The airline industry is booming, and both Boeing (NYSE:BA) and Airbus rode the tailwinds of increased aircraft demand for a fantastic 2017. In this segment from the Industry Focus: Energy podcast, host Sarah Priestley and Motley Fool contributor Adam Levine-Weinberg explain why Boeing looks like the better bet going into 2018. Find out how Boeing has made some fantastic moves for their long-term success, what metrics Boeing nailed compared with Airbus last year, how the aircraft company is working to mitigate supply chain risks, and more.
A full transcript follows the video.
This video was recorded on Feb. 8, 2018.
Sarah Priestley: Adam, out of the two of these plane makers, which do you feel has the advantage this year?
Adam Levine-Weinberg: When you look at the two companies, obviously, we talked about how Boeing delivered somewhat more planes than Airbus, but Airbus is catching up, or at least, was catching up last year. And on the other side, you had more orders coming in for Airbus, and Airbus also has the larger backlog. The one thing that makes Boeing's relative performance look far better is its profitability and cash flow. Up until now, Airbus hasn't shown the ability to turn its high volume of aircraft production into big earnings numbers and big cash flow numbers. If you look at last year, Boeing posted a core operating profit of $9 billion, and free cash flow of $11.6 billion, both of which were well above its initial guidance and far above the prior-year figures. Airbus hasn't reported its full-year results yet for 2017, but as of its most recent guidance, it's expecting its operating profit which should come in around $5 billion and adjusted free cash flow of less than $2 billion. So, quite a bit behind Boeing in terms of profitability. In terms of the cash production, they're on completely different planets. That's really quite astounding. It's probably a combination of more efficient factories and supply chain for Boeing, and to some extent, stronger pricing insofar as Airbus may be offering bigger discounts to customers in order to build up this backlog, in this attempt to gain long-term market share from Boeing.
Priestley: Absolutely. Boeing has been making some fantastic moves. They've been cutting its workforce at their commercial aircraft unit, so they've actually lowered the number of employees that it takes to build one aircraft. They boosted production two-thirds over the past seven years while doing that. And like you mentioned, a lot of the issues for them to actually produce the finished product come from suppliers. They've been pressuring their suppliers for better terms. And there has also been a lot of consolidation within the supply chain, which will hopefully deliver results. And this whole supply issue absolutely should not be underestimated. A lot of Airbus' issues, like we talked about Qatar cancelling four planes late last year, that came from the Pratt & Whitney, which is a United Technologies Corp. subsidiary, failure to meet their engine deliveries. They only made 75% of the engine deliveries that they were supposed to in 2017. I think the executives joked that there were so many planes waiting for engines that they were now in the glider business. And, as you mentioned, the manufacturers collect most of the price of the aircraft when they ship, so waiting for these suppliers to get their act together is not good.
Levine-Weinberg: Yeah. Both companies definitely are very much focused on this. Another area where they've had some serious supply constraints has been on seating, and actually, lavatories has been a big supply issue recently. Boeing actually just formed a joint venture very recently to create its own seating company to build aircraft seats. It basically said that it needs to be in the business just to provide extra supply and make sure that it can meet its commitments to customers to get planes out the door. I think you could definitely see something similar at Airbus, because they've definitely been burned quite a few times in the last couple of years by suppliers saying they'd be ready for production increases and then not actually being ready.
Priestley: Absolutely. I think a lot of suppliers are seeing a tightening of their belts. A lot of the margins in this industry are actually felt further back in the supply chain. As you mentioned, Zodiac, which makes a lot of parts for Airbus, they agreed to be acquired by Safran. I don't think that's gone through yet. But, it demonstrates that the reason, the impetus for that arrangement, was to try and help them speed up their production. Very interesting for the whole manufacturing supply chain.
Adam Levine-Weinberg has no position in any of the stocks mentioned. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.