Boeing Has Another Reason to Lord It Over Airbus
(Bloomberg Opinion) -- These should be the best of times for aircraft manufacturers. Their airline customers will probably enjoy a tenth consecutive year of profitability in 2019, helped by still relatively decent economic growth and lower oil prices. So they have money to spend.
Leaving aside Boeing Co’s dispute with Indonesia’s Lion Air over a tragic plane crash, the U.S. manufacturer is looking strong financially. Earlier this week, the Chicago giant hiked its dividend by 20 percent and authorized another mammoth share buyback program. In the past six years, it has returned more than $50 billion to shareholders by my calculation.
With new aircraft programs ramping up and various production difficulties slowly being overcome, investors in Europe’s Airbus SE hope they’re on the cusp of a cash windfall of their own. Analysts think the Toulouse-based manufacturer will finally start to really capitalize on its massive order book and generate more than 4 billion euros ($4.6 billion) of free cash flow in 2019, according to the Bloomberg consensus of their views.
There’s one problem though: How much of that cash will end up in the coffers of national authorities investigating corruption allegations? Airbus’s failure to declare the use of third-party agents to secure overseas business is being scrutinized in the U.K., France and the U.S. As ever, it’s the Americans who give investors the biggest cause for concern. That’s why a report in France’s Le Monde newspaper on Thursday, claiming that the Department of Justice has opened an official investigation, caused such a fuss. Airbus shares fell as much as 10 percent after the story appeared.
There wasn’t all that much new in the Le Monde report. Airbus had already told investors that the U.S. had asked for information about its use of middlemen. But even after investors calmed down a bit, some 3.6 billion euros of equity value had been erased.
Airbus has warned previously of “significant penalties” and hence some analysts include an estimate of the potential fines when trying to assess what the stock is worth, usually somewhere between 1 and 2 billion euros.
Even if the financial damage ends up being worse than that, Airbus could afford it. The company had more than 13 billion euros of net cash at the end of last year. Plus it’s doing pretty much what you’d hope in this situation. It has shut down the system of payments, overhauled its management right to the very top levels and cooperated fully with the authorities.
Nevertheless, its fate is largely out of its hands – and fines aren’t the only concern. If Airbus was found guilty and barred from bidding for public sector contracts, the company’s large defense business might suffer. In the meantime, the probe is also a huge distraction for management and undermines staff morale.
If the investigation drags out, or threatens to become even more serious, it’s possible that Airbus won’t feel comfortable splashing out too much cash on its shareholders. That means Boeing will keep lording it over its bitter rival for a while yet.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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