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1 Way Boeing Is Absolutely Crushing Airbus

By Adam Levine-Weinberg – Nov 5, 2018 at 4:20PM

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Airbus has captured far more aircraft orders than Boeing over the past five years, but it hasn't given the European aerospace company much of an earnings boost.

Together, Boeing (BA 4.11%) and Airbus (EADSY 2.70%) absolutely dominate the global market for commercial jets. Between them, they will deliver more than 1,600 commercial aircraft in 2018. No other company is likely to deliver even 100.

There's plenty of room for debate about which aerospace giant has the better model lineup and the best future sales prospects. In recent years, Airbus has tended to collect more aircraft orders (although Boeing is poised to win the 2018 order race). As a result, Airbus has a larger order backlog than its American rival.

However, Boeing leads Airbus by a wide margin in terms of both profitability and cash flow. The two companies' recently released Q3 earnings reports show that Airbus is still struggling to turn strong order activity into big profits.

Boeing is flying higher than ever

Last quarter, Boeing faced plenty of challenges, as engine production delays disrupted 737 MAX deliveries. As a result, core operating income slipped to $1.9 billion from $2.3 billion a year earlier. Nevertheless, free cash flow surged 37% to $4.1 billion last quarter, and core operating income is still up 8% on a year-to-date basis.

Boeing expects to catch up on aircraft deliveries in the fourth quarter. As a result, it will still end the year with between 810 and 815 deliveries.

A rendering of a Boeing 737 MAX 8

737 MAX delivery delays haven't dragged Boeing down. Image source: Boeing.

Meanwhile, the aircraft manufacturer raised its full-year guidance for several key financial metrics. It now forecasts core earnings per share between $14.90 and $15.10, which would imply a net profit of nearly $9 billion. Free cash flow is on track to top $13 billion, up from $11.6 billion last year and $7.9 billion the year before.

A different story at Airbus

Airbus' profitability has improved significantly in 2018 relative to 2017, but it still lags Boeing by a wide margin. For the first nine months of the year, Airbus' adjusted operating profit more than doubled to 2.7 billion euros ($3.1 billion) -- less than half of the $6.8 billion core operating profit that Boeing achieved.

The difference in performance is even more stark when looking at free cash flow. Year to date, Airbus' free cash flow is steeply negative. For the full year, it expects free cash flow (excluding merger and acquisition activity and customer financing) of less than 2.95 billion euros ($3.36 billion), compared to $13 billion or more for Boeing.

To be fair, while Boeing and Airbus are roughly neck and neck in terms of commercial aircraft production, Boeing has a much larger defense business. But even adjusting for its smaller size relative to Boeing, Airbus is dramatically less profitable.

What's driving the discrepancy?

Some of the reasons for Boeing's superior profitability and cash flow are easy to pin down. For example, Airbus is still in the midst of ramping up production of its A350 widebody and the new A220 narrowbody program it acquired from Bombardier. Brand-new aircraft types tend to be less profitable to produce initially, but costs come down over time.

Additionally, production of the new A321neo (a variant of Airbus' popular A320 family) has hit some snags this year. The move to a more flexible cabin configuration has added complexity to the production process, likely driving up costs.

Problems at component suppliers have also hindered production of Airbus' A330neo and A350 widebodies, whereas Boeing's widebody output has been relatively shielded from the recent global supply chain issues. (Both companies have faced engine production delays for their single-aisle jets.) All in all, supply chain and industrial problems have put Airbus in jeopardy of missing its 2018 delivery target of 800 commercial jets.

Another possibility is that Airbus has been offering deeper discounts than Boeing. While Airbus and Boeing proudly announce every major aircraft order they receive, the pricing of each deal remains a closely guarded secret. Based on the relative profitability of the two aerospace giants, Airbus' market share gains over the past decade may have come at a high cost.

It's certainly possible that as Airbus ramps up output of its newer jet models, its profitability will improve to a level more in line with what Boeing routinely achieves. But until Airbus shows more progress in that direction, investors are probably better off sticking with the proven cash machine: Boeing.

Adam Levine-Weinberg 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.

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