Go Let It Out - Airbus, Boeing, OPEC…
October 13th, 2008
While critics relish every opportunity to drive the stake through the heart of Boeing, its stock price and its unknown future, with global market volatility, the bigger industry concern is not that of the quality of Boeing’s order book or its backlog, but rather the more precarious and less discussed issue of Airbus and its fortunes.
Before the financial crisis swept across the US and Europe, Goldman Sachs rescinded from its target price of over $90 a share for Boeing to just $40 basing much of its scepticism of the company solely on the delays to the 787 Dreamliner.
Even for neutral observers, this relentless barrage of anti-Boeing sentiment is now getting tiresome.
Image courtesy of Boeing
Just weeks after the 149th meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, OPEC is to convene again on November 18, 2008 to discuss what it calls “the deteriorating economic conditions with contagion risks.“
In September, OPEC agreed to slash oil output by some half a million barrels a day in a bid to both shore up prices that had dipped below the once eye-watering $100 a barrel threshold and also due to decreased demand. It is all but a foregone conclusion that next months extraordinary meeting will see yet more cuts in production to push prices up, and that means wholesale fuel increases for airlines across the board.
“At this meeting our country’s request (for the Organisation of Petroleum Exporting Countries) to cut production and the members’ crude quotas will be submitted,” said Iran’s Oil Minister, Gholam-Hussein Nozari.
At a time when many airlines are grounding older, less efficient airplanes, cutting back system wide capacity and introducing a superfluity of charges to passengers, decreased demand and declining load factors are already pressurising the bottom line without having to have the additional misfortune of seeing the fuel bill rise just as the Christmas period commences.
Looking back in April 2008, the first high profile casualty was Skybus, which buckled under oil prices at that time of $100 a barrel, coupled with one of the most ridiculous strategies of selling seats at $10 a go expecting to make money. Skybus’ death also brought with it the death of over 50 outstanding orders for Airbus’ A319 airplane. Of course, there have been notable carriers fold flying Boeing jets, but none of the carriers that have hit the wall had outstanding orders of comparable magnitude and its bizarre that in a year of such calamities why Airbus’ greater exposure to carriers sporting dubious junk credit ratings is not being discussed or even examined.
The recent decision by Kingfisher to swap orders for the A340-500 for A330’s and defer deliveries of A320’s points to more of Airbus’ customers seeking deferrals during the economic downturn than that of Boeing, despite CEO Jim McNerney stating that no customers had yet approached the company for financing purposes.
Image copyright/owned by FleetBuzz Editorial.com
Speaking exclusively to this site, Doug McVitie, Managing Director at Arran Aerospace notes a range of factors that jeopardise Airbus’ backlog.
“Airbus’ backlog is undoubtedly more fragile than the manufacturer admits or possibly even realises, given the non-commercial compensation basis on which most of its widebody orders have been secured in recent years (Kingfisher Airlines being a case in point — supposedly the harbinger of high-volume profitable business for A380 customers as well as an endorsement of the proposed A350, but in fact the airline is already stalling and is now unable even to take delivery of its optimistic quota of more downturn-resilient A320-family narrowbodies). Airbus will soon face increased order cancellations as too much of its orderbook is of suspect quality,” he said.
Kingfishers expansion plans are frighteningly similar to the unrealistic growth targeted by Skybus. One only need look at the carriers decision to potentially scrap its international flights so soon after coercing the Indian Government for months to amend flying rules in the wake of its takeover of ailing Air Deccan points to Airbus facing yet more production problems of long haul jets being made with nowhere to fly.
“[Kingfisher] started its daily flights with an A330 from Bangalore to London Heathrow last month with dire load factors–an average of 35 passengers per flight.” (Aviation Week)
Of course, this is but one example, but there are a litany of disasters waiting in the wings. Already, United Airlines said in a regulatory filing just a few months ago “that it is highly unlikely that it will take future delivery of these [Airbus A319/A320] aircraft.” As of yet, the orders have not been removed from Airbus’ backlog pending formal termination of the contract.
Aerospace analyst Harry Nourse noted that “with a $271bn backlog, Boeing should be able to shuffle slots between customers in the event of deferrals and cancellations and will aim to hold production rates steady, thereby reducing cyclicality and the downside risk to multiples.“
Of course, the same situation is prevalent for Airbus, but given that the European planemaker comprises over 80% of earnings for parent EADS, it doesn’t take a rocket scientist to establish which of the two firms stands to lose out in the wake of cancellations.
Click to enlarge / courtesy of Yahoo!
In the wake of the recent global financial crises, both EADS and Boeing stock has been hammered. While neither company derived much benefit in the wake of the tanker competition being deferred until the next US Administration takes office, EADS’ plans to set up a manufacturing base in Alabama and its desire to use US taxpayer money to subsidise the aging A330 line is now unlikely ever to materialise. Coupled with the ongoing debacle that is the A400M with a capricious “threat” to terminate the whole programme, EADS’ business as a whole is far more subject to volatility than is Boeing.
Perhaps now we can do away with the anti-Boeing verbatim that has reverberated for the past several weeks in the wake of the IAM industrial dispute and instead focus on letting out the demons hidden with Airbus.
Better yet, why not encourage OPEC to go let out more oil supplies to suppress the price and provide some much welcome and needed lower fuel cost relief to encourage people to fly…
Sphere: Related ContentEntry Filed under: Aeroplane, Aerospace, Air Transport, Air Travel, Airbus, Airbus Orders, Airlines, Airplane, Airplane Order, Airplanes, Airport, Airports, Alenia, Aviation, Boeing, Boeing 737, Boeing 747, Boeing 747-8, Boeing 747-8F, Boeing 747-8I, Boeing 767, Boeing 777, Boeing 777-200LR, Boeing 777-300ER, Boeing 777F, Boeing 787, Boeing 787 Orders, Boeing 787 Premiere, Boeing 787 Rollout, Boeing 787-3, Boeing 787-8, Boeing 787-9, Boeing Commercial Airplanes, Boeing Orders, Dreamliner, Dreamliner First Flight, EADS, FleetBuzz.com, Fuji Heavy Industries, Global Aeronautica, IAM, Jet Travel, Jim McNerney, Kawasaki Heavy Industries, Mitsubishi Heavy Industries, SPEEA, Scott Carson, Spirit AeroSystems, Travel, Vought
14 Comments Add your own
1. Curious | October 13th, 2008 at 6:31 am
Why don’t you ever criticize JP Morgan or UBS for their anti-Boeing views? why only Goldman Sachs?
2. Graphite Epoxy | October 13th, 2008 at 6:39 am
It’s difficult to extract the truth these days. In spite of a lack of candidness driving the worlds economy into the ditch, manipulation of the facts seems to be the order of the day still.
While it’s clear that Airbus does in fact have more exposure these days, I think Boeing has a lot riding on this weeks earnings call.
My advice for them would be to drop the rhetoric and speak a whole lot of truth, truth grounded in the real world. A lot of rosy estimates based on unrealistic optimism could stand to drive a stake through the heart of investor trust in Boeing. Boeing’s position is at least better than Airbus’s, and the company is on sound financial footing. It should otherwise be seen as a safe place for investment, were it not for the Wall St analysts trying to pile drive the stock into oblivion, while they short sell it all the way down. Boeing has a chance to re-establish credibility and investor confidence by being candid, as well as settling with it’s labor unions and smoothing over hurt feelings.
A little hat in hand humility might go a long way.
3. DonS | October 13th, 2008 at 6:53 am
RE the Tanker Fiasco - because the AirForce changed the specs in mid game - and because in FACT, only Commercial A/P are subject to GATT agreements re subsidies, and because several agencies in the U.S made major bu-boos , Airbust will no doubt have a good case to sue for ‘ costs’ of the bidding, and related issues. In simple terms - breach of contract .
AS a result - my prediction several years ago about some sort of a split is- IMO- still on the table.
Otherwise - I agree with the above article- Airbust will be hurt much more severely than boeing over the next 3 to 4 years- and as a result- ALL the subsidies for the A-3Piggy will be forgiven
4. boeing investor | October 13th, 2008 at 7:03 am
DonS - you’re right, all that A380 debt will be written down and consigned to the trash can.
“Curious” - perhaps you didn’t notice that GS twice in less than ten days slammed Boeing while failing to consider that it doesn’t just make the 787.
JPM *raised* profit forecast - hardly a critical move or didn’t you see that?
http://www.businessweek.com/ap/financialnews/D93L3S280.htm
As for UBS - please tell us how many times this year aside from this past Friday they have hit the stock like GS?
5. Doug McVitie | October 13th, 2008 at 7:17 am
Single-issue posters like ‘Curious’ above seem unable to focus on the matter at hand (latest examples of pronounced and ill-informed institutional bias in certain quarters against Boeing), and appear to feel one should only comment multilaterally, or not at all.
That’s PC BS. Pointing the finger is a very good way to identify the current target, whereas “two blacks don’t make a white”. Very weak point from ‘Curious’.
6. mike j | October 13th, 2008 at 8:18 am
I like #2 and #3 bloggers, although all the above are good.
I don’t much care what happens to Airbutt, although I do think Boeing needs competition because Boeing Management gets “too big for their breeches” alot.
I most agree with bogger #2 that there is way too much BS and cover-up regarding every issue (everywhere on this planet!). We really have no clue what really goes on.
Lastly, key persons who created this financial meltdown need to go to jail.
Will that happen? I can only wish.
7. Aurora | October 13th, 2008 at 12:58 pm
Graphite Epoxy said “It should otherwise be seen as a safe place for investment, were it not for the Wall St analysts trying to pile drive the stock into oblivion, while they short sell it all the way down.”
Do you know this for sure? If true, it would warrant an SEC investigation at a minimum.
mike j, “I don’t much care what happens to Airbutt,”
Well, mike, you should. This consortium was founded with the expressed goal of wresting commercial aerospace supremacy from the United States. Judging from the vitriol and bile I see in the press during this strike, they are getting a lot of help.
8. Jacobin777 | October 13th, 2008 at 2:10 pm
While Airbus probably has more exposure to its order book than Boeing does, given the massive backlog of Airbus A32X as well as its backlog of A330s (at knockout prices…but regardless) and A350XWB’s (at knockout prices again), it will certainly keep production lines moving.
Of course we know their A345/A346 program are basically dead and I would like to know after spending approximately $4.5 billion on the A340NNG and greater than $20 billion (Bloomberg) on the A380 program, where is Airbus going to get all of the funding for their next programs (I’m being rhetorical as we know where its coming from).
9. Chris Wallace | October 13th, 2008 at 3:05 pm
Both companies likely have a somewhat similar level of general exposure due to the spread of customers.
Some point to Airbus’ exposure in China as a sign on strength, but China is an export-driven economy and as consumer’s in the West stop spending, that impacts Chinese exports. Also, after years of being cheaper then dirt, the dollar is now starting to gain strength which means those Chinese exports are getting more expensive just as Americans aren’t in a spending mood.
The Middle East is also an area where Airbus has extensive exposure, though Boeing has been doing well there, too. Oil was in a free-fall and some analysts said $50 a barrel may be the future, but now that the Western governments seem to have stopped the current panic amongst their citizens, oil has stabilized around $80 a barrel. While that is only about half of what it was in recent times, it’s still a heck of a lot more then it used to be for decades which helps keep those governments liquid. And while Dubai is suffering from the credit crunch, EK continues to say their liquidity remains strong and they are able to meet their commitments with both Boeing and Airbus at this time.
10. Ken | October 13th, 2008 at 4:12 pm
Having been and investor in both Boeing and EADS stock I might add that both were at one time profitable and well run.
I had disposed of my EADS stock just prior to the announcement of the wiring delay on the A380, thank god.
So let me say that Boeing has certainly had its problems with the start up phase of the 787 but that’s to be expected when you basically rewrite the book on building aircraft.
Not only are they designing an aircraft made an entirely new way, the material used is groundbreaking, composite material has been used for years on aircraft but never on a scale like this.
So like I mentioned delays and setbacks are to be expected, subcontractors are going through the same learning process and bringing all the pieces together is monumental.
But it appears the major setbacks have been resolved, and the major delay now is the IAM strike.
And now to EADS/Airbus
I said that Airbus was at one time a well run company, that is no longer the case.
I a relative of mine was employed with them as an engineer prior to the power eight reorganization, and he has some pretty tales to tell.
First the A380 project, it was and still is the biggest cock up at AB, it may be the final downfall for the company, needless to say I can’t reveal details because of confidentiality agreements signed by my relative, but a few tidbits.
The A380 is still being hand wired at horrendous costs not only in €’s but talent.
Engineers who should be working on the A350 project are not, and despite glowing remarks from the talking heads, that project is way behind.
Sales of the A380 to worldwide customers are still stuck, other than middle eastern carriers, interest in the aircraft is basically stalled. U.S. carriers have ordered zero, and are very unlikely to change their minds.
EADS/Airbus will never be able to recover the costs of the aircraft at the current rate.
They may be able to look to EU partners to bail them out.
The other big drain is the A400M.
This may drive the stake through the heart of the company, it nearly equals the A380 in losses, and if the customers don’t agree to forgo delivery delay compensation, I think the project will be killed.
All of this on its own is bad enough, the other factor that despite all the brave faces, and positive statements, is loss of customer confidence.
First the A380
Emirates, Singapore, Qantas, are all major customers, and all are suffering from major setbacks in their plans to renew fleets, upgrade route capacity.
More has been said about this aircraft than any since the 747, and its mostly negative.
A400M
A disaster, the military customers are fuming, they can’t wait, lives are at stake, military planning can’t say oh well, thats the way it is, people are being put in harms way, loyalty to Airbus and EADS will only go so far, then the have to think of their troops, their military commitments, their ability to support the military infrastructure.
And finally one has only to look at the stock history of EADS, and its in the ditch, investor confidence is rapidly losing the glow it once had.
Synopsis:
Airbus has far too many negatives
Boeing will bounce right back once the strikes are settled.
11. DonS | October 13th, 2008 at 7:25 pm
Interesting the views of Airbus-EADS and the A3Piggy and other models. SEVEN years ago, I was involved in a very detailed analysis of Airbus sales and subsidy issues. I had put together a very detailed study which was to be submitted on behalf of SPEEA to Dept of Commerce as support for the filing of a Counter Vailing Duties (CVD) petition against EADS/Airbus. Matter of fact the petition was to be submitted the second week in September - 2001. Of course 911 overrode- and later in Jan Feb 2002 the Boeing company successfully subverted the SPEEA Executive Director and a few others , and the Tanker fiasco was in full bloom ..
http://home.att.net/~dshuper/CVDMOTION.html
Countervailing Duty Petition Against Airbus Industries
Whereas, for the past year, the SPEEA Legislative and Public Affairs (L&PA) Committee has been conducting an intensive investigation into whether Airbus Industries is selling their commercial airplanes below fair market prices, due to the subsidies it receives from EU governments.
Whereas, SPEEA, acting on behalf of its members, does have legal standing to file a petition with the International Trade Administration (ITA) within the Department of Commerce and United States International Trade Commission (USITC) requesting relief under U.S. countervailing duty law.
Whereas, the L&PA Committee has gathered data from various sources, including: annual reports from Boeing and the European Aeronautic Defence and Space Company (EADS) which includes Airbus; statistical surveys conducted by the European Aerospace Industry (EAI); Boeing and Airbus websites; numerous press accounts; and informal discussions with industry representatives.
Whereas, the L&PA Committee’s evaluation has determined there is sufficient data to support our belief that Airbus is selling aircraft into the U.S. market at 10 to 25 percent below cost (not including special leases or other financial arrangements), with the resultant negative impact of lost jobs in the American commercial aerospace workforce.
Whereas, the L&PA Committee has completed a draft of the petition requesting relief under U.S. countervailing duty law.
Whereas, the L&PA Committee has completed a position paper which recommends filing the petition.
+++ there is more on my site - although outdated in one sense - the basic data and reasons have not changed - and of course a few years later Boeing filed a similar argument directly with the WTO..
12. DonS | October 13th, 2008 at 7:27 pm
As a follow up to my previous post here is more
note date
http://home.att.net/~dshuper/CVDPOSIT.html
Airbus Countervailing Duty Position Paper -AUG 2001 -
NOTE ; THERE MAY BE SOME MINOR CHANGES IN THE NUMBERS FROM THIS VERSION AS PRESENTED TO THE COUNCIL , BUT NOT SUFFICIENT TO CHANGE THE CONCLUSIONS OR THE TEXT. DON SHUPER
For the past year, the SPEEA Legislative and Public Affairs Committee (L&PA) has been conducting an intensive investigation into the practices of Airbus Industries; namely, the subsidies being provided by EU governments, and the below fair market prices at which they sell their commercial airplanes. SPEEA is concerned because these practices have had a severe impact on the jobs of commercial aerospace workers and the people we represent.
The L&PA Committee has concluded filling out a very detailed petition requesting relief under U.S. countervailing duty law. The SPEEA Council authorized this investigation, with the goal being to determine whether such a filing could be reasonably supported by examination of publicly-available information from both Boeing and Airbus. Once this petition is filed, the International Trade Administration (ITA) within the Department of Commerce and United States International Trade Commission (USITC) will be able to consider the initiation of a countervailing duty proceeding. Such a proceeding is administrative in nature, and may result in the imposition of special countervailing duties on specific imports.
In order to fill out the petition, the Committee gathered data from various sources, including: Boeing Annual Reports; the first European Aeronautic Defence and Space Company (EADS) (formerly France’s Aerospatiale Mantra, Germany’s DASA, Spain’s CASA, and Britain’s BAE Systems) Annual Report for 1999/2000; statistical surveys conducted by the European Aerospace Industry (EAI) for 1997 - 1999; information from both Boeing’s and Airbus’ websites; numerous press accounts; and informal discussions with industry representatives. The Boeing Company has neither helped nor hindered us, nor have we had access to any Boeing proprietary data. As SPEEA represents workers within the industry, and not the industry itself, actual sales prices, contract information, profit margins, discounts, and lease information are closely held by the respective companies and were not available to us; however, these can be requested by the ITA and ITC.
The L&PA Committee has made the following observations which lead to our belief that Airbus, through a variety of methods, is effectively selling their products below cost. Raw material, engines, avionics, landing gear, and similar parts cost the same for Boeing and Airbus. Assembly techniques, automation, certification, process controls, and computer-aided design techniques are essentially the same, and have no inherent cost differences. Additionally, labor costs are higher for EU countries, with differences from 15% higher in 1995 to about 5% in 1998. Finally, the EADS annual report shows that for the year 2000, Airbus’ share of EADS net consolidated profit was zero.
We then compared the published selling prices of Boeing and Airbus commercial airplanes from 1998 - 2000, omitting figures for the Boeing 747. For 1999, the average cost of all airplanes sold by Boeing was $59 million per plane, whereas the average cost for Airbus was $46.4 million per plane. We then compared two comparable models of aircraft, the A320 and the 737-800. Figures reflected an average 737-800 costing (conservatively) about 10% more than the A320.
Therefore, how can Airbus, with equal material and subassembly costs, higher labor costs and arguably lower productivity, and admittedly zero profits, still undercut Boeing prices by at least 10 percent? Our determination is that Airbus is selling most, if not all aircraft models into the U.S. at 10 25% below cost. Note: this does not include special lease, financial, or maintenance agreements, which even further harm our workers.
In conclusion, the overall affect of the governmental subsidization of Airbus has caused distortions in international trade that support United States governmental action. Therefore, the SPEEA L&PA Committee is recommending the SPEEA Council and Executive Board take action to file the petition for countervailing duty relief with the United States Department of Commerce and International Trade Commission.
Note: On Aug 9, 2001, The SPEEA Council passed the accompanying motion
13. DonS | October 13th, 2008 at 8:01 pm
not to ken “Not only are they designing an aircraft made an entirely new way, the material used is groundbreaking, composite material has been used for years on aircraft but never on a scale like this.”
On one level regarding NUMBER of aircraft using composites as primary structure you are correct as to scale
However, I believe the B-2 stealth bomber has an even greater useage of composites both externally and internally than the 787. However, I admit to not working out the percentages. And rewinging of the A6 intruders for the navy about 15 years ago was also a learning experience regarding primary structure.
Boeing was heavily involved in both programs
it remains to be seen if the automobile like moving assemby line for such large aircraft is really workable when matched to the ” just in time ‘ process. Globally extended supply lines have different vunerabilities than shipping across state lines or japanese prefectures(sp?) or major cultural differences.
So far it is difficult to discern just where the ball was dropped .
14. Trike | October 13th, 2008 at 9:07 pm
Nice to have a topic (even if it’s not particularly positive news for Airbus) other than Militant Union activities in Seattle. Let’s hope it isn’t too long before things start looking up and we might even get something positive going on in the Industry. Thanks FBE for the welcome change of tack.
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