Air Travel
One of the underappreciated marvels of the modern world is the omnipresence of air travel. Every day, there are more than 100,000 commercial flights taking place. This is not only important for passenger transport for both business and tourism, but also to carry quickly essential medicine, small packages, etc.
The industry has recovered well since the downturn caused by COVID-19, coming back to 2019 levels, which were on a steady rise that persisted for decades.
Source: Airbus
The Covid period also saw the construction of 42 new airports and 43 new runways, with 7,250 new routes opened since 2019, displaying the persistent growth of the industry as a whole.
When it comes to airplane manufacturing, the industry is essentially a duopoly, with the domination of 2 giants: Boeing and Airbus (AIR.PA +0.44%).
For a long time, the 2 companies dominated commercial airplane manufacturing, especially since a series of mergers and acquisitions in the 1990s: Boeing absorbed its competitor McDonnell Douglas, and Airbus became THE pan-European aerospace consortium. Meanwhile, competitors like BAE Systems, Convair, Fokker, and Lockheed Martin withdrew from the market.
From 2007-2016, the 2 companies shared the market rather equally, as Airbus received orders for 9,985 aircraft and Boeing received orders for 8,978 aircraft.
Among smaller companies are Canadian Bombardier (BDRAF +0.48%), which is more active in business jets (138 deliveries in 2023), and Brazilian Embraer, which produces business jets and short—to medium-range airliners. Also worth mentioning is the Irkut Corporation (Russia) and Comac (China), which are currently mostly focused on their respective domestic markets.
Airbus Overview
Airbus is divided into 3 major segments:
- Airbus: the manufacturing of planes, especially commercial airliners, is responsible for most of the company’s revenues.
- It includes best-sellers like the A320 (11,328 deliveries and 18,460 orders; 81% of recent orders) and the world’s largest passenger aircraft, the A380.
- Helicopters: including business, civilian, and military helicopters, as well as heli-drones.
- Defense & Space: a key component of the European nations and NATO defense forces, with equipment like the Eurofighter Typhoon combat aircraft, and refueling tankers.
- It is also tasked with the development of pan-European defense programs like Eurodrone, SIRTAP, and maybe more importantly, the Future Combat Air System (FCAS), which should become the main fighter jets of the European armies in 2040.
- The company is also active in cyber defense and military data systems, notably with the development of the Multi-Domain Combat Cloud.
- Space activities include the European launcher Ariane (in partnership with Safran) , as well as weather and telecom satellites, and space exploration probes, often built for the ESA (European Space Agency).
Source: Airbus
Financials
In H1 2024, Airbus registered a €1.4B in EBIT (Earnings Before Interest and Taxes) and EPS (Earnings Per Share) of €1.38. This was generated by 323 aircraft delivered by Airbus, 124 helicopters delivered (split 49/51% between civilian and military orders), and €4.9B in defense & Space-related revenues.
Overall, the company expects for 2024 to deliver €3.5B in free cash flow, with 770 commercial aircraft delivered.
With €31.9B in gross cash on the balance sheet (versus €13.9B in gross debt), a profitable business, and a massive backlog, the company appears very solid financially.
Boeing’s Troubles & Growth
This duopoly situation felt like it could go on forever, but then Boeing started to flounder. Two fatal crashes in 2018 and 2019 put into question some of the design choices of the company, with decisions to cut corners for small savings.
More recently, panel breaking mid-flight, landing gear breaking, and other similar issues have increased the perception of recently built Boeing planes being subpar.
Meanwhile, the aerospace division of Boeing seems to suffer from similar reliability/safety issues, with a capsule to the ISS ultimately decided to be unsafe by NASA. The stranded astronauts will finally be rescued by a SpaceX capsule instead.
(We discussed in more detail the events related to Boeing in “Boeing’s Reputation is in Shambles – How Has it Survived?” and “Why Is Starliner Stuck In Space And What Does It Mean For Boeing?”).
In theory, this should open a massive opportunity for Airbus, as its only serious competitor is weakening. In practice, this might be a little complicated.
Massive Order Backlog
In the past 5 years, since Boeing’s reputation started to suffer, Airbus has outpaced Boeing for 5 years straight in airplane orders and deliveries. Overall, it is clear that Airbus is gaining market shares.
There is one problem, however: Airbus is already making planes as quickly as it can, with a backlog of more than 8,600 orders – and speeding things up is not easy:
“Airbus is managing a diversity of challenges in getting the parts it needs and must make sure that we ramp up at a pace that is compatible with the weakest suppliers.”
Guillaume Faury – Airbus CEO
This is a shared problem with Boeing, and the switch of orders from Boeing to Airbus is only making it bigger for the European company.
In part, this is due to the tendency of the industry to externalize the supply of some of their key components like reactor parts to sub-contractors. As a result, both Boeing and Airbus have little control over their supplier capex spending, and spare capacity.
Toward Vertical Integration
In its strategy “toward commercial aircraft ramp-up”, Airbus is looking to boost the entire supply chain to manage to ramp up total aircraft production. If only one component is missing, this would not work.
It is also important that such a production ramp-up occurs while maintaining quality and safety standards. If anything, the troubles at Boeing must have made Airbus extra cautious to not repeat the same mistakes.
This is being achieved with a few strategic changes:
- Extending the commitment horizons of certain suppliers, helping give them revenue predictability and justifying investment in growing production capacity.
- On-site supply chain experts will support the operations of Airbus suppliers.
- Dedicated task forces to manage the risks associated with a degrading geopolitical context.
- The restructuring of Airbus Atlantic and Airbus Aerostructures, ongoing since 2022. This will bring into a new unified organization the building of the structural elements, as well as pilot seats, ducting, and pipework.
- The idea is to “produce include mechanical, hydraulic and electrical systems which have been functionally tested for things such as pressure and continuity before delivery, so OEMs can perform “plug and fly” assembly.” The client list includes not only Airbus but also Bombardier, ATR, Dassault Aviation, and Embraer.
Currently, the most limiting supplies are in engines, cabin equipment, and material produced by Spirit AeroSystems (SPR -0.25%).
It is worth noticing that similar steps are being taken by Boeing, notably with a deal with Spirit Aerospace to re-acquire parts of its manufacturing chain that were outsourced.
It is likely that the era of maximized outsourcing is over. Boeing’s troubles stem in large part from sub-contract key competence, leading to failure to detect problems before they become deadly.
Similarly, Airbus is struggling to meet demand as its suppliers cannot ramp up production quickly enough.
So overall, it appears that the outsourcing strategy to maximize capital efficiency has ultimately led to a lack of resilience and flexibility in production to seize opportunities.
Space Lagging
A segment of Airbus that has not been doing so well is the space division. Most notably, the Ariane program now appears to lag behind technologically compared to more nimble and innovative companies focused on reusable launchers like SpaceX or RocketLab (RKLB -1.22%).
The dominant idea is that Airbus’s space division lacks the scale to be cost-competitive, a recurring issue in a fragmented European space sector. In theory, this could lead to Airbus and defense giant Thales (HO.PA +0.17%) to merge their space divisions, with maybe even the Italian defense firm Leonardo joining it as well.
Can China Threaten the Duopoly?
Comac In Ambush?
While Airbus is looking to grab market share from Boeing, a newcomer might appear in the next years and bring a new challenge.
The Chinese company Comac (Commercial Aircraft Corporation of China) has recently announced that its C919 airliners, similar in size and capacity to the A320 (Airbus bestseller), were starting commercial service in 2023, after receiving a fly certificate from the CAAC (Civil Aviation Administration of China) in 2022.
The C919 order book is now 998 aircraft, making a big splash in the world of airliners dominated by Boeing and Airbus.
Source: Channel News Asia
Looking at it closer, the orders are for now purely a Chinese affair, with 46% of the backlog committed to six airlines, all of whom are domiciled in China. The rest of the orders are for companies renting out the planes, all of them based in China.
Still, this is a massive volume of airplanes, able to give Comac the initial production scale to later compete in international markets.
Source: Cirium
Projection expects 1,700 C919 program deliveries through 2042, with the immense majority for the Chinese domestic market. This would give C919 a 25% market share in China.
Comac’s International Potential
Cormac will likely take time to internationalize its activity. The first reason is that, as we have seen with Airbus, even established players can struggle to ramp up production quickly. Relatively speaking, inexperienced Comac is likely to have to deal with this problem as well. Another reason is that it is likely that the Chinese government wants to see its domestic fleet be much more localized than it is today.
The sudden announcement of the interruption of maintenance and service to Western-made planes in Russia, following the war in Ukraine, was a wake-up call for China, as it is itself increasingly at odds with the USA. So, while Comac is still ramping up production, the Chinese market will likely absorb most of what it can produce.
Lastly, Airbus and Boeing inherited a complex and extensive network of aircraft support services from the companies from which they stemmed. This is a very important business asset, as airline companies will have the expectation that the planes they bought can be maintained and repaired all over the globe.
Building such a network will take Comac time, with most likely an initial focus on China and Asia at large, before trying to reach globally.
In addition, sanctions and a general lack of goodwill from Western authorities (including regulators like the FAA) are to be expected, as in 2021, the United States government named COMAC as a company “owned or controlled” by the People’s Liberation Army (PLA). This means that any American company or individual is prohibited from investing in it.
Comac’s Future
Ultimately, it will also take time for Comac to prove its planes’ safety, efficiency, and cost to operate with millions of flight hours in real-life conditions. Only then will it manage to convince international airlines to take a chance with a completely new design and brand.
“The pace at which COMAC will walk through that door is relatively slower than Airbus walked through the same door more than 30 years ago.
At present Boeing is clearly weakened, but with time Boeing will fix its issues and return the Boeing 737 family to a level of production some four times larger than COMAC’s stated intent in 2029.”
Rob Morris, Global head of consultancy, Cirium Ascend Consultancy
So, while in a very long-term perspective (2040-2050), Comac could become a serious challenger, thanks to the support of the massive Chinese and Asian airplane market and decades of slow maturation into a global giant, it is far from a major concern for Airbus currently, except for the potential loss of sales in China.
Conclusion
Airbus is moving from controlling half of the airplane manufacturing market to becoming the dominant actor, amidst Boeing’s ongoing string of scandals and structural problems.
How much it will benefit will highly depend on its ability to ramp up production quickly enough. And while Comac might eat up a bit of the company’s business in China, it is not going to be a major threat for decades.
Airbus is also a key defense company in Europe, at a time when major countries like Poland, Germany, and France are rearming. In this sector, next-generation fighter jets, cyber defense, and drones are likely to all be key weapons systems for the strategic needs of the 2030s onward.
The company’s aerospace segment is less successful but might manage to restructure successfully, especially if it combines its strength in satellite manufacturing with Thales’, as well as the key technology controlled by Leonardo.
However, the outlook for the Ariane program is relatively poor, with a reusable Ariane 6 rocket declared “not economically interesting” by the ArianeGroup CEO even in July 2024.
Overall, Airbus is a very solid company with years of backlog orders, a good balance sheet, and a strong competitive position.
This can make it a good pick for investors looking for a defensive stock, with upside exposure to increased geopolitical risks through its defense segments.