed to have concentrated more than Boeing. In relative terms this appears to be the case: Capex/net investment as a proportion of Operating Cashflow at Airbus was 70% in 2018 and 60% over the 6-year period, against 30% and 25% respectively at Boeing. But this was because Boeing has been able to generate much more cash than Airbus in the first place. In absolute terms, Airbus’ expenditure during 2012-2018 was €13.2bn ($14.7bn) compared to $18.2bn at Boeing; in 2018 Airbus spent a net $1.8bn while Boeing spent $4.6bn.

• Subtracting Capex/investments from Operating Cashflow gets us to Free Cashflow, which for Airbus last year was only €0.7bn ($0.8bn) dwarfed by Boeing’s $10.7bn. And over the 6-year period the comparison is: Boeing $55.4bn, Airbus €9.0bn ($10.1bn). The basic question then is: what to do with this cash? Which proportions to return to shareholders or pay down debt or add to reserves?

• Boeing has been very generous to its shareholders, paying out $4bn in dividends in 2018 and more importantly carrying out a $9bn/year share buy-back exercise in recent years, all of which goes to support or boost the share price. Boeing, in fact, paid more in dividends and spent more share re-purchases last year than it generated in Free Cashflow. It partly funded the shortfall through an increase in borrowing — the Increase/Decrease in Debt line ($1.3bn increase) is in effect is the balancing line between Total Financial Flows and shareholder returns.

• Airbus, working with a much lower Free Cashflow ($0.8bn against $10.7bn), paid $1.3bn in dividends along with a $2.2bn reduction in debt, by using some reserves.

• What this means is that both OEMs have been returning cash to shareholders at close to their limit to do so. It could be argued that the duopoly has not produced super-normal profits, but it has created super-normal shareholder return — as is reflected in a five to six-fold surge in the share price during 2012-18. During this period Boeing’s outflow on dividends and share repurchases was in total 6.8 % above the amount generated by its Free Cash Flow. For Airbus the difference was higher: dividends exceeded Free Cashflow by 15.6%. The two OEMs, according to their own accounts, have been borrowing money to help them meet dividend and share buy-back outflows.

Boeing now is facing a difficult, but not critical, problem. Its Operating Cashflow will inevitably be dented by, at least, $2bn-plus per year this year and perhaps over the next two years, as the result of the MAX crisis, compensation payments and re-certifying costs. Which means that Free Cashflow for dividends and share buy-backs may well  be depleted, as capex/investment will not be cut back in the current situation. Yet it is apparent that shareholders expect a continuation of the type of returns that have become the norm over recent years. A safety valve may be its cash reserves — unrestricted cash was $7.6bn at the end of 2018.

For Airbus, the issue is not so much capex/investment versus distribution of funds to shareholders as the management’s commitment to commercial normalisation of the company — to improve its net profitability, or rather its Operating Cash Flow, in order to generate the funds to return to shareholders. Having said that, its unrestricted cash balance by the end of last year was €9.4bn ($10.5bn), 35% higher than Boeing’s, and its shareholders might focus on that number.