For a neat summary of the state of affairs at Airbus Group, look to its newest civil airliner, the A350. Calendar 2014 ended with the first delivery, to Qatar Airways. That delivery came at the end of a mostly uneventful test flight and certification campaign. Now the company’s priority is to hand over to Qatar a second A350 – probably this month – and get on with ramping up output to 10 units per month in 2018, to service a backlog that today stands at nearly 800.
Indeed, group chief executive Tom Enders sums up the priorities for 2015 in two words: “ramp up”.
Presenting solid financial results for 2014, Enders, speaking in Munich, added some nuance, describing 2015 as a year of “transition”. In addition to continuing the A350 programme’s move to its production phase, the A320 programme is in flux. Come October, Airbus expects to deliver the first of its Neo versions with Pratt & Whitney’s PurePower engines. First delivery of the CFM Leap-powered option is to follow in 2016, and Airbus and its supply chain will also be working to ramp up output to 50 aircraft per month from the first quarter of 2017 – while studying the “feasibility” of a further move to “60-plus”.
The A380 superjumbo is also making a dramatic transition, from loss-making to breaking-even. Whether the programme ever moves into the black remains to be seen, but after 15 years of investment, eight years in service, more than 150 aircraft delivered – including 30 in 2014 – and “triple digit millions” still going annually into improvements, Airbus expects to soon start taking in more money for each A380 delivered than its marginal cost of manufacture.
Whatever question marks may hang over the A380 (how many orders will ever be had beyond the 162 in the backlog today? And would a re-engined Neo version make economic sense?), Enders reckons that the programme “is in as good a situation as we want it in 2015”.
The same might be said of the whole company. In 2014, revenue improved by 5% to €60.7 billion ($68 billion) but profits – earnings before interest and tax – soared 54% to €4 billion, giving the group a 6.7% return on sales.
Notably, 2014 saw Airbus deliver a record 629 civil aircraft and take enough orders to maintain a book-to-bill ratio of more to 2-to-1. The group expects deliveries in 2015 to set another record, and still expects its backlog to rise. Profit growth will be only “slight”, as 2014 was excellent and 2015 will see some drag from costs associated with the A320 and A350 ramp-ups – but, says chief financial officer Harald Wilhelm, subsequent years should see a return to strong profits growth.
The helicopters business grew 4% in 2014 (revenue: €6.5 billion), in year which the Super Puma fleet’s grounding over transmission problems came to an end and deliveries of the new EC175 (now H175) began in December. Some question marks hang over 2015 orders – offshore oil and gas operators, a customer-base mainstay, are not eager to buy right now, given low oil prices – but Enders is enthusiastic about the division. H175 deliveries will carry on, H145 and H135 look solid, and the new X4 will make its maiden flight.
Although the Defence & Space division saw sales dip by 1%, the space part enjoyed its best year ever – and it looks like more of the same in 2015, with a book-to-bill ratio greater than one and the flagship Ariane 5 rocket continuing its flawless run of launches, now at 63.
And, says Enders, Airbus and Safran are making good progress in forging the joint venture, formally created in December, that will consolidate the Ariane 5 and 6 programmes in a bid to transform their cost base. Better yet, to make the JV 50-50, Safran will be paying Airbus €800 million.
That payment – along with the prospect of continuing divestment of tranches of shares from Airbus’s minority stake in Dassault Aviation, and other potential disposal as well as strong commercial performance – make the group look like a cash generating machine, with reserves in excess of €9 billion and growing. Cash demand is great, given the heavy programme ramp-up schedule, but Societe Generale aerospace analyst Zafar Kahn reckons that Airbus – which will raise its 2014 dividend by 60%, to €1.20 – may consider returning more cash to shareholders with a buy-back, perhaps from 2016.
Defence remains the weak link. The A400M military transport programme is behind its delivery schedule, as reflected in a fourth quarter 2014 charge of €551 million, and Eurofighter is desperate for an export order. As Jefferies equities analyst Sandy Morris sees it, the A400M could be a big problem if the relationship between Airbus and any of its customers turns out to be less than robust, as some may have the right to cancel.
However, he says, the “A400M is shaping up to be a good aircraft. My hope – and my belief – is that everyone will now pull together to get it over the line.”
Ultimately, Morris’s note on Airbus sums up the general view of the company: “juggernaut”.
Investec’s Rami Myerson is similarly upbeat, if less dramatic. Shares are trading at around their all-time high of €55 and strong results in 2014, he says, point to “further upside to the shares from better execution and strong positions in a growing market”.
That’s a considerable improvement on five years ago, when profits were borderline zero and Enders’s predecessor, Louis Gallois, declared unequivocally that profitability had to improve.
Profitability has clearly improved – thanks to a steady focus by Gallois and Enders, and their management teams, on cost, efficiency and innovation. Moving past the A380’s early-stage production problems has been a help, of course. And today, Airbus is also enjoying the benefit of a strong dollar, which translates into good money in its home currency, the euro – although the effect of that currency tailwind won’t be felt much for a couple years yet, as Airbus is today heavily hedged against exchange rate risk.
Along the way and despite the intervention of the worst financial crisis in decades, there has been no small amount of help from surging demand for air travel, especially in increasingly wealthy emerging markets. As Enders told market analysts, even airlines – notoriously prone to losing money – are booming, with 2014 industry profits at some $20 billion and a better year forecast for 2015; profitable airlines, he notes, are “better customers”.
Broadly, says Enders, there has been talk of dark clouds around the aerospace industry for years, “but we don’t see it, unless the world comes tumbling down”.