Boeing and Airbus:
The financial fall-out Oct/Nov 2020

Some 20 months after its grounding, the FAA recertified the 737 MAX in mid-November — finally, some good news. But both Boeing and Airbus still have to confront the financial fall-out from the Covid 19 crisis.

EASA and other regulatory authorities are likely to follow suit, which provides Boeing with the opportunity of shifting the inventory of parked MAXes, 450 in total. But this is not going to be a quick process — the aircraft have to re-activated, the new MCAS software installed and training programmes completed.

Moreover, there is the possibility or probability of more deferrals and cancellation from airlines and lessors (usually clients can cancel without penalty and retrieve deposits if the delivery is delayed by more than 12 months from its scheduled date). Boeing also has to pay compensation to MAX customers when it hands over the aircraft, for which it has currently allocated about $6bn.

The calamity that has hit Boeing and Airbus is highlighted in the order and delivery charts. Having roughly matched each other on orders and deliveries, Boeing’s performance fell away sharply in 2019 with the MAX crisis. So far this year (January to September) Boeing has achieved a negative net order total of -381 (67 new orders and 448 cancellations) and delivered 98 aircraft. Airbus managed in pick up 300 net new orders, almost all A320/21s and delivered 341 units.

Since April Airbus has been producing A320/321s at a rate of 40 a month, five a month for A350s and two a month for A330s. Possibly the last A380 was rolled out in September. These rates are about one third below pre-Covid production norms, but Airbus wants to ramp up production with the aim of getting A320 neo family output up to 47 a month by the third quarter of 2021

Boeing’s production cut-back has been on a different scale. The MAX was supposed to be produced at 57 a month but by the beginning of this year production had been suspended; the current plan is cautious, increasing output gradually to 31 by the beginning of 2022. The 787 programme has dropped from 14 a month pre-Covid to 10 currently, then will be cut further to six in 2021. The 777 programme, including the 777X, is currently five and will be cut back to two in 2021. The 767 was 12 a month pre-Covid, and is now at three where it will remain next year. A single 747 is planned for every two months for the rest of this year and next year.

The two OEMs have contrasting strategies in this regard. Airbus is maintaining a relatively high production rate because of fairly firm demand for A321s, even in the Covid crisis, and because its production efficiencies depend on a high level of throughput. Its calculation is 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. Boeing already has an inventory of undelivered aircraft, but it also has a more flexible cost structure, as the result of extensive outsourcing strategy, and cutting production rates drastically makes sense because suppliers are then forced to bear a proportion of the pain.

Comparative calamities

Neither company could have anticipated Covid 19, but equally neither company had pursued the type of financial strategy that might have mitigated its impact. To put the 2020 crisis into perspective, the charts trace key financial numbers for the two OEMs from 2014 through to the first three quarters of 2020.

As we have argued in previous articles (for example, Aviation Strategy, November 2019), both Boeing’s and Airbus’ financial priorities were questionable in the period following the recovery from the Global Financial Crisis, with unsustainable amounts of cash being returned to shareholders, with admittedly a very positive effect on the share prices, and probably too little being allocated for investment in new products or simply to bolster reserves in case something unexpected happened (like Covid 19).

In terms of total revenues, Boeing had been by some margin the bigger company until 2019 when Airbus caught up, achieving $78.8bn against $76.6bn. 2020 turnover will be about 30% down on last year at both companies.

Boeing had also 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 successful in 2019, Boeing losing $0.6bn, because of the MAX grounding, and Airbus $1.5bn. because of production difficulties with the A321, cost increases from suppliers and labour unrest.

In the first nine months of 2020 Boeing produced a loss of $3.5bn while Airbus lost $3.1bn. Boeing’s loss would have been much high but for positive contributions from Defense and Global Service of $1.3bn in total.

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, creditors and debtors, etc — was huge at Boeing — $15.3bn in 2018, a margin on revenues of 15.1% in contrast to just $2.7bn or a margin of 3.6% at Airbus. Then in 2019 everything went wrong at Boeing; operating cashflow turned negative, -$2.4bn, while Airbus manged to maintain positive cashflow of $4.3bn.

Subtracting capex and investments — which includes new and replacement manufacturing equipment, R&D, investments on other companies, such as Airbus’ purchase 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. Last year Boeing’s free cashflow shrivelled to -$3.9bn while Airbus was just marginally positive. January-September 2020 free cashflow is simply painful, though Boeing’s outflow is somewhat distorted by the inclusion of the purchase of short-term financial notes using funds from the long term debt it raised

Nevertheless, both OEMs earned substantial funds in free cashflow during the six-year period 2014-19 — Boeing generated $43.9bn and Airbus a more modest $6.5b. The basic question then became: what to do with this cash? Which proportions to return to shareholders or pay down debt or add to reserves?

The strategy pursued by both OEMs was to return all this cash to shareholders. In fact, they returned more to shareholders in dividends and share re-purchases than they generated in free cashflow. Boeing returned $60.1bn and Airbus $8.2bn during the period 2012-19. These sums exceeded free cash by $14.2bn and $1.7bn respectively. Unsurprisingly, no dividends are currently being paid, and share buy-backs are inconceivable.

Most of the increase in net debt during 2102-18 went to fund the shortfall between free cashflow and dividend/share buy-back spending — in effect, the OEMs borrowed money to pay their shareholders to enhance to share prices, which quadrupled between 2014 and 2018. Such a strategy depends on nothing going wrong, which it certainly did with the MAX grounding and Covid 19.

Boeing and Airbus found themselves with inadequate liquidity to deal with the crises — Boeing held $9.6bn in cash at the end of 2019, Airbus $11.2bn. This led to a surge in borrowing to cover liabilities and contingencies: during January to September 2020 Boeing increased its net debt by $33.5bn, Airbus by $9.3bn.

As a result, the liquidity problem has been solved at least for the short term. At the end of September Boeing held $27.1bn in cash and near-cash while Airbus had $12.5bn. (Both OEMs also have broader definitions of liquidity). This may be just enough to get Boeing through to the end of 2021 when it projects that it will turn cash positive. Airbus is aiming for cash positivity by the end of this year.

Debt (long and short term) now stands at $64.0bn at Boeing and $44.1bn at Airbus. The OEMs have not taken state loans, but they have benefitted from implicit state support. For instance, Boeing’s $25bn bond issue in April, which carried an interest rate of 5.1% over 10 years, 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 but that is looking less certain for Boeing. In October Fitch downgraded its long-term debt from BBB to BBB- which is the lowest of the investment grades. Airbus too has recently been downgraded from A- to BBB+ on unsecured senior debt.

The end-September balance sheets shown that with the increase in borrowing this year, Boeing’s liabilities now exceed assets by $11.6bn — technical insolvency for one of the US’s largest and most iconic corporations. Airbus still has positive equity, just, €1.9bn. The debt/equity ratios for OEMs are unmeasurable in Boeing’s case, 23:1 in Airbus’.

The paradox is that they cannot fail (unlike airlines). The stockmarket believes this, as Boeing is currently valued at $114bn, Airbus at €70bn. Between them the OEMs have a commercial jet backlog of 11,700, aircraft that nobody else can supply. Boeing is part of the US military complex while Airbus is partly state-owned and a symbol of European unity.

That status, however, does not provide a solution to the massive balance sheet problems that Covid 19 and the MAX grounding have created.