Wednesday 24 October 2018

Share watch: Brexit problems could clip the wings of Airbus

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John Lynch

If someone really wants to be amazed by the dramatic developments that have changed the world in the last century, it is only necessary to look upwards. At any one moment in the day the skies are filled with some 10,000 planes moving millions of people across nations and continents at speeds that even recently would have been considered recklessly insane. In the 115 years since the Wright Brothers made something mechanical travel 120 feet in the air to kick-start the aeronautical revolution, the progress is breathtaking. The probable plans for the company under the microscope today, Airbus, suggest a future that will have even more surprises. Passenger numbers are doubling every 15 years and airlines, as well as airports and air traffic control, have to find a way to cope.

Airbus is one of the great examples of Europeanisation and has ended up being the effective consolidation of the European aerospace industry, a dream since the 1970s. It wasn't easy because of the intense rivalries in the sector and the pride in aerospace technologies from the start. But the great claim that Airbus can make these days, is that its fleets have flown 12 billion passengers more than 215 billion kilometres and today it's valued by the market at €73bn. It is well established as one side of a duopoly with the American Boeing Corporation. That, however, may be one of the things that's going to change before long.

A sure and certain feature among the giant aviation companies that no one takes for granted is that their rivals cannot be challenged. Recent events saw Airbus clinch a deal to take control of Bombardier's new regional jet for a nominal sum. This scuppered Boeing's attempt through US courts to kill off the Bombardier jet and handed a great industrial opportunity to Airbus in the US. Boeing later decided to open partnership discussions with Brazil's regional jet producer Embraer.

However, the big new competition to the duopoly is coming from China. The Chinese are in the final stages of launching a single-bodied commercial aircraft for two years' time. They also have a joint venture agreement with the Russians to produce wide-bodied aircraft.

Boeing's success over the years has been based on a group of highly skilled and internationally diverse employees which has delivered over time the state of the art aircraft. Unfortunately, many of them are retiring. The group has announced the departure of the CEO, German-born Tom Enders, and the COO, Fabrice Bregier. These management changes are of concern to investors who worry if the next generation will be as competent. It will also see the retirement of the legendary head of sales John Leahy who over a 32-year-career is said to have sold more than $1.7tn worth of aircraft.

Last year Airbus delivered 700 planes for the year (Boeing 800) but is still plagued by delays from its engine suppliers. In 2018 it expects to deliver 800. However, the European aircraft maker has been struggling to keep its wide-bodied aircraft afloat. Recently Emirates threw it a lifeline when it ordered 36 of the super Jumbo aircraft.

Results for 2017 surprised investors with better than expected profits and cash flow. Revenues for the year were stable at €67bn (Boeing €74bn). Earnings rose 52pc to €3.4bn, cash flow increased to €3.7bn and dividends increased by 11pc. Shareholders shrugged off the €1.3bn charge for its troubled military transport plane.

The company stated this would draw a line under the troublesome programme. These results saw shares hit an all-time high in January of €100, but they have since slipped to €94, trading at a price earnings multiple of 25.

Brexit, however, will present problems for Airbus as the future shape of the relationship between the EU and the UK remains unclear. Commercial aircraft, security and defence, and the space industry all could see the UK being frozen out. This would present serious implications for Airbus. Hard borders and regulations risk blocking the supply chain, not a good position for Airbus but one that will have to be sorted out in thorny negotiations.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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