Feb. 16, 2016, © Leeham Co.: Boeing has been under pressure since its Jan. 27 earnings call, when its 2016 guidance fell short of analyst expectations. Then the news that the company is under preliminary investigation by the US Securities and Exchange Commission over how its program accounting assumptions were reached.
Free cash flow (FCF), shareholder buybacks and strategy all have come under scrutiny is recent years. But just how different is this compared with its bitter rival, Airbus?
It turns out that other than Boeing’s use of program accounting and Airbus’ use of unit accounting (except for the first several A350 deliveries, for which contract (program) accounting is used), the approaches toward cash flow and shareholder buybacks are very similar.
Credit Suisse’s European analysts who follow Airbus issued a long research note on Feb. 5, just days before the Bloomberg News report on the SEC investigation. The Feb. 5 note doesn’t address program or contract accounting. But as does Credit Suisse’s US analyst who follows Boeing, the Airbus note discusses FCF and stock buybacks at great length.
Credit Suisse USA is bullish on Boeing’s FCF guidance and with its own analysis. This is the principal driver for CS-USA’s stock rating, currently Neutral, though it recently raised its price target. Seven analysts currently rate the stock Hold (Neutral), 13 are Buy, two are Overweight (basically, Buy) and two are Sell. Most focus on Boeing’s FCF, although there are, of course, other factors.
CS-London rates Airbus Outperform (Buy). Thirteen analysts rate Airbus Buy, seven Outperform, eight Hold, one Underperform and two Sell. We rarely see Airbus research notes so we are unable to give an overview of the driving factor. Since we do have CS-USA and CS-London reports, we’ll use these as our comparisons between the Big Two OEMs.
Since we have written many stories about the Boeing FCF issues, we will focus on Airbus today.
Airbus, writes CS-London, “is a free cash flow story.”
“Airbus should generate EUR24bn of cumulative FCF over 2016-20E, vs EUR19bn for 2000-15,” writes CS-London. “This should be driven by the increase in A320 output, a reduced cash drain from A350 and A400M and the Iranian order….”
CS concludes that the “large bulk” of the cash flow will come beginning in 2018. This is when production of the A350 is schedule to peak at 10/mo and the A320neo, with its greater selling price vs the A320ceo, will be at full production. The CEO is supposed to be phased out by then. The following year, production of the neo is planned to increase to 60/mo. The A330neo will be ramping up in 2018; the first is scheduled to be delivered in December 2017.
“Based on this FCF build-up, we expect Airbus to close 2020E with a net cash position of EUR24bn (vs EUR9bn in 2015E)…. Given the cash needs of the business (eg, investment in new programmes, a EUR8bn cash buffer), we estimate that this would allow Airbus to envisage share buybacks of up to EUR15bn…between 2017 and the end of the decade.”
CS-London also expects Airbus to increase dividends, something Boeing has also done in recent quarters.
Boeing has been accelerating pre-delivery deposits (PDPs) and negotiating much larger “advances,” or initial down payments, for orders for at least two years to meet its cash flow requirements, including its commitments to shareholders for stock buybacks and dividend hikes. Last year the figure was estimated by Wall Street analysts to be about $1.5bn, and more than $3bn the year before.
“Cash advances did not have a material impact on our operating cash flow result, which was a strong $9.4B for the year,” Boeing spokesman Chaz Bickers told LNC.
In contrast, CS-London “see[s] Airbus spending the cash it has rather than the cash it may have or the advances it receives from clients.”
A380 charge predicted
CS-London includes the expectation that Airbus will take a new charge on the A380 program next year, “to reflect price pressure that we feel may result from the lack of commercial success of the aircraft.”
This would be a non-cash charge, not affecting cash flow.
Or in simple words: Airbus’ accounting is boring but robust.
It is a pity that Boeing did create such a show basically on borrowed money. Why was this necessary?
Taking higher and earlier advance payments (probably in exchange for lower overall price) is nothing else than borrowing money.
This increases the likelyhood that times will be harsh at Boeing until the end of the decade. Something some analysts predict since about 2 years (Buckingham Research).
Why was this necessary?
Just the regular madness. the industry driven GAAP standard has been leveraged to sex up lack luster results for quite some time now. It is an open secret that numbers from US companies need -5..-15% adjustment to fit numbers elsewhere.
( hand in hand with out sourceing or removing oversight altogether.) All these little easements for the ailing industry now come home to roost in situations that the original conservative assessment methods were designed to expose early. And it is ringing back up the risk taker chain.
GFC back in the 2008 bombed for the same reasons only in the domain of the highest risk gamblers.
I do wonder when the certification embeddedness will join up into these cycles.
Interesting reading. To me though it reads as the approaches to (free) cash flow and shareholder buybacks are opposed rather than very similar. In Boeing’s case share buyback dictates FCF, whereas in Airbus’ case FCF dictates share buyback. One of these sounds healthier than the other for the underlying business….
Another item: advances are not really Free Cash Inflow.
as recipient you are in a trustee position. limited scope of use.
( and I’d assume there is language in the contracts handling that liability).
Both OEM’s are creating storms in a glass to each other by dogfighting in the markets. The business of Airlines has turned healthy, robust. Both OEMs are in dire needs of FCF increments to face their respective challenges-to-come. Boeing need to face the SEC inquest and possibly will have to make amendments to align to industry GAPP for 747 and 787 programmes, then they need to cope with the A321LR attack upon the MOM niche … Airbus are facing the challenge of A350 ramp-up and a slowing pace for the A380 whilst pondering an early launch of A322, their MOM Joker ? Time is ripe for both OEMs for burrowing the war-axes and go in more for what it costs to build an airliner, terminating the hard-discounting, seeking to close deals at more robust contract proceeds. Too much added value created by the Airframers is being passed into the hands of the Operators as things are, the backlogs are sur-realistic anyway so the sales teams can take a break to allow for some readjustments to happen. Except for Bombardier who need to wake up ?!
Strike the “both”.
It is only Boeing making a mess. again.
Due to PA Boeing is at least the overall amount of deferred cost and judicious amount of inventory value deeper in the bog than anybody else. they are in a negative energy release trap.
Your constant Boeing bashing is getting tiresome.
“Good Morning Boeing”. Thank you for listening 🙂
Frankly its not PA that’s at issue (some adjustment and life goes on even if its a bad way to do business)
Its buying your own stock back that is.
That’s known in the survival area as “eating your seed corn”.
So when times are tough (A321 completion) you need to get a new model into the market ASAP.
That’s why you save money not throw it away.
You’re not welcome. Repetitive/compulsive behavior isn’t entertaining.
“Good Morning Airbus!” 🙂
Now Rick it’s never tiring! “Boeing BAAAD, Airbus GOOOD” gives a much needed dose of certainty to the day, much like the sun is always going to rise in the east!
I invented the Leahy Tinseth (LT)index ranging from 1 to 7 precisely for this problem. Can’t we all be allowed our own prejudice? At the same time can we be accepting of others prejudices
Sowerbob (LT4) – strangely I am completely neutral, funny that….
“then they need to cope with the A321LR attack upon the MOM niche”
How many a321LRs have been sold?
Paper and PowerPoints can kill!
More trouble on the GTF front…
“Qatar Airways has threatened to cancel an order for Pratt & Whitney Geared Turbofan engines for an order of 50 A320neo-family aircraft, saying the newly developed power-plants had “a lot of problems”.
If that was coming from any other airline or any other CEO I would think that Pratt is really in trouble.
Not though when it only comes from Qatar ans AAB.
You can cry wolf so many times until you become nothing more than a punchline.
It’s just the never-ending rantings of the crazy Al Baker. Somewhere along the line, Al Baker missed his calling – somewhere there is a bad French restaurant in desperate need of an ill-tempered Maître D. So, what turns out to be a loss for the restaurant world also turns out to be a loss for the Airline industry. Strange how things are so symmetrical that way.
I like it!
GTF has better than 15% improvement on some baseline, I am not sure what, Leap-1A only 12%, and not in service yet. GEn-X had at least two serious issues, coatings and the ice ingestion issue that handicapped it’s operators for a couple of years. So it sounds like AAB is just at it again, maybe asking for a discount?
Investors like transparency, and Airbus is a bit more transparent. I also think the number of informed analyst opinions available on the net today explaining the aerospace cycle means that the original reason for program accounting, which was making long term sense out of the cyclic nature of the business, isn’t valid anymore, and we know it is too easy to misuse.
Agreed GTF is the right way to go. P&W has left themselves open with execution problems. 3 significant failures is not good.
Its not the architecture of GTF, its the execution.
You can make a case its endemic with P&W as they had the same rubbing issue with F-35 engine.
I do think they will get it ironed out, but that also has left them open to Al Bakars rude MaitreD act.
The faster spinning main shafts of the GTF have pushed the bearing technology beyond its current accepted criteria. That could be an item to watch ?s
no. it hasn’t. core RPM has always been this high (at higher temps & pressures to boot)
there is no new technology in their bearings or main shafts.
The shaft bearings for the compressors for the GTF will have a DN of around 3.3 mill [DN is bearing diameter in mm x max rpm] where the previous highest figure was around 2.5 mill. They have also introduced counter rotation at this thrust class which complicates the vibration modes.
True GTF numbers for N1,N2 are hard to find but Ive seen these approx.
Fan 3500rpm , N1 10,000rpm , N2 18-20,000 rpm
while older engines are:
CF680C2B6F max N1 rotor speed 3854 rpm, N2 speed 11055 rpm
PW4000 Max N1 rotor speed 4012 rpm, N2 speed 10,450 rpm
CFM 100% N1 rotor speed 5175 rpm, N2 speed @ 100% 14460
They can run a bit higher than 100%.
Broadly the GTF N1 is at everybody else N2 and N2 is in a different class
your N2 ( turbine side ) is off. The gearbox links Fan and LP turbine 1:3. your fan upm is about right. … times three moves N2 into the same ballpark figure you find on the N1 spool. 12..14krpm.
Not sure where you get your numbers from.
This story in Flight Global about the GTF demonstator in 2007 mentions much higher speeds as described by a P&W executive
The 31,000shp (23,100kW) fan drive gearbox in the 30,000lb thrust-(134kN) class GTF demonstrator provides a 3:1 reduction. This allows the 1.9m (75in)-diameter, 18-blade fan to run at two-thirds the speed of a conventional engine while the low-pressure spool runs two and a half times faster than normal, says Bob Saia, P&W vice-president, next-generation product family.”
2 1/2 times FASTER for the LP turbine and shaft
Still looking for backup for my N2 speed but so far the N1 is about right being TWICE that of the CFM
N1, N2 Data are available in the certification documentation.
( via EASA website , GTF is an IAE engine there https://easa.europa.eu/system/files/dfu/EASA%20TCDS%20IM.E.093_issue2_20152311_1.0.pdf
LEAP is CFM:
There was a discussion here at Leeham news about the GTF and its rpm back in 2014, which you participated Uwe
The figure mentioned for the GTF HP spool is 18-20,000rpm, much as I was using. ( there being an approx rule of 2:1 for HP:LP ration.
Thanks for that Uwe. Its good to get original sources.
PW1100G-JM which has 24-33ooolbs thrust
N1 is 10,047 and N2 is 22,300, as these are listed as maximum I presume that means overspeed. The N1 was spot on my original figure while N2 is is more than the 18-20,000 probably the overspeed helps that.
The leap1A figures are N1 3858 ( overspeed is 3894) and N2 is 16645 with overspeed to 19391.
The other figure which is important is the dry weights
PW1100 2857 kg ( dry)
Leap1A /1C 2990 kg ( but inc fluids!)
Which surprises me, they are not exactly totally comparable numbers but are likely pretty close. Im guessing they are essentially the same for the A320 models
I’m left wondering how long before someone (RR?) catches up. Ten years? Sooner or later P+W will lose their lead, so they need to “make hay while the haying is good.”
You can see now what a very serious mistake it was on Rolls Royce part to leave the single isle market, would have helped them no end right at this moment in time. Sadly with bad management to blame everyone expects the new CEO to produce miracles over night. As to the 10 year time frame,I think China will be in the market big time. Any assumptions ignoring them are useless.
I am not an accountant, but it does seem to me that all this ‘discounting’ on prices only leads to the buyer expecting more if he shouts loud enough-not a way to make a profit.
While P&W has FINALLY (?) been reasonably forthcoming on its PW1100G gtf issues–primarily through Mr. Leduc’s explanations, it’s certainly been a “process”. “Oh, we’ll have a software fix that’ll take care of things by February.”(Airbus) Oh, we’ll get Qatar its satisfactory neos by April or May this year.” (Airbus) Oh, we’ll get dampers on those rotor bows installed now, and ramp up gtf production in the second half of the year.” (P&W) “By December, we’ll have “normal” 50 second start times per engine on our 1100G gtfs.” The word that comes to mind for all this–for both P&W and Airbus–is lackadaisical. And, these comments really don’t inspire confidence in the (moving) timelines cited by both companies’ executives!
You say that Airbus response is lacksadasical, and I find that strange considering Airbus is not the engine developer or manufacturer. Nor did Airbus long ago identify the problem and ignore it. Really…what more could Airbus do to help solve the GTF issues than they have already done?
The way I understood this, launch customers get a big discount because this sort of thing is almost inevitable.
Somewhere, somehow, Airbus is responsible to their NEO-GTF Customers for letting pass P&W fooling the world. Airbus is supposed to fox out the subterfuges of a faulty engine make, after all, that’s what FTV1, FTV2, FTV3, FTV4 … are there to circumvent. Airbus failed in identifying the catch. How many test flights, how many flight hours flown and no mention of a cat-in-the-sack ?? Obviously, P&W (who know perfectly well their business) have selected materials for those FTV-engines (shafts, bearings, … in what ? Ti alloys ?) to make sure nothing could go wrong. Come the day – past Certification – of EIS when P&W start delivering “production quality” engines – whatever that implies – and we have shaft micro-bending happening. U-Turn Al Baker is right : Airbus carries responsability for failing to prevent the miscarriage ?!
Well….where was Al Baker and his crew when Pratt was designing and certifying an engine that is he doesn’t deem worthy. After all those tests, are you telling me that Qatar Airways – who has a lot riding on the outcome – wasn’t paying attention so they could “fox out” Pratt’s subterfuges?
Are you telling me that Qatar Airlines doesn’t have technical Reps working with the carriers and Engine Builders? If they don’t then shame on them.
Ya’ see…this “Blame Game” has no end once you choose to blame anyone other than Pratt.
No way, Jimmy : Qatar is walking on the opposite side of the street, Airbus the airframer and P&W the GTF-maker are providers, in the same boat. Airbus is the Captain, in charge of the Helm, P&W is down in the machine-room gunning up the powerplant. The ship’s heading is set by Airbus, Airbus need to know their people. If it is a P&W custom to cut shafts for development engines in Ti alloys then to switch to some trivial – softer – steel alloys for series production engines – at a risk to programme resilience – it is the job of Airbus to anticipate and avert the consequences of this lackadaisical trait of their GTF Supplier. Buyer Al Baker is exempt, Qatar cannot be blamed.
The PW1000G GTF engine family is a pioneering endeavour – just like the JT9D on the early 747s.* The JT9Ds had a myriad of problems, early on – including damage to the high pressure turbine, apparently resulting from the failure of the blade-retaining rivets, ovalisation of the engine casing during take-off, apparently resulting from blade rubbing etc. – leading to a loss of efficiency, among other things.
We could also talk about the development travails of the pioneering three-shaft RB-211 engine for the L1011 – that eventually lead to; 1), the insolvency of Roll Royce and soon after, full nationalisation of RR by the UK government; and 2), Lockheed receiving US government guarantees for the bank loans required in order to finish the development of the L1011.
Therefore, talking about P&W and Airbus supposedly being lackadaisical with the GTF powered A320neo, is nothing but uninformed supposition.
Finally FWIW, Airbus initially wanted P&W to offer the GTF engine for the A320neo under the aegis of IAE
Cash flows often reflect a misplaced pride projection. The prudent financial knows too well: the share buybacks and increased dividends are signs of a lack of strategic planning, from a deficit of promising projects. Although a direction tells that to pay the patience of shareholders, in reality, it is a tactic to preserve profit margins before aircraft buyers. Take the case of Boeing. What it says on the military side and projects? What is there in the IPSP-line? And Airbus? Besides the A400, and helicopters? Boeing, for its history, is an industrial box filled with engineers. What are the bases of this organization today? Should we rejoice at a squandering of financial resources? The best business decision that can take the board is to privatize Boeing. In an extraordinary remake box to innovative projects.
I think regardless of GTF or LEAP, high BPR’s for low noise and sfc are the way forward. Boeing has no choice to offer a new NB/MoM with high BPR engines going forward.
Seeing the limited resources I expect we could see a compromise, 1 fuselage with two sets of wings engines, like the Embraer E2. 1 Set optimized for short flight up to 180 passengers and 1 set for MoM like missions.
To combine the pro’s and avoid cons of 1 and 2 aisles, maybe they’ll specify 1.5 aisle 😉
Other 2-2-2, 2-3-2 studies for comparison
2016 will be existing / moonshot after all 🙂
We are in the middle of February already and Airbus just revised its 2015 orders: http://www.reuters.com/article/us-airbus-group-orders-idUSKCN0VP0KG
Could you explain this update from Airbus please.
@Al This one beats me. I don’t have an answer other than the snarky “5th quarter” for which Airbus is famous.
Here is Airbus’ reply to my inquiry:
Airbus (Airbus Group) takes a prudent approach when presenting our official orders. At the time of the annual press conference in January (when we announced 2015 orders), fulfilment of “condition precedents” (basically, special approvals required for a deal to be considered “a deal”) in relation to the orders you’re referring to had not yet happened. Now that they are fulfilled, we are advised that it’s best practice to consider the orders as part of the 2015 results.
I can not see any advantages for Airbus having it either on 2015 or 2016 order tally. Maybe 2016 better as a good start?