EADS held an investors Day this week; here are takes from two who attended.
Airbus presentations may be found here.
EADS is holding its annual Global Investor Forum. We describe key themes from Day 1, which focused on EADS overall and Airbus. A key message we took away was that EADS is headed toward governance changes that should make it a more normal company.
We now expect reduced government involvement with independent directors becoming the majority on the board. The free float is planned to rise from 49% to 70%. Although the sale of shares may depress the stock in the near term, long term it is positive.
Margin upside remains the key value driver for EADS, with higher margins likely on A320 and A330 from cost reduction and pricing. A380 performance appears to be improving. We see the main risk as the A350 production ramp in H2 2013.
Summary. We attended the EADS Global Investor Forum in the UK. Given that Airbus is the primary competitor to Boeing in manufacturing large commercial aircraft, its outlook is important to the suppliers in our coverage universe. Overall, we believe the key highlights of the forum on day 1 were 1) demand for airplanes remains strong as Airbus now says 2014 is overbooked for A320 2) the A350 and A320neo developments remain on track 3) Airbus has about 300 A320 current engine option airplane slots to sell in 2016-2017 that could see some pricing pressure and 4) Airbus is intently focused on reducing its costs which could lead to some pricing pressure for suppliers. In particular, Airbus highlighted Spirit Aerosystems as a supplier that has been challenged on the A350. For the suppliers in our coverage universe, we believe the positive commentary on a stronger 2014 and the order backlog should give investors increased confidence in Boeing and Airbus production ramp ups despite recent economic weakness. In addition, while Airbus has focused on reducing costs, we believe pricing pressure has been continuous for the suppliers in our coverage universe and do not expect substantial changes in the profitability of work for Airbus. We continue to be positive on the commercial aerospace suppliers based on the OEM upturn.
A350XWB. Airbus confirmed its schedule on the aircraft with first flight in mid-2013 and entry into service in H2 2014. We do not know how many aircraft Airbus plans to deliver in 2014, but the company did say that one of its two launch customers, Singapore Airlines, has shifted its planned aircraft deliveries into 2015 leaving only Cathay Pacific to receive the aircraft in 2014.
A320neo. Airbus continues to highlight its re-engined narrow body A320neo as superior to Boeing’s 737MAX. The company believes that its larger fan size allows total cash operating costs to be 3.3% better than the 737MAX. Boeing of course calculates different economics and can show its offering is superior to the A320neo. Airbus said it has about 300 open delivery slots for the current generation A320 aircraft before production transitions to the A320neo in 2017. Not surprisingly, most of these appear to be at the end of A320ceo production in 2016-2017. The company said that its 2013 and 2014 delivery slots are now fully booked (and 2015 is nearly so), an improvement from the company’s Q3 earnings conference call when there were still 2014 delivery slots available.
Backlog Growth in 2013. Airbus has about 7.5 years worth of production at planned rates (similar to Boeing’s production in backlog). Management thinks this long backlog has reduced the cyclicality of the airplane manufacturing business since 2004. On the other hand, Boeing has said it desires to reduce its backlog such that it can deliver airplanes on a more timely basis to customers.
Focus On Cost Reduction Could Mean Pricing Pressures For Suppliers. Airbus is targeting a 10% EBIT margin by 2015 (excluding A350 losses and the impact of a weaker Euro) and is aggressively looking to take out costs. As part of its cost reduction efforts, Airbus will have reorganized its plant management process beginning in January 2013. The new structure empowers plant managers with increased authority to manage production problems. At the same time, Airbus has implemented a single procurement organization to more effectively and efficiently manage the costs of the supply chain.