Airbus raised its list prices for aircraft by an average of more than 5% because on the continuing weakness of the dollar vis-a-vis the Euro. Airbus prices its airplanes in dollars but much of its costs are in Euros. Every 10 cent decline in the dollar costs Airbus $1bn in EBIT profits. The price list is at the end of this column below the jump.
This article explains the details. But this isn’t the only problem Airbus has.
The cash drain by continuing production challenges of the A380 is unquantified be significant. Last year Airbus delivered just 10 A380s vs. an intended 21. This year Airbus projects delivery of 20 A380s vs an originally intended 45. Using an average sales price of $150m per copy (probably high, as the airplanes in question are launch-customer orders, and Business Week reported several years ago the prices were between $130m-$140m), Airbus will be short roughly $5.4bn in cash flow last year and this year just on this program. (Another caveat: pre-delivery payments typically amount to 30% so this has to be factored into the cash flow as well, and considering delays there is no way for an outsider to know how this flow affects the $5.4bn figure.)
Although the revenue is delayed, Airbus eventually will see it when the behemoths are finally delivered. Still, the net present value of the deferred revenue and the absence of the cash flow is harming the company.
Airbus has no choice but to continue with the A380; it has a backlog of about 180 airplanes and cannot feasibly cancel the program even if it wanted to, and officials still believe in the aircraft.
Clarification: A reader points out that a few weeks ago we questioned whether the time has come to terminate the A380 program, which is at odds with the statement above. The seemingly contradictory statements certainly failed to distinguish our thoughts, which are these:
Airbus has no choice but to continue the A380 program to fulfill current orders, with delivery now underway on a disastrous schedule. What should be reassessed is to whether to continue the program beyond the current orders. We believe the break-even on the A380 is well beyond the 425 units Airbus acknowledged two or so years ago. We also do not support the notion that the Very Large Aircraft market will support the Airbus projection of 1,400 sales over 20 years, noting it took Boeing 35 years to reach this milestone with the 747. With these and other factors, we question the wisdom of continuing the A380 program and diverting cash requirements from other, more prospectively popular programs.
The previous context, which was not repeated here, also included the observation that many suggested and wondered whether the Boeing 747-8 program should be or would be canceled prior to first deliveries (we said “No.”)
A mess with the A400M
The same can’t be said for the A400M. Airbus can cancel this program, though it would have to pay out an estimated 7bn Euros in refunds to its customer-governments. It is unclear how much more might have to be paid to suppliers should the program be canceled.
The fixed-price contract agreed to by Airbus and the government-customers when the program was launched is a crushing financial drain. Right now there is no cash flow at all to Airbus–it’s all cash outflow. This cash drain is $139m a month at current exchange rates, or $1.67bn a year, with no immediate end in sight.
Airbus and the governments remain at odds over resolving contract differences.
In a new report to be published this week by AirInsight, of which we are a part and co-authored, we conclude that the A400M program has the potential to harm Airbus’ competitive position vis-a-vis Boeing because of the cash drain. Airbus is faced with upgrading the A320 family, which is aging and–depending on the model–is marginally competitive with the Boeing 737 family. New competitors are on the horizon with far more fuel-efficient airplanes. Boeing is evaluating whether to re-engine the 737 or proceed with a replacement and what to do with the 777 to meet the forthcoming A350.
While we believe Boeing will choose to re-engine the 737, we conclude in our AirInsight report that Boeing could take the huge leap and elect to go for a replacement airplane, capitalizing on the financial limitations Airbus has because of the A400M. Boeing theoretically could also elect to replace the 777 rather than enhance it with a major make-over.
Given Boeing’s own financial strains brought on by the 787 and 747-8 programs, as well as the three year delay in proving the composite 787 technology and production line, deciding to go for new airplane programs instead of the safer and less-costly make-overs would be a huge gamble that makes any previous bet-the-company program pale by comparison.
But imagine the leap that Boeing could make over Airbus by taking this huge gamble. Airbus’ market share would be set back for easily a decade.
The only way Airbus could match a Boeing decision to replace the 737 now rather than do a re-engine would be to rely on the controversial launch aid that continues to poison the strategic effort to win an important tanker contract with the USAF. If Boeing launched a replacement 777 that could promise better operating and maintenance performance than the A350, how could Airbus respond without more launch aid?
The Airbus governments spent 40 years supporting Airbus and more recently the creation of EADS to become a world-class company. Airbus represents about 70% of the EADS revenue and how goes Airbus, so goes EADS. The recalcitrance of the governments to support the A400M program is mystifying. The very same governments that supported Airbus for 40 years have the chance to undo the progress and do more harm to the Airbus competitive position than anything the US Trade Representative or Boeing can do.
Defense programs are no subject to the rules of the World Trade Organization and the Airbus governments could write endless checks for the A400M (like the US government has for the V-22 Boeing-Bell Osprey over 20+ years, just to cite one example). This would free Airbus-generated cash to funnel into its core A3-Series programs, without the crabbing that accompanies launch aid.
If the Airbus governments fail to adequately support the A400M, Airbus has the choice to continue the program at a major cash drain, or to cancel the program at the cash cost of some 7bn Euros. Either way, this hands Boeing an easy victory. The question then is, Does Boeing take the safe route of doing make-overs for its 737 and 777, or does it truly roll the dice and proceed with new airplanes that will put Airbus at a competitive disadvantage for decades to come?
Here are the new prices for the A3-Series.
Prices are average, in millions