Where Does Airbus Group Stand After the Biggest Order Loss in Its History?

Gulf operator Emirates Airline has cancelled orders for 70 Airbus A350s, wiping of $21 billion from the company’s order book in one go.

Jul 3, 2014 at 5:06PM

European plane maker Airbus (NASDAQOTH:EADSY) recently received a rude shock. One of its key clients and the fastest growing Gulf operator, Emirates Airline, cancelled a multibillion-dollar deal the two had made back in 2007. What makes matters worse is that the cancellation is for the A350 aircraft on which Airbus' future hopes are tied, and it happened just months before the aircraft enters service. The A350 is Airbus' answer to Boeing's 787 Dreamliner and regarded as a modern marvel. How does this setback affect Airbus? Let's find out.

The multibillion-dollar setback
Emirates recently called off its 70 orders for Airbus A350 wide-body aircraft, which is the largest cancellation suffered by Airbus to date. The deal amount was around $16 billion in 2007, and the current list price is roughly $21 billion. Though Emirates management did not cite any specific reason for the decision, suggesting it had to do with "fleet management," it did sound an alarm bell for Airbus. The company is currently pressed for cash, having invested around $15 billion on development of the fuel-efficient A350XWB aircraft, which is expected to showcase similar technology as in Boeing's widebody Dreamliner 787 jets. 

The A350-900, Source: Airbus.

With this cancellation, the order book for A350XWBs currently stands at 742 from 38 customers. Albeit this number shows that the backlog is strong and not dwindling, the cancelled Emirates order did represent around 8.5% of Airbus' backlog. This is also a big competitive setback as Emirates placed orders for 150 Boeing 777Xs with 50 more options at the Dubai Air Show in November. Bloomberg reports that Mark D. Martin, CEO of Dubai-based Martin Consulting, has said that "the 777 is now increasingly becoming the mainstay fleet of Emirates ... the 777 is flying to almost all their key destinations."

Airbus-Emirates relationship continue
The Emirates' cancellation made investors nervous, and the stock price dropped, but COO John Leahy has soothed concerns by saying other operators have shown interest in buying the planes, and the company hopes to sell the lot by 2020. The firm order of 50 A350 planes by Etihad Airways from the Dubai Airshow also serves to neutralize the negative impact of the Emirates cancellation. The plane maker has a huge wide-body aircraft backlog of 5.6 years of production, with a majority of A350 logged orders. 

The deal cancellation does not signal a rift in the long-standing relationship of Airbus and Emirates. A few months back in November 2013, Emirates placed orders for 47 A380s. Given that the superjumbo jets are finding it difficult to find buyers with growing popularity of twin-engine aircraft, the deal was a nice surprise. Tim Clark, President of Emirates Airlines, said while appreciating this airplane, "The A380 is our flagship aircraft. It is popular with our customers and delivers results for us in terms of operational performance." Emirates already has a fleet of 48 A380s in operation and remains the top client for this aircraft. 

The Emirates fleet dynamics. Source: airchive.com.

With this order Airbus' backlog for A380 superjumbo increased to eight years of production, far ahead of Boeing's backlog of 2.8 years of production for its own superjumbo 747. 

Airbus is in a strong market position
Airbus won 15 new customers in 2013 and ended the year with close to 51% gross market share in the aircraft category over 100 seats. It successfully closed its order book 80% higher than that reported in 2012 for commercial aircraft. This was almost 11% greater than the net order count reported by Boeing. Airbus President and CEO, Fabrice Bregier, stated -- "In 2014, there will be further improvements in our global competitiveness, efficiency and effectiveness. The focus also will be on incremental innovation that is simpler, less risky, and less costly and comes faster to market."

True to his words, within the first five months of this year, Airbus racked up 203 net orders that is a comfortable count for the airplane manufacturer. The company is undertaking several measures to improve its profitability and free cash flow generation that has been a big concern for investors.

Foolish last word
The cancellation of the Emirates order is definitely bad news for Airbus, but it's good to know that the company is confident that this would not disrupt its delivery schedule. Emirates is a big account for the plane maker, and the A380 order marks the trust that the airline still has on Airbus manufactured airplanes. The strong backlog and the ongoing recovery in the commercial airplane segment provide Airbus with a cushion for what could have been a big blow to its future revenue prospects.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information