The OEMs’ Finances
Stabilised Jan/Feb 2023

However, Boeing is facing a more difficult task challenge than Airbus — at least that is way that stockmarkets view the two OEMs. Up to the end of 2020, including the period when the MAX crisis emerged and the pandemic started, the share prices of the two OEMs closely tracked each other, then they stated to diverge, with Airbus outperforming Boeing. Currently, Airbus is trading at about 7% below its pre-pandemic peak (January 2020) while Boeing is languishing 48% below its peak (July 2019).

The divergence is not simply due to the MAX crisis, which now appears to be well under control, but to the financial policies pursued by Boeing, and to a lesser extent Airbus, in the prepandemic years. To put it bluntly, there was an obsession with quarterly results and share price momentum (one of the drivers of top management’s bonuses) resulting in unsustainable amounts of cash being returned to shareholders. This phenomenon was prevalent in most industrial sectors in the 2010s, but the impact on 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.

The financial tables and the graphs trace the financial fortunes of the two OEMs; the statistics may look dry, but they provide some interesting insights into their relative fortunes.

In terms of total revenues, which are mostly driven by deliveries, Boeing had been by some margin the bigger company until 2018. But over the next two years its revenues collapsed by 43%, and the two OEMs are now very close in terms of dollar turnover. Revenue recovery has been insipid for both companies in 2021 and 2022. Boeing’s target for 2025/26 is for $100bn in revenues, which if achieved will return it to the record sum reached back in 2018.

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%. Boeing continued to lose money throughout 2021-22, reporting a net loss of $(5.1bn) for last year, a margin of -7.7% on revenue. Airbus has manged to push back into profitability in this period and reported a net profit of $4.3bn in 2022, a fairly impressive 7.0% margin.

In 2020 and 2021 Boeing’s Commercial division was in effect supported by the Defense and Global Services divisions which together produced twice the revenue of the commercial aircraft operation and contributed all the profit at operating level. Disturbingly this changed last year when both Commercial and Defense reported losses, in the case of Defense blamed on losses in fixed-price government development programmes. Airbus is predominantly a civil aircraft manufacturer, but its Defence and Helicopter divisions also returned to profitability last year.

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 everything went wrong — for the period 2019-2021 Boeing’s operating outflow totalled $(20.7bn), though it did turn positive last year, while Airbus managed to generate positive cash of $10.1bn during this period.

Subtracting Capex — which includes new and replacement manufacturing equipment, R&D, investments in or divestment from other companies, such as Airbus’ successful integration of Bombardier and Boeing’s aborted joint venture with Embraer — from Operating Cashflow 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’ $2.7bn. (These calculations of Free Cashflow are taken directly from the published accounts; the OEMs may have different definitions.)

In startling contrast, for 2019-2022 Boeing’s Free Cashflow went negative to the tune of $(24.9bn). Airbus was marginally positive, $1.3bn, on this measure. Net Capex at Boeing was only $1.2bn in 2022, about half the historical average; Airbus’s expenditure at $2.8bn was roughly at the historical norm.

At least the 2022 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’s provisions for MAX-related costs have been reduced to $1.9bn from an original $7bn.

However, the reality for Boeing is a large part of future cashflow 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 plus other supply issues, the OEMs found themselves with inadequate liquidity which led to a surge in borrowing to cover liabilities and contingencies: during 2019-20 Boeing increased its net debt by about $49.2bn, Airbus by a much more modest $8.1bn. The OEMs did not take industry-specific 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.

In 2021-22 they have been paying their debt down — Boeing by $6.9bn, Airbus by $3.5bn — but Boeing’s balance sheet remains weak. Its debt (long and short term) stood at $57.0bn as at the end of 2022, meaning that its balance sheet showed negative net equity of $(14.8)bn. Debt totalled $45.9bn at Airbus, though it has positive net equity of $18.4bn.

Debt was easily manageable in the era of ultra-low interest rates — for example, Boeing’s 2022 interest charges of $2.5bn equated to just 4% of total costs. But the company may well find it harder now to refinance its more expensive debt — just over half of the $57bn total debt is at rates ranging from 3.95% to 8.75%.

Liquidity problems appear to have been solved — as at the end of 2022 Boeing held $15.2bn in cash and near-cash while Airbus had $13.7bn. (Both OEMs also have broader definitions of liquidity). As long as the production issues are solved, there is adequate liquidity to cover most eventualities. Both OEMs have managed to retain their investment grade ratings: Fitch rates Boeing’s long-term debt at BBB- and Airbus’s at BBB+ with stable outlooks.

Boeing has rejected any prospect of an equity raise and has not committed to any future dividends. Airbus, on the other hand, has restored a dividend payment, totalling €1bn for 2022, which will put some pressure on Boeing.

It is worth recalling what happened to all that cash generated during the good times, 2014-18. During this period Boeing generated $42.7bn in Free Cashflow 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, funding the gap through borrowing. Airbus followed the same policy, albeit on a much smaller scale — generating a total of $3.9bn and paying out $6.8bn.

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.

Boeing’s problems have been simplistically attributed to a prioritisation of profits over technological innovation. However, there should be no conflict between these two aims; the real problem was the focus on short-term financial manipulation at the expense over longer-term investment, a mistaken policy which the current management is now rectifying.