During the first half of 2020, Boeing (BA -2.87%) and Airbus (EADSY -0.67%) seemed to suffer equally from the COVID-19 pandemic. The sharp plunge in air travel demand led airlines to defer and cancel orders en masse, causing both aircraft manufacturing giants to bleed cash.
However, Airbus separated itself from Boeing in the third quarter. Deliveries of its A320 family of jets have rebounded to respectable levels, driving strong improvement in Airbus' financial results last quarter: particularly its cash flow. Meanwhile, the competing 737 MAX family remains grounded due to a pair of fatal accidents in late 2018 and early 2019, weighing heavily on Boeing's results.
Aircraft deliveries rebound
The abrupt change in market conditions earlier this year led Airbus to build far more jets in the first half of 2020 than its customers were willing to accept. The company delivered 196 commercial jets in that six-month period: down 50% year over year. As a result, by the end of June, it had about 145 completed jets that could not be delivered because of the pandemic sitting in its inventory.
Image source: Airbus.
This inventory buildup weighed heavily on cash flow. So while Airbus' adjusted operating loss for the first half of the year was a fairly modest 945 million euros ($1.1 billion), it burned 8.8 billion euros ($10.3 billion) of cash, excluding a one-time settlement payment.
In the third quarter, Airbus delivered 145 commercial jets. The sequential increase in its delivery rate helped it return to profitability, with an adjusted operating profit of 820 million euros ($958 million).
Furthermore, Airbus has reduced its production compared to the beginning of 2020. It is still delivering fewer aircraft than it did a year ago, but the number of jets that could not be delivered due to COVID-19 receded to 135 by the end of September. This enabled Airbus to generate adjusted free cash flow of 642 million euros ($750 million) last quarter.
Airbus' third-quarter results stand in stark contrast to the results Boeing reported last week. While Boeing's core operating loss shrank sequentially, its cash burn exceeded $5 billion for a second consecutive quarter.
Image source: Boeing.
Airbus expects improvement to continue
The global airline industry is recovering from the pandemic at an even slower pace than Airbus' management had previously expected. Nevertheless, based on the company's stabilizing results last quarter, management projected that adjusted free cash flow will be breakeven or better in the fourth quarter. (It did add the caveat that this outlook assumes no new disruptions to the market or its operations. With several European countries imposing various types of lockdowns recently, new operational disruptions are certainly possible.)
Airbus isn't providing formal guidance for 2021, but it seems to have a fairly optimistic outlook -- at least for the A320 family, which accounts for the bulk of its production. When the pandemic hit, Airbus slashed its A320 production rate by a third: from 60 per month to 40 per month. However, it plans to increase production to 47 per month in the second half of 2021 as airlines look to replace jets that they have retired this year.
By contrast, Boeing CFO Greg Smith acknowledged on the company's recent earnings call that free cash flow isn't likely to turn positive until 2022. Furthermore, Boeing expects 737 MAX output to increase slowly next year, only reaching a rate of 31 per month by early 2022, with "gradual increases to correspond with market demand" beyond then.
The better bet on an aircraft manufacturing revival
Boeing stock has plunged 56% year to date, as the pandemic has aggravated problems stemming from the 737 MAX grounding. Yet Airbus stock hasn't done much better, having lost half of its value in 2020. In fact, Boeing's enterprise value is still nearly double that of its European rival.
Airbus vs. Boeing stock performance and enterprise value, data by YCharts.
While Boeing does have a stronger defense business than Airbus, investors' apparent preference for Boeing still doesn't make sense. As of the end of September, Airbus had 7,441 commercial jet orders in its backlog, compared to just 4,325 for Boeing. This suggests that Airbus' current advantage over Boeing in terms of earnings and cash flow could continue over the next five to 10 years.
Airbus has a better product portfolio than Boeing for the current market. It has a bigger backlog. It also faces less uncertainty, whereas the cost of the 737 MAX debacle could continue to rise in the years ahead. That makes Airbus a much better choice than Boeing for investors looking to bet on a recovery in aircraft manufacturing.