Airbus Earnings 9m 2023
Airbus SE presented results with new finance chief Thomas Toepfer, maintaining guidance for the full year on deliveries, Adjusted EBIT and Free Cash Flow. The business continued its recovery as more people kept flying and despite supplier snags. Performance in the nine months to September 2023 was driven by higher deliveries in the commercial and helicopter segments. Revenue grew 12% to EUR 42.56 bn and Adjusted EBIT by 4% to EUR 3.63 bn.
Alongside welcoming a new CFO, the company created a dedicated management team to head up the commercial segment. The segment will be led by Airbus lifer Christian Scherer.
Source: Company Filings, Sinensis Notes
Commercial (Airbus)
Commercial revenue increased 22% as airlines received 488 aircraft, achieving 68% of Airbus’s full year target. Demand continued to strengthen as the backlog increased to 7,992 units from 7,294 at the end of Q3 2022. Net orders improved 27% on higher gross orders and much lower cancellations (39 vs 209). This took the 9-month gross book-to-bill to 2.62 from 1.96. Narrow bodies (A220 & A320) are recovering faster than widebodies (A330 & A350) in line with a lagged return of international travel.
Source: Company Filings, Sinensis Notes
With 71 planes already delivered in October, it leaves 161 for November and December. The last quarter tends to be the highest in terms of revenue for the commercial business, having averaged 35.6% of annual commercial topline since 2018. Given this and that 172 commercial aircraft were delivered in Q3 alone it means they they could come just shy of their 720 guidance for the year. Including October, the monthly rate is marginally higher at 56 compared to 55 at the same time in 2022, showing just how slow the first half of the year was.
The ramp up is hanging on suppliers such as Spirit AeroSystems, GE and RTX. Spirit’s strike and production problems (aft fuselage on the 737) caused Boeing to extend financing to the company. RTX is also having some ramp up issues given the recall of their GTFs. On the earnings call the Airbus chief Guillaume Faury was adamant that their engine suppliers would commit to deliveries for this year. But GE points to a different reality in the coming year. They guided lower narrowbody engine deliveries growth during their Q3 earnings call. Some engines will be delivered in 2024 and 2025 as the company continues to deal with supplier delinquencies.
“…LEAP deliveries are a little bit lighter than we had initially expected. Still a pretty substantial ramp in the fourth quarter we're expecting. Based on the revised guidance that we just provided, we expect about a 15% growth from 3Q to 4Q and a pretty big ramp year-over-year. Now some of the LEAP deliveries have pushed out into '24 and '25. So as we think about the outer year margins, we had guided to about 1 point of margin headwind from LEAP between '23 to '25. So now that will just be marginally higher, just movement of LEAP engine shipments from '23 to '24.”
GE Q3 2023 Earnings Call
On the bright side, the 57 monthly average rate from Q3 speaks well for 2024 when they will most likely deliver more than 720 aircraft. LTM Revenue has passed its trough and should reach 2019 levels in 2024.
Source: Company Filings, Sinensis Notes
Helicopters, Defence & Space
The helicopter business generated 3% higher revenues and 10% better adjusted EBIT. Customers took 4 more units than last year (197 vs 194). Demand weakened as net orders dropped to 191 vs 256 in 2022.
The Defence & Space segment’s topline dropped 6% with the EUR 231 million adjusted EBIT from 2022 wiped down to EUR -1 million. Only four A400M military planes were delivered compared to seven in the first three quarters of 2022. On top of that the business took a EUR 0.4 million charge on one of their space programs. This came from an adjustment of the so-called ‘estimate at completion’, which requires revisions to projections of costs and production timelines.
Emerging Issues from the Earnings Call
Earnings calls are always great for getting in tune with the latest investor debates and possible catalysts for a stock. Below are some of the key issues discussed.
Availability Of Engines for Ramp-Up
Although the CEO was clear that their engine suppliers had committed to agreed schedules earlier in the year, analysts sounded skeptical. For one, the GTF recalls could mean that Airbus leans more on GE’s LEAP engines in the near term. This is key because RTX’s resources will be tied up in resolving the GTF recalls. The PW1100G-JM powers the A320neo which has seen a resurgence in orders. Between 600 and 700 engines will need removal. However, GE Aerospace is having some challenges with supplier delinquencies which could affect any GTF replacements Airbus would need in 2024.
Spirit AeroSystems
Spirit is a component supplier to Airbus, making wing and fuselage parts for the A220, A320 & A350. But Boeing is more dependent on Spirit than Airbus, explaining the $180 million funding commitment they made to Spirit to improve production. Spirit looks to renegotiate terms with Airbus and Boeing to ease pressure on previously agreed delivery targets.
Headcount & Inventory
As part of their frustration with the supply chain the company took on more employees and inventory. The headcount is up 7.8% from 2019 with the extra capacity added to shift some subcontractors’ work in-house. This should help with the planned ramp-up in 2024. But, given the reduction in capacity due to COVID in 2020 and 2021, they’ll will need training to move down the learning curve.
“We have a high level of the first stock of intermediary inventory that we believe is necessary given the landscape and the very volatile nature of the supply chain to the able to secure the ramp-up even if we have a crisis popping up here and there, and that’s the very nature of the environment we have at the moment.”
“…we have also part of the additional headcount compared to previously that come from change of scope. We have also internalized a number of activities because we think it’s more efficient to have…Airbus workforce other than subcontractors or third parties.”
Looking Ahead
Making an aircraft is complex and requires several layers of suppliers. Additionally, an uninterrupted production process would be nice. When reiterating the basis for their guidance, the CEO gave a slight chuckle after saying “the company assumes no additional disruptions to the world economy.” The supply chain will continue to be a problem in the short them. Many of the issues stem from errors made as suppliers are pushed to capacity in pursuit of recovering demand. Labor costs, materials bottlenecks and higher operating costs are also a concern.
Travel demand is projected to grow significantly over the next 20 years. Both Airbus and Boeing project a doubling of in-service fleets in that time. IATA also sees travel demand doubling in that time. Newer generation aircraft with better fuel efficiency will replace older aircraft, and higher travel demand will create growth. It’s estimated that just under 20% of the world has flown on an airplane. As incomes increase, incremental demand for travel will boost demand for the aircraft that provide it.
Assuming a similar 20-year 5.2% CAGR for Airbus deliveries between 2000 and 2019, Airbus should deliver 1,700 aircraft annually in 20 years. Assuming half of that means 1,000 aircraft. A third ends with just over 900 in 2041. The question is whether Boeing and Airbus will be the sole sources of large aircraft over the next few decades. If China’s aircraft manufacturing ambitions succeed it won’t be the case.
Source: Company Filings, Sinensis Notes
The press release announced the end of a three-year probation period related to charges made against Airbus in 2020 regarding bribery and flouting arms regulations. Airbus ended up paying $3.9 bn (EUR 3.6 bn) to the US, French and UK authorities in 2019. It represented 6.2% of total assets then. This is concerning given how competitive commercial aerospace is. I think the likelihood of this occurring again is significant. The history of the commercial aerospace sector is littered with questionable sales tactics and aggressive pursuits of market share. Both Boeing and Airbus have had their share of company culture issues and production mishaps. This will be a key issue for investors to watch.
On the positive side, Airbus continues to run net cash on their balance sheet and has done so for some time. It proved prudent during the COVID crisis, and at some point could result in higher returns to shareholders.