Thursday, August 31, 2017

Airbus on the Runway, Ready for Take Off: What’s holding back Airbus is also what could make its stock pop



The Wall Street Journal
By Alex Frangos
Aug. 31, 2017 5:30 a.m. ET

Planes eventually get built—and investors rewarded. Stick to that faith when it comes to Airbus. 

Europe’s jet maker has been a laggard of late compared with arch rival Boeing, the darling of the Dow Jones Industrial Average this year. What is holding Airbus back is also what could make its stock pop.

In many ways, Airbus and Boeing are both in a sweet spot. After years of healing among airlines, order books for new planes have swelled. At the current production pace, it will take Airbus nearly 10 years to fulfill its confirmed orders for 6,771 planes. Selling aircraft isn’t the problem—executing on the orders is.

In that respect, Airbus has been punished largely for the faults of others. United Technologies’ Pratt & Whitney division, one of two engine suppliers to Airbus’s wildly popular narrow-body A320neo program, has encountered problems with the engine’s novel turbofan design. That has endangered Airbus’ delivery target of around 200 of the fuel efficient planes this year.

Investors are right to be concerned about how long it will take for Pratt to resolve the issues, which it has promised to do. Delays gum up Airbus’s production, making it harder for the company to create savings as it ramps up.

But past lessons of aerospace technology delays is that they eventually get resolved, as was the case with Boeing’s troubled 787 launch. And with Airbus’s delivery schedule on the A320neo swelling to more than 600 planes a year by 2020, sorting out teething problems now will ensure smoother cash flow generation in the future.

There is better news on that front with Airbus’ newest plane, the widebody A350, a competitor to Boeing’s 787 for long-haul traffic. There have been bumps, notably interiors supplier Zodiac failing to deliver toilets on time. But there are now 100 A350s in service, some having flown for over a year without the major problems that dogged other ambitious debuts, such as the wiring design mishaps with the double-decker A380 or battery fires on the Boeing 787. Investors will be relieved when Airbus delivers on its target of around 80 units this year, ramping to over 100 for the next four years.

Another overhang on the stock, possible cancellations, aren’t the threat that they seem. With the order book so large, a recent Qatar Airways cancellation of four A350s won’t seriously dent cash flows. Other customers simply move ahead in the line. With passenger travel growing at more than 7% this year, above the industry’s long-term 4% to 5% trend, and airlines’ profits robust, buyers have little reason to abandon new orders en masse.

Airbus has traveled neck-and-neck with Boeing in terms of populating the sky with its planes since the turn of the century. That also has been true in terms of shareholder returns over the past 15 years, with the most recent period being an exception. In terms of valuation, though, Boeing’s success and Airbus’ hiccups have the two trading on their widest gap in terms of enterprise value to forecast earnings before interest, tax, depreciation and amortization since 2011.

Airplane makers often stumble, but in the end get it right. Waiting for Airbus’s problems to be fixed will be too late for shareholders to enjoy the flight.

Original article can be found here ➤  https://www.wsj.com

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