Boeing and Airbus:
The First Stage of Recovery December 2021

Both Boeing and Airbus still have to fully confront the financial and strategic weaknesses that the Covid-19 crisis exposed. But they have survived the worst.

For Boeing the MAX situation appears to be under control. At the end of 2020 the FAA recertified the 737 MAX, followed by EASA and the other regulatory authorities, with the exception of China — a very significant exception given that around 25% of the parked MAX fleet is destined for that country. In December the CAAC issued an Airworthiness Directive which should lead to full recertification early in 2022, but there is the possibility that any deterioration in Sino-US relations will cause more delay.

Nevertheless, the new MCAS software installed in the aircraft, along with other modifications and training programmes, has been successful, and Boeing has been able to reduce its inventory of parked MAXes from over 450 as its peak to around 350 by the end of the year. It aims to reactivate all these aircraft by the end of 2022. The production rate for the MAX will be ramped up to 31 per month in 2022 from 19 currently (though the pre-Covid plan was for 57 a month).

Boeing has stemmed the wave of cancellations for the MAX (usually customers can cancel without penalty and retrieve deposits if the delivery is delayed by more than 12 months from its scheduled date). Provisions covering Boeing’s compensation payments and other concessions to MAX customers, which totalled $7.4bn at the beginning of 2020 have been reduced to $3.4bn (as at September 2021) as payments have been made to the affected airlines. Boeing is confident that this amount will be sufficient to meet remaining liabilities.

Unfortunately, Boeing now has another problem, this time with the 787, following the discovery of defects in the composites used to manufacture the aircraft. Deliveries have been suspended since May 2021 (when monthly output was six per month, compared to pre-Covid expectations of 14-plus), though the problems are not serious enough to have affected the operating fleet. An inventory of about 110 undelivered units has built up at Seattle, and Boeing has assigned a provision of $1bn for “abnormal costs”. Assuming the technical issues are resolved, and the FAA issues the requisite approvals, full production could resume in the spring of 2022.

The 777 production rate is still limited to just two per month, though this will be upped to three or more in 2022 to meet demand for Freighter versions. The long-range 777X has also run into certification problems — following an incident in a test flight during which the aircraft displayed uncommanded pitch movements, apparently similar to those that affected the MAX. The FAA is currently supervising a test programme but unofficial reports from the agency suggest that certification will be delayed to 2023 at the earliest.

Airbus has had to deal with significant supplier-related problems as well, which caused delivery shortfalls with A321s, and is facing a lawsuit from Qatar Airways, one of its biggest customers, over alleged flaws with the A350. But it has a much more aggressive production plan aimed at restoring pre-Covid output by 2023.

By the end of 2021 it had ramped A320 Family production back up from the mid-30s to 45 per month. And Airbus intends to steadily increase to 64 per month by mid-2023. The A220 production will move up from five in 2021 to six in 220. The target for total narrowbody production is 75 per month by 2025.

The A350 production rate is expected to increase from five to six per month by autumn 2022 while A330 production is expected to remain at an average monthly production rate of two.

The two OEMs have different strategies. Airbus is committed to an increasing production rate partly because of strong demand for A320/321neos, but also because its production efficiencies depend on a high level of throughput, which is related to fixed costs. Its calculation has always been that the unit cost of storing undelivered aircraft would be less than the increase in unit cost through losing scale economies from low production rates.

Indeed, aeroengine manufacturers, GE in particular, have expressed concern about the scale of Airbus’s planned production increases; their concern is that this will cause an acceleration in the retiral rate in the operating fleet, which could be detrimental to the aeroengine manufacturers as their main income stream is from maintaining engines.

Boeing, on the other hand, has to consider its inventory of undelivered aircraft when setting production rates, but it also has a more flexible cost structure, as the result of an extensive outsourcing strategy, and sticking to lower production rates makes sense because its suppliers are then forced to bear a proportion of the pain.

Responding to the Covid-19 crisis, Boeing implemented deep cost cutting measures, focusing on reducing the workforce by about 20% from 160,000 pre-pandemic to around 130,000 in 2022. Airbus’ proposed redundancies were more moderate (15,000 or 10% of the workforce) but these cuts have been scaled back. In 2021 the company came to agreements with key unions in France and Germany that essentially meant that the redundancies would be voluntary.

In total, Boeing’s delivery total for 2021 will be around 330 units (estimated from 11-month data), 75% of which are 737 MAXes or -800s. This is a major improvement on 2020’s 157 total though nowhere near the 700-800 outputs of earlier years. Airbus’s estimated 2021 total will be near the 600 mark, of which 90% are A220 or A320 Family aircraft, but still some way below pre-crisis levels.

A provisional assessment of 2021 orders shows Boeing to have reversed its dire performance in 2020 when it recorded negative 471 (orders minus cancellations), producing 476 net orders (this is estimated from end-November figures plus official announcements by the OEM). Airbus achieved 413 on the same basis. The final year figure will depend on the ritual PR exercise whereby additional orders materialise in order to grab the winner headline. Recent major orders like Air France-KLM’s order for 100 A320neos, Qantas’ order for 20 A321s and 20 A220s and Allegiant’s switch to Boeing with 50 firm orders for MAXes could go into 2021 or 2022 (and are not included in our totals). More generally, the wide disparity between gross and net orders for the two OEMs highlights the problem of the reliability and significance of order totals in a still very fragile market.

Who are the intrepid companies that have ordered at the nadir of the aerospace manufacturing industry?

• United Airlines was the dominant player, firming up and placing orders for 258 MAXes and turning to Airbus for 70 A321s (as replacement for its 757 fleet). What the unit price was is open to speculation — our guess would be around $35-38m for the MAXes, $40-42m for the A321s.

• Wizz Air has been the most confident of the LCCs — it has grown its capacity by 20% during the pandemic and placed a new order for over 100 A321s. Other LCCs in the market were Southwest, Jet2 and Volaris, but no Ryanair.

• US new entrant Breeze placed an order for 20 A220s, while Akasa, an Indian start-up whose explicit strategy is to exploit opportunities at the bottom of the cycle, committed to 72 MAXes.

• A few of the lessors — Avolon, ACG and SMBC — placed significant orders but most have been preoccupied with restructuring their existing portfolios and dealing with airline defaults. An interesting orderer was 777 Partners, a Miami-based alternative investment fund — which ordered 68 MAXes.

• The integrators, FedEx and UPS, riding the boom in demand for airfreight, ordered new 767-300Fs.

State of the finances

To put the Covid-19 crisis into perspective, the charts trace key financial trends for the two OEMs from 2014 through to 2019, the first year of Boeing’s MAX crisis, the depths of the Covid-19 calamity in 2020, and the first stage of recovery in the first three quarters of 2021.

Both Boeing’s and Airbus’ financial priorities were questionable in the period following the recovery from the Global Financial Crisis: an obsession with quarterly results and share price momentum (one of the drivers of top management’s bonuses) resulted in unsustainable amounts of cash being returned to shareholders. This phenomenon was prevalent in most industrial sectors, but the impact on the OEMs, especially Boeing, was deleterious, with too little capital being allocated for investment in new products or to ensure production quality or simply to bolster reserves in case something unexpected happened.

In terms of total revenues, which are mostly driven by deliveries, Boeing had been by some margin the bigger company until 2019 when Airbus caught up. Then 2020 turnover plummeted by 24% at Boeing following an identical decline in 2019, while Airbus’s revenues fell by 29% in 2020. The goodish news is that Boeing turnover will be up by around 10% in 2021, Airbus’ by about 5%.

Boeing had historically been a significantly more profitable company than Airbus, with a net result peaking at $10.5bn in 2018, a margin of 10.4%, more than twice that of its European rival. The two manufacturers were equally unsuccessful in 2019, Boeing losing $0.6bn, because of the MAX grounding, and Airbus, $1.5bn. because of production difficulties with the A321 and cost increases from suppliers. 2020 was calamitous for Boeing — a net loss of $11.9bn or 20% of revenue while Airbus was just moderately bad — a loss of $1.9bn equating to a margin of -3.4%.

In the first nine months of 2021, financials have recovered. Boeing got very close to breaking even. Note, however, that, in financial terms, Boeing’s commercial division was dwarfed by Defense and Global Services which together produced twice the revenue of the commercial aircraft operation and contributed all the profit at operating level. Airbus, predominantly a civil aircraft manufacturer, managed to report a decent net profit of $2.9bn for the first nine months of 2021, driven by accelerating NEO deliveries.

A major difference between the two OEMs used to be Boeing’s superior ability to generate cash. Operating cashflow — ie, profits plus depreciation and amortisation, changes in inventories, pre-payments, creditor/debtor balance, etc — was huge at Boeing — $15.3bn in 2018, in contrast to just $2.7bn at Airbus. Then in 2019 and 2020 everything went wrong at Boeing; operating cashflow for the two years was hugely negative, $(20.8)bn in total. Airbus managed to limit its cash outflow to $(1.8)bn during this period.

Subtracting capex and investments — which includes new and replacement manufacturing equipment, R&D, investments on other companies, such as Airbus’ successful integration of Bombardier and Boeing’s aborted joint venture with Embraer — gets us to free cashflow, which again was historically much stronger at Boeing than Airbus. In 2018 for instance Boeing generated $10.7bn, dwarfing Airbus’ $0.8bn.

In startling contrast, in 2019 and 2020 Boeing’s free cashflow was negative to the tune of $(40.7)bn for the two years (through this figure is somewhat distorted by the inclusion of the purchase and redemption of short-term financial notes). Airbus was only marginally negative on this measure.

January-September 2021 financials indicate that the free cash drain has ended and indeed turned positive, caused by revenue recognition on increased deliveries and the reduction in provisions for client liability — Boeing produced positive free cashflow of $3.3bn, Airbus $2.5bn.

However, the reality for the two OEMs is that these cashflows will, in effect, have to go to paying down debt (as opposed to capex, adding to reserves or paying out dividends). Coming into the crises, first the MAX grounding then Covid-19, the OEMs found themselves with inadequate liquidity which led to a surge in borrowing to cover liabilities and contingencies: during 2019-20 2020 Boeing increased its net debt by about $40.7bn, Airbus by a much more modest $7.5bn.

But what happened to all the free cash that was generated during the good times, 2014-18? During this period Boeing generated $47.8bn but then returned $52.8bn to shareholders in dividends and, especially, through share re-purchases — in other words it paid out more to shareholders than it was producing in free cash, funding the gap through borrowing. Airbus followed the same policy, albeit on a much smaller scale — generating a total of $5.7bn and paying out $6.7bn.

This policy worked well for shareholders (and top management) who saw share prices quadrupling between 2014 and 2018. But such a strategy depends on nothing going wrong, which it certainly did with the MAX grounding and Covid-19. And ironically the share prices of the two OEMs, especially Airbus’s, have held up reasonably well, given the massive scale of the crisis

The liquidity problem appears to have been solved — as at the end of September Boeing held $20.0bn in cash and near-cash while Airbus had $18.1bn. (Both OEMs also have broader definitions of liquidity). As long as the recovery in deliveries continues, there is adequate liquidity to cover most eventualities.

However, debt (long and short term) now stands at $64.1bn at Boeing, which means the its balance sheet shows negative net equity of $(14.3)bn. Debt totalled $51.0bn at Airbus, though it has positive net equity of $9.9bn. The OEMs did not take state loans, but they have benefited from implicit state support. For instance, Boeing’s $25bn bond issue in April 2020, was issued against the background of the Federal Reserve’s $2tr commitment to buy up distressed corporate bonds.

Both OEMs have managed to retain their investment grade ratings: Fitch rates Boeing’s long-term debt at BBB- and Airbus’s at BBB+ and has changed the outlook for both companies from negative to stable. Net interest payments still account for small percentages of total costs at both manufacturers.

But the problem is the drag that the debt piles will exert as the recovery, hopefully, continues. And how much of management’s efforts will continue to be focused on financial engineering rather than technological innovation.