Airbus and Boeing Have Both Forgotten How to Make Money
(Bloomberg Opinion) -- Bombardier Inc. has given up trying to compete in the commercial aerospace market by selling its remaining stake in the 100-150 seat A220 program to its joint venture partner Airbus SE. The 1.4 billion-euro ($1.5 billion) full-year net loss that Airbus announced on Thursday, alongside that deal, is a painful reminder of why Bombardier’s own large jet ambitions always looked doomed.
In theory, building commercial jets is a fantastic business. There aren’t many competitors — Airbus and Boeing Co essentially have a duopoly in large aircraft — and demand is booming. As people in emerging markets get richer they want to travel more and climate worries haven’t dissuaded most people from flying yet.
The trouble is that designing and launching a new commercial airliner consumes massive amounts of capital; and that’s if all goes to plan. Typically it doesn’t.
The delayed A220, then known as the C-Series, ended up costing Bombardier at least $6 billion to develop and caused its debts to balloon to an unsustainable level. Airbus came to the rescue in 2017 by taking a majority stake in the program. But even now, long after the plane entered service, it is a burden on Airbus’s cash flow.
Another reason why Bombardier sought Airbus’s help back in 2017 was that Boeing persuaded the U.S. to impose punitive import tariffs, thereby hurting the Canadian manufacturer.
Trade and tariff threats are multiplying in the era of Donald Trump and Brexit. The better capitalized Airbus is more able to withstand these problems than Bombardier, but it’s not immune. Because of its World Trade Organization dispute with Boeing, the Americans have also imposed tariffs on the planes Airbus exports from Europe to the U.S.
Unlike Bombardier, Airbus and Boeing both have large defense business whose cash flows help fund their massive development costs. Even that’s no guarantee of success. Pension costs (a function of the large workforces needed to build big planes) are a challenge — Airbus’s pension deficit has swelled to about 8 billion euros because of low interest rates.
And then there’s stuff that just seems to come out of the blue. Airbus disclosed an astonishing 5.6 billion euros of negative adjustments to its annual results.
Much of that relates to the fines Airbus must pay to settle bribery charges brought by various international authorities. But the company also suffered yet another 1.2 billion-euro charge on the troubled A400m military transporter program, more than 200 million euros of costs related to defense export restrictions, plus various other one-off costs.
For a while it seemed as though Boeing had cracked the financial alchemy of commercial aerospace. Soaring cash flows were returned to shareholders via a massive share buyback program. After two fatal crashes involving its 737 Max, we now know that success came at the cost of squeezing suppliers, browbeating regulators and neglecting safety. In 2019 Boeing reported its first yearly loss in two decades.
Following the disappointments of the A380 superjumbo program — a seemingly bottomless money pit — and various production difficulties involving new narrow-body aircraft, Airbus shareholders were hopeful that it too would start converting its massive order book into cash that could be returned to them.
Airbus’s performance has certainly improved, yet that windfall never seems to arrive. Airbus’s 2020 production and profit guidance was weaker than expected. It should generate 4 billion euros of free cash flow this year, but once the corruption fines and several hundred million euros of tax and legal costs are paid, there will be precious little left. The coronavirus could yet cause unexpected setbacks; struggling airlines might have to cancel orders and there could be an impact on the supply chain. While Airbus is raising the dividend by 9%, share buybacks will have to wait.
Bombardier’s withdraw from commercial aerospace is a sad acknowledgement of how hard it is to make money selling big aircraft. Even Airbus and Boeing struggle.
This column does not necessarily reflect the opinion of 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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