Why Things Still Look Optimistic For Airbus

Aug.13.14 | About: Airbus Group (EADSY)


Airbus' prospects are improving as evident from the sales and earnings growth reported for the first half of 2014.

Backlog has reached a new high after the company made record number of deals at the recently held Farnborough air show.

Airbus' re-engineered jets A320neo and A330neo are the center of attention as customers are flocking to buy them.

The European aircraft maker, Airbus (OTCPK:EADSY), is the second largest manufacturer of commercial planes and military jets, with more than 150 field service offices worldwide. It boasts of a diverse commercial aircraft line-up: the A320 family in the narrow-body segment; and A330, A340, all-new A350 XWB and double-deck A380 in the wide-body range.

Investors have been concerned about the company's low profit margin and negative free cash flow. The 200 odd order cancellations in 2014 have added to their fears. However, things seem to be looking up for the aero major, and here's why.

Appealing Mix of Numbers
Airbus reported its half yearly earnings on July 30. It posted solid numbers for the first half of 2014, reflecting the improvement in operations and continued focus on program execution. The Group revenue went up 6% to 27.2 billion euros ($36.5 billion at current exchange rate) in the period. This was driven mainly by Airbus' commercial aircraft and helicopter segments that grew 7% and 8%, respectively, from the year-ago period. On the flip side, the defence and space segment reported flattish sales, down by 1%. Earnings per share grew by a whopping 54% to 1.45 euros from 0.94 euros in the year-ago period.

Airbus delivered 303 commercial aircraft in the first half of the year, vis-à-vis 295 a year ago. The helicopter business saw 200 deliveries, up from 190 recorded in the first half of last year. Increased deliveries had a positive effect on Airbus Group's overall revenue.

Operating income (EBIT) for the company improved 24%, reaching 1.84 billion euros ($2.47 billion) from 1.48 billion euros reported in the same period last year. The EBIT of the three core operating segments - Airbus, Airbus helicopters and Airbus defence -- increased 24%, 17% and 3%, respectively, on a year-over-year basis. Higher deliveries and operating efficiency in these segments led to the upswing.

As the company tries to rein in costs and invest in production and development plans, its free cash flow position has improved to -2.27 billion euros (-$3.05 billion) from -4.06 billion euros reported a year ago. The company is targeting "breakeven" free cash flow before acquisitions in 2014.

Orders On the Move
Airbus had an excellent run at the Farnborough air show held last month, which CEO Fabrice Bregier described as "…this is the best Farnborough Airshow in Airbus history and the third biggest [air show] ever if you include the Paris Air Show."

Before Farnborough, Airbus had only 290 firm orders, while its U.S. competitor Boeing (NYSE:BA) had 649. However, the event brought in a dramatic difference to the French jet maker's order book -- it made deals for 496 aircraft worth more than $75 billion at list price. Airbus' single aisle offerings, the A320neo and A321neo, received combined orders for 317 planes. The company also won deals for 50 A330-900neos from Malaysian-based long-haul budget carrier Air Asia X. In comparison, Boeing signed contracts for 201 aircraft worth $40 billion at list price. Airbus ended July with a backlog of 5,912 aircraft, representing eight to nine years of full production.

Cash Cows to Enter Production
Airbus has introduced upgraded versions of its existing models with better aerodynamic and fuel-efficient features that match the changing requirements of airlines and leasing companies. The re-engineered planes also help keep development costs low.

Airbus' A320neo program launched in December 2010 and the A330neo program unveiled at the Farnborough air show are a part of its re-engineered narrow-body and wide-body offerings, respectively. Both planes have received good response from airlines, which speaks volumes for Airbus' future prospects. The A320neo is slated to enter the market by the end of 2015, and the A330neo by the final quarter of 2017.

Airbus' A320neo directly competes with Boeing's 737 Max. The order tally stood at 3,000 for A320neo reported end-July, and 2,100 for 737 Max 8 reported mid-July. The two next generation planes are at loggerheads to capture a greater share of the narrow-body market.

The A330neo competes with Boeing's 787 Dreamliner. Despite its technical snags, Boeing has received orders for more than 1,000 Dreamliners since its launch and has delivered around 165 units till date. Airbus is also hoping to match that and have at least 1,000 A330neo orders in its basket eventually.

Final Word
Airbus has reported a decent half year with good traction in sales and earnings. It's becoming more profit-oriented as evident from its recent moves like building re-engineered planes, cutting costs, and targeting cash break-even in the near future. The uptick in new orders is a testimony of the popularity of Airbus' product line, and the strong backlog assures steady revenue over the coming years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.