Leeham News and Analysis
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Leeham News and Analysis
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Fallout from the Airbus investors days
Dec. 11, 2014: The fallout continues from the disastrous Airbus investors days held yesterday and today in London. Company investor days are supposed to bolster the stock. Yesterday, Airbus stock tanked 10% on cash flow and profit projections, the delivery delay of the first A350 and, according to some commentary, news that theA380 program might be terminated.
We’ve talked with a couple of the analysts who were at the meeting, who reacted with a mixture of eye-rolling, chuckles and “what where they thinking?” moments.
And Tim Clark, president of Emirates Airlines, which has ordered 44% of the total orders for the A380, was none too pleased about the comments from Airbus’ CFO that cancelling the A380 program might be contemplated. Tim Hepher of Reuters has this exclusive interview with Clark.
Airbus was in full damage control over the A380 today to mop up the Wednesday remarks of possibly cancelling the program. Analyst reaction over the kerfuffle was that cancelling the program would be a good thing because of the cash drain and, at best, break-even nature of the program. One analyst, in a remarkable bit of candor for which he pleaded anonymity, said the market would “puke” if Airbus proceeded with the expense of an A380neo–and this comment was before Airbus Commercial CEO Fabrice Bregier said that one day there will be a neo (and a stretch). We’ve not heard back if this analyst had a burp bag handy. Airbus stock closed down another 4.3% today.
One analyst wondered how Airbus could have such contradictory messages, when the presentations were prepared in advance.
All-in-all, not a good two days.
Amazing, interesting to hear the investing community weighing in.
Not that I don’t think they are right in this case, but if we listened to investors we would still be in caves and running animals over cliffs to eat.
“One analyst, in a remarkable bit of candor for which he pleaded anonymity, said the market would “puke” if Airbus proceeded with the expense of an A380neo”
Well, one should keep in mind that analysts quite often seem to act like sheep, in that they tend to travel in herds. Likewise, herd behavior is, of course, typical in financial markets. Let’s just travel back in time, in this blog, to December 2010 and with the blog entry:Lessors, banks in blistering critique of Airbus NEO. At least, it makes for entertaining reading. 🙂
https://leehamnews.com/2010/12/09/lessors-banks-in-blistering-critique-of-airbus-neo/
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Thanks for that – just wanted to point out the same thing. 🙂
Anyway, if Airbus does a solid business case on the A380neo and think they can make money with it, I don’t see any reason for anybody to puke, other than people who really don’t like the plane. The German SPIEGEL, for example.
I’m surprised how the same (?) analysts and traders that reacted very calmly when Emirates cancelled their 70 A350s earlier this year suddenly act like headless chickens on the back of the few tidbits from the investor days, regardless of how badly the messaging was handled.
Anyway – as other have said, it seems like a good time to buy Airbus stock.
As an aside: That link to the interview with Tim Clark doesn’t load properly because it ends in a redirect loop (or so Chrome and Firefox tell me). Fixed link is
http://news.yahoo.com/emirates-raps-airbus-over-a380-gaffe-dangles-huge-094551483–finance.html
I’ve found a link to comments attributed to Tim Clark regarding the Airbus CFO’s A380 remarks:
https://www.youtube.com/watch?v=wriL5cQcIG8
2014:
– A320 NEO first flight & sales leader
– A330 NEO successful launch & Delta orders
– A350 Seamless development & TC with ETOPS370 Quality stamp
– A380 Successful & popular, 5 years backlog. Against all odds.
– 6000 Aircraft backlog, unprecedented.
I guess everyone can see, but not every one likes it, press / analysts included.
What counts for analysts are news, not stuff that is already known for some time and alreday priced into the stock price. And the current news are bad.
Airbus now admits it can’t close the production gap for the A330 CEO and has to reduce production further. That’s pretty bad news since the A330CEO is the only cash cow beside the A320x.
The A380 is just barely reaching break even in terms of production costs and zero planes have been sold this year. I think the A350 will be a cash cow too, but that’s future. There will be years until the A330NEO and the A350 programs have ramped up and will be making enough money to substantially support the bottom line.
The big picture is far from disaster, but the bad news just overshadow that at the moment.
Zero A380’s sold this year? Amedeo ordered 20 in February and the net order position at the end of November was 14.
Well maybe people that don’t drink the small water you drink see things differently. If the management had stopped where you stopped and then did not answer any questions things might have ended more to your liking. You failed to include the comments that the A330CEO program has not had the hold over sales that program needed, and that although the world might enjoy the A380 sales have not been coming in. All those thing seem to say that despite success the world is not as well as you say it is at world Airbus.
You also missed the recent announcement of the world beater A321NEOLR 757 replacement will be taking the world by storm.
The only reason the A380 has a five year backlog is because they have never been able to ramp up to full production, due to the time it takes to outfit the cabins.
And Boeing has a backlog of 5years @ 0.65 748 per month. Horray.
How does Boeing fare with building one and a quarter 747-8 per month ( or even less in the future ?)
How would you assay their situation in respect to closing down or making further improvements?
seems like a great time to buy airbus stock
Indeed. Madness struck the newswires & the very moderately informed traders started running. It might take a few days before numbers & common sense prevail.
Why would Abuolafia want to remain anonymous?
Priceless! Thanks for the laugh! 😀
I am surprised by the magnitude of the drop in stock price, but can’t fault the investors for having a negative reaction to the A380 announcement. Right now Airbus is losing on the order of $10M per aircraft on the A380 (in recurring costs). Assuming that Airbus reaches the breakeven (again, only a unit cost basis) point in 2015-17, and slight profitability from 2017 onwards (for arguments’ sake, assume $10M in profit per aircraft), it’s very hard to justify the case for an A380neo. Even if the neo doesn’t result in any unit cost (read: not price) increases, it would take an A380neo about 7 years to break even ($2B development costs) on a program accounting basis assuming these profitability levels. Airbus could find much better ways to spend their money than getting a lousy an questionable payoff over 7 years. Remember, breakeven isn’t the goal of aircraft OEMs. A “good” aircraft program will end up somewhere in the 20% range for total program profit margin. To do this, the A380 would need to dramatically reduce internal and supplier costs, increase prices, increase production rates, have a production run sustained well into the next decade.
I personally love the A380, and it’s great for many airlines… but as an Airbus investor I think the rational choice is to either embark on a substantial cost cutting campaign or cut the program. The airlines are getting a great product from Airbus, but that clearly isn’t translating into financial success.
“Assuming that Airbus reaches the breakeven (again, only a unit cost basis) point in 2015-17, and slight profitability from 2017 onwards”
No. The A380 will be profitable from 2015. Not 2016 and not 2017. From 2015.
Your other assumptions are so laughable they don’t even deserve an answer.
No need to be overly defensive and rude. I’m trying to provide actual numbers to give people context on how the financial community makes their assessments. The A380 will break even in 2015 on a unit cost basis. $10M profit per aircraft would be a huge stretch for the program at this point. If you move my assumptions back two years and assume that the aircraft is profitable from 2015 onward, that doesn’t change the fundamental point that the aircraft has dug itself into a huge cash flow hole.
Which assumptions exactly are laughable? According to Airline Monitor, one of the more reputable semi-public sources for tracking average aircraft sale prices, the A380 had an average realized sale price of $225M in 2013 (a 46% discount off of list price). What do you estimate the per aircraft contribution margin to be after breakeven in 2015? Regardless, it’s unlikely that Airbus can make the aircraft profitable enough on a recurring cost basis to recoup their investment into a neo at sufficient margins to make it worthwhile. As an investor, that $2-3B that could be put into a neo would be much better spent on other projects (A350-1100, investing in expanding airline IT and services businesses) or by returning cash directly to the shareholders through share buybacks or dividends. Amortizing a $2-3B in non-recurring costs over a low rate production aircraft only works if that aircraft is highly profitable, which definitely isn’t the case with the A380.
Feel free to post some actual numbers, assumptions, or facts in your reply to give it some credibility, then maybe we can have an actual discussion.
It’s not laughable, but I find it lamentable that financials cannot look beyond accounting. The value of the A380 is wider that just an income generator.
this may be the reason why airbus doesn’t do program accounting – any aircraft generates more value than just money; Knowledge, continuity and prestige are definitely valuable, even if they don’t generate income directly.
So yes, the A380 may have costs Airbus money (it is still a profitable company) – That doesn’t mean it isn’t worth it.
Comments like “As an investor, that $2-3B that could be put into a neo would be much better spent on other projects” are BS. Having a credible flagship at the top of the market is very valuable – look at other transport builders (cars, boats) – The top of the line models are used for marketing so they can sell the more economic models. Meanwhile, the flagship introduces new tech and features that can then be fully tested, and later translated to the real sellers.
Just looking at income is shortsighted, and share buy-backs are bad for business. What is good for the share-holder is not always good for the business!
I completely agree that financials don’t tell the whole story. The A380 has given Airbus a huge boost in prestige, both internally and externally. The value of that can’t be overstated. However, like the development costs, that’s in the past. The decision on whether or not to continue production or even launch an A380neo can’t be based on pride or an emotional response. Airbus has already received the technology trickle down (to A350 and future programs) and engineering experience benefits from the A380 program.
The notion that the A350 would net be selling as well as it is, without the “prestige” of the A380 is laughable.
If you don’t make money you don’t develop airplanes. Might be nice to have all the wonderful things that go along with aerospace development and programs, but keeping A380 alive because it is a national treasure is not a good use of the company’s money. Let’s say doing the A380NEO impacts capital investment in the A330NEO and the A321NEOLR. The $2 Bil used for say 130 frames at a (this is just an example) $30 Mil loss per copy plus the loss of the $2 Bil is a good investment? Or put the $2 Bil in two other programs and achieve 1000 frames sales per program? Would the company’s identity be better served with 2000 profitable frames?
Laugable is a term that should not be used in discussing program investment in the $2-3 Bil range. The comment makes sense and it may be part of the reason the Airbus bean counter made his point publically. Financial people don’t go public with comments of the nature made without reason for the heck of it. This observer has a comment that is logical and you call it laughable? Understanding that the A380 is a wonderful development for mankind, but there are times when wonderful and laughable need to call it a day. I respect Scott and this website but sometimes the comments here seem to devalue the effort, research, and value commenters place in sharing. I may not like some positions taken here but I understand that in many cases actual thought goes in to typing the comments. But the attacks because it fails to support another’s prospective is shameful at best. Laughable, really? Good professional sites where real discussion takes place lose their energy when comments of this nature are aired. Something about the analysis, the timeframe, the assumptions used might have enabled further discussion, but to simply say “laughable” enables nothing. Glad the commentor asked for clarification about the orgins of laughable. But really?
Perhaps Rational Observer would kindly apply his rationale to the 787 and provide numbers.
I still wonder what the methodology is for the $25 billion of 787 costs to be recovered.
Don’t mistake me for a Boeing fan either 🙂
In all seriousness, the 787 is obviously in a huge financial hole as well. I think Boeing will eventually have a net profit on the program sometime in the early-mid 2020s, but of course it won’t come anywhere close to the initial expectations. If Boeing is telling the truth and deferred production costs peak in 2015 (my opinion is it’s more likely to be mid-late 2016), then, like the A380, the 787 will finally have a sale price higher than unit cost. Life-of-program, things should be okay, but it looks pretty grim if they don’t meet their production rate targets or there is another down cycle.
One big difference between both programs is that all the developing cost of the current A380 are in the past (they took the hit when it happened).
That means that any penny of profit that any A380 generates goes directly into the company’s profit.
Maybe the program as a whole won’t break even, but at this point in time.. who cares?… for someone that buys shares today, what it matters is that it will help my bottom line next year. 🙂
Cheers
JD
Just to clear something up, Boeing charges all development costs as they occur, and doesn’t amortize them over the life of the program. Boeing does do this with the aircraft build costs. Airbus actually does amortize some of their R&D costs over a 10 year period, but the vast majority are charged as they occur like Boeing.
Someone correct me if I’m wrong, but I believe Airbus announced they will be using program accounting for the first 4 years of A350 deliveries. This approach is expected to improve their profitability by ~0.5% in 2015/2016 and decrease their profitability by the same amount in 2017/2018.
That means that any penny of profit that any A380 generates goes directly into the company’s profit.
You still have to account for the developing cost somewhere. I would say that any penny of profit that any A380 generates goes to offset the $25 billion in development cost, even if it’s been written off for accounting purposes.
Make up your mind.
You can’t use money twice.
You still have to account for the developing cost somewhere […] even if it’s been written off for accounting purposes
That’s a complete contradiction in itself if there ever was one.
What you’re saying is that sure, the A380 has been paid for, but you’d like to account for it again.
Knowing what Airbus know now, would they develop the A380 again? Probably not. But that’s neither here nor there.
Fact is that any profit Airbus can make on the A380 on a per-frame basis will go straight to the current bottom line, as there are no development costs left to pay for.
So while they can build A380s and deliver them at a profit per frame, they’d be stupid not to.
“So while they can build A380s and deliver them at a profit per frame, they’d be stupid not to.”
That’s assuming an airline buys an A380 or nothing at all. Suppose the choice is between buying an A380 or two A350s. If the profit on the two A350s is greater than the profit on the single A380, it makes more sense to build A350s.
In this particular case, however, you could argue the choice is really between Emirates buying A380s or 777Xs.
I wonder how you got “Boeing787 accounting system” out of an article and post discussing AIRBUS INVESTORS DAY and AIRBUS FINANCES…….
Because Airbus went to contract accounting on the first few A350s, which is similar to the program accounting Boeing uses.
Looking at the stock value of the last week, this is all rather amusing. The stock fell 10%. Detail: Airbus has never been stronger / healthier before! We are watching something that definitely needs closer observation / analyses! Airbus HQ must be flabbergasted, nobody could have expected this.
A “young”CFO should have stayed in his office, A330 will maybe not hold on to its record production rate while transitioning & an arab prince feels he’s god. All 2014 milestones & strategic successes are overshadowed.. The CFO will have a sleepless night no doubt. 😀
Rational Observer is presenting the reality.
Airbus is attempting (fairly successfully to this point) of transforming itself from a government jobs/tech entity into a private corporation.
The reason is that if they stayed a jobs creation entity, they would fall into the morass and fail. While its amazing what they did under the old regime, it would fail (we saw that with the various decision and fights over the acquisition of BAE, taking wing plant away form Britain etc.
Japan n is seeing that come home to roost and China has not learned that lesson. You can start them but if they are to be successfully compete in the private world you have to let them go (much like kids) . Airbus had some good designs but also some great luck to slide in the way they did.
If the investors think Airbus is reverting to its roots, then they are going to drop the stock.
Not that Boeing is anything to write home about. Its the opposite argument of capitalism gone bad (i.e. public trough is fine for us but not for the citizens)
And yes the 787 program is a fur ball mess, all because if bad management decisions, not because there is no market for that aircraft.
The A380 suffers from the opposite. There is not enough private market justification for it and enabled by launch aid which is clearly distorted the decision to bring it out (if you are not accountable to the market, then you can do that sort of thing)
Government money in the form of financing, defense contracts, R&D, space programs, tax policy’s, job creation has always been there for the industry. Boeing being absolutely no exception. Being government owned for decades, thousands of B47s, B52s and KC135 ordered paved the way to build an airliner and take the lead in civil jets. How much tax incentives, R&D, aircraft financing, Boeing had for the last 50 yrs? No one knows, less wants to know. If things go rough, the Government sends home the CEO, CFO & selects the home team (KC46).
How much “launch aid” has Airbus had for the last 40yrs? No one knows, less wants to know. If things go rough, the Government sends home the CEO, CFO & selects the home team (A400M).
Shouldn’t you just write your aerospace creed down somewhere and link to that for simplicities sake ?
Yeah that’s it, the young guy is being too honest about the business. This is Airbus being open about their business risks to the investment community. If a year from now a notice is made about reduced earning due to program investment and the investment community was not aware, then you have real trouble. Making the market aware now, and telling customers if they don’t buy soon, the program is going to shut down is a good thing. The industry now knows that if there are no sales then the program is over. They gave a timeframe and the airlines now know the real deal. They did it for the A330CEO too. JL didn’t have to give them the bad news, he can now say, “hey management is making me be so pushy about getting these sales closed by YE. You don’t buy soon, I got nothing.”
Airbus is in a fundamentally sound position business wise, and make some fantastic aircraft.
whatever was spent on A380 development to date is sunk cost, and MBA 101 says sunk costs have no bearing on future actions.
what does have bearing is marginal contribution to the bottom line. the A380 will likely become cash flow positive on a per aircraft basis sometime in the next 12-18 months, but will not become profitable enough to justify a $2B+ investment to become a NEO. assuming they can average $10-20M profit per frame over the next 5 years, they would earn $1.5-3B on the program, wiping out that small profit in order to design a NEO in order to eek out another 5 years of minimal per unit profit (after the first 5 years of NEO profit go to paying off the development) is a hard case to make to the board.
It is very difficult for an airline outside the ME3 to make a business case for, and the continual improvements of the big twins will further marginalize it by delivering comparable CASM costs with much less market risk to the airlines. additionally, you can bet that the ME3 know that and squeeze airbus to the bone on unit price.
From the CFOs perspective, is the A380 sufficiently accretive to earnings to justify devoting enormous corporate resources to its continued production, or should those resources be refocused to more profitable products?
From the CEOs perspective saying that in public before a decision has been made at Board level is tantamount to pointing a gun at your own head and pulling the trigger.
And oil went below $60 in the US today.
Big implications for B and AB.
Re oil at 60$/barrel, the implications are for the Airline community : virtually any aircraft becomes economically resilient at current ticket prices, however low … in reality, Investors are not sour towards A or B, they are simply repositioning their calls onto airline stock : AA, SWA, EZY, ME3 … are their new targets. Why lately A +B have insisted upon giving away forward their production to come in the next eight years is a mystery to me, to be held against CEO + COO Customers, not against CFO who’s been the helpless spectators of the gâchis ?!
Low oil prices could have relatively less efficient aircraft flying longer.
– 747-400
– A340 (few parked anyway)
– A330 CEO
– 737-300
– 757
– 767
In theory bad for sales of the 737NG, A330CEO, 77W because airlines will have less appetite to replace previous generation aircraft with them, before the new ones (NEO, MAX, A350, 9X) come along. Short term growth becoming the more important incentive.
I don’t know why people are so up in arms about the a380 ceasing production. Tim Clark? yes he I can understand. Those of us who only fly a380 longhaul will be miffed but hey? It didn’t work out the way it was marketed. The naysayers were right. So deal.
If it ain’t making the cash, it’s got to go
BS, cash is not the only measure of worth.
from the position of a stockholder it is.
if it a product (even a profitable one) is not producing profit at equivalent rates to the corporate baseline profit margin, it is a candidate for discontinuation or divestment.
a fine example of this is the 757, an aircraft that Boeing was making money on, but sales were declining and the margins were shrinking. In the early 2000s, Boeing did a market analysis and concluded (wrongly I think given that the 757 had a market niche to itself and the extremely high percentage of the fleet still in the air for a platform out of production for 10 years) that a -MAX style re-engine with minor aero tweaks was not going to provide sufficient ROI.
with 20/20 hindsight, that may have been a poor choice, but also at the time the engine guys were not ready to offer up their new generation of ultra high bypass turbofans, and dramatic increases in fuel prices didn’t hit for another few years, so the re-engine value proposition looked less attractive.
If Airbus is claiming to now be a purely commercial enterprise, these are the kinds of tough decisions demanded by that reality.
“from the position of a stockholder it is.”
If you cannot look further than a quarter of a year then cash is the only value. That sort of thinking nearly killed the US automotive industry. A company needs “worth” and also “glamor” to sell products.
“if it a product (even a profitable one) is not producing profit at equivalent rates to the corporate baseline profit margin, it is a candidate for discontinuation or divestment.”
Sometimes you need the complete range of products to compete on the market. So one product might be less profitable than the others but without the less profitable one you would not sell as much of the other products.
Without the A380 the A350 would not be the aircraft it is today. Right between of A350 and A380 you can find the remaining orders for 777: 310 orders for at least 6 years.
wasn’t saying I agree with the philosophy, just saying that that is the prevailing criteria in the world of public corporations.
“if it a product (even a profitable one) is not producing profit at equivalent rates to the corporate baseline profit margin, it is a candidate for discontinuation or divestment.”
In general I suppose that’s true, but in an industry like this with relatively small product lines and order numbers it may not be. As a farmer, I could decide that corn is underperforming and plant more soybeans next year instead without much trouble. That’s harder with airplanes. You can’t just discontinue the A380 and build twice as many A320s instead because the market can’t support those volumes. So any program that is profitable is probably worth keeping.
In the past we have been gifted with endless explanations that Boeing doesn’t need to make a dime from selling 787 because they would get stinking rich on just supporting the Dreamliner fleets.
Whats good for the gander .. 😉
Uwe,
I’m not sure how that relates to my comment, but it’s a good point nonetheless. It’s like giving away cheap printers and making money selling ink.
Still, that business model could apply to any aircraft. I suspect there’s more money to be made supporting the 787 or A350 than the A380 simply based on the expected fleet sizes.
So if sales of the A380 dry up, what is Airbus supposed to do? Keep producing them anyway? Launch an A380neo what will put the program even further into the red? That is not how a business is supposed to operate.
So if sales of the A380 dry up, what is Airbus supposed to do? Keep producing them anyway? Launch an A380neo what will put the program even further into the red? That is not how a business is supposed to operate.
You’re right there. But nobody suggested that Airbus continue producing the A380 at all costs.
In fact, all the current uproar was kicked off by the Airbus CFO stating the obvious – if sales dry up, we’ll look at our options and the associated business cases, including an A380neo and ending production.
As for any further A380 development – they’ll look at the investment required, the expected market demand, and expected loss/profit based on that demand.
It just seems that for you it’s a foregone conclusion that any further development shouldn’t happen.
Everyone is acting as if the choice is between building the A380neo or building nothing. What if Airbus just continues to sell the A380ceo without an upgrade?
Tell Emirates (the only plausible major customer) they can buy more ceos for expansion or fleet replacement, but there’s no neo coming. Emirates will still buy the planes. What else can they do? They need the A380’s capacity, and there’s nothing else either in production or in planning that can match it.
Tim Clark will piss and moan, but at the end of the day he still needs 140 A380s of some sort. Substituting 747-8s or 777-Xs isn’t a viable option when you’re already filling 5 A380s a day on LHR-DXB.
Well, personally I feel up in arms over a perfectly orchestrated [Edited] storm. Seeing this avalanche through the media is fascinating to watch. Someone in the background saw an opening and moved all the levers available.
Certainly fascinating. No bad news & stock takes a dive based on rumors & misinterpretations. I’m sure there is a strong WTF atmosphere in the Airbus boardroom as we speak. I wonder how they’ll react, apart from trading stock 😉
Looks like the real trade volume behind the fall is minimal.
Highspeed trading gone bad?
or a large offer that was retracted ?
Prospects are now good for own stock repurchase, not for stock-option sales. CEO Fabrice Brégier’s stock-quotation related eoy success bonus might be somewhat eroded. But up or down, stock Traders thrive on (d)escalations, wherefore Trader conspiration (with CFO unvoluntary concurrence ?) cannot be entirely excluded. Subsequent SEC hearings will establish if there has been insider or falcon tradings, ie who exactly got away with high&quick takes ?
When I read the thread in a.net yesterday my eyes got tired with all the rolling they had to do.
What the CFO was saying was (paraphrased, obviously) “it’ll soon be time to update since what else can we do… cancel?” (i.e. obviously we don’t want to cancel so of course we’ll be upgrading). This position was then reaffirmed (following the inevitable media and fanboy poopstorm) by the CEO – which was of course interpreted as Airbus is U-turning, doesn’t know what it wants, etc. etc.
It’s just pathetic the amount of straining that some people do to completely ignore what the CFO was trying to say, then pick out and mix around enough snippets until it sounds like what they want it to say. And I think they even magically believe their own made-up version once they’ve done twisting it out.
Of course, knowing how inexplicably rabid some people are about proclaiming the A380’s doom, it was monumentally stupid of the CFO to have said it the way he did. I knew as soon as I read it what the fallout was going to be…
What the former CFO and new CEO of UTC indicated in respect to product developement at P&W on the same day might provide for a better explanation. That includes why it also hit Boeing shares.
( and then “Wilhelm”s always made problems in Europe 😉