BABWF - Airbus: 90 Billion Reasons To Buy

2023-11-10 09:00:00 ET

Summary

• Airbus SE stock is not performing as strongly as other aerospace names due to production challenges and engine issues.
• Airbus received 199 airplane orders in October, including 60 from United Airlines and 8 from Cathay Pacific.
• Airbus delivered a total of 71 airplanes in October, showing improvement from previous months and putting them on track to meet their delivery target.

Any stock prices or stock price changes for Airbus stock or the financial markets are as of November 8th.

The monthly order and delivery from the big commercial airplane manufacturers are not always moving the stock price, and I believe that, especially for orders, there should also not be a stock price given the long time it takes from order placement to delivery, with only a small cash flow being activated on signing a purchase contract. However, tracking the orders and deliveries on a monthly basis is still worthwhile as it allows to detect trends early on and position accordingly. As an example, last year we were able to determine that Airbus was unlikely to achieve its delivery target using this method months before Airbus ended up walking away from its delivery target.

In this report, I will be discussing the order and delivery activity for Airbus SE ([[EADSF]], [[EADSY]]) commercial airplane orders in the month of October.

How Is Airbus Stock Performing?

Generally, I view aerospace names as stocks with a probability of outperforming the market, and while I have seen my model portfolio increase 27% on a negative market, Airbus is not showing the strength of aerospace at this point. Its October and year-to-date figures are showing similar returns as the market. I would attribute this mainly to continued challenges on increasing production rates as well as the Pratt & Whitney Geared Turbofan issues layering , on top of that which are a specific challenge to Airbus customers.

The current high demand for air travel and the increased oil prices do little to make the stock more compelling for near-term returns, as the ability to capitalize on the demand hinges on the ability to increase production rates which has proven to be challenging. Furthermore, service entry of the Airbus A321XLR and Airbus A350F have been delayed with the former also running into some challenges providing the promised range performance.

Airbus Airplane Order News: United Airlines Adds 60 Orders

Airbus booked a total of 199 airplane orders, up 96 orders sequentially, with 109 single aisle orders and 10 wide body orders valued $7.6 billion:

• United Airlines (UAL) ordered 60 Airbus A321neo airplanes.
• Air Niugini ordered six Airbus A220-100 airplanes.
• Cathay Pacific (CPCAY) ordered 8 Airbus A320neos and 24 Airbus A321neo airplanes.
• An undisclosed customer ordered 10 Airbus A350-900s.
• An undisclosed customer ordered eight Airbus A220-300s.
• An undisclosed customer ordered three Airbus A321neo airplanes.

During the month, the following changes were made to the order book:

• Aegean Airlines cancelled orders for five Airbus A320neo airplanes.
• AerCap ( AER ) converted orders of 20 Airbus A320neo airplanes to orders for the same number of Airbus A321neos.
• An undisclosed customer cancelled orders for six Airbus A321neo airplanes.
• An order from BOCOM Leasing for one Airbus A320neo was put in the undisclosed customer category.
• Chengdu Airlines was identified as the customer for one Airbus A320neo likely converted from an order for the Airbus A320neo.
• CMB Financial leasing was identified as the customer for four Airbus A320neo airplanes likely converted from the Airbus A320neo.
• Flynas took over one delivery slot for the Airbus A320neo from CBM Financial Leasing.
• Orders from Goshawk Aviation for 12 Airbus A320neo and 8 Airbus A321neo were assigned to SMBC Aviation Capital of which Goshawk Aviation is now part.
• China Southern Airlines converted an order for five Airbus A320neo airplanes to five Airbus A321neos.
• Juneyao Air was identified as the customer for one Airbus A320neo.
• Macquarie Financial Holdings cancelled an order for one Airbus A220-300.
• NAS Aviation Services cancelled an order for 20 Airbus A321neos and converted 11 orders for the Airbus A320neo into A321neo orders.
• An undisclosed customer seemingly cancelled six orders for the Airbus A321neo.

Note from the author: The order data provided by Airbus in October contains an error as the total orders do not add up. I went through the data and could attribute it to six airplanes missing in the customer list. I have categorized these orders as cancellations as it is probable that Airbus has not correctly accounted for the cancellation.

In October, Airbus logged 119 orders valued $7.6 billion with 32 cancellations valued $1.8 billion, bringing the October net orders to 87 units valued $5.8 billion. During the month, we saw the order for 60 airplanes from United Airlines announced earlier being added to the backlog, and we saw continued demand for the Airbus A220, Airbus A320neo, and Airbus A350. In October 2022, Airbus booked 177 orders and 163 orders after cancellations with a net order value of $8.7 billion. The difference in net orders and net order value can be explained by higher cancellations this year being partially offset by better mix and higher gross orders last year, as Airbus logged nearly 60 orders from International Consolidated Airlines Group (ICAGY).

Airbus is having a strong year so far, with 1,399 gross orders and 1,328 net orders with an estimated value of $90.2 billion . By comparison, in the same period last year Airbus booked 810 net orders valued at $38.50 billion. The difference of 518 orders can be attributed to the order from IndiGo for 500 airplanes earlier this year during the Paris Airshow.

Airbus Airplane Deliveries Improve

In October, Airbus delivered a total of 71 deliveries comparing favorably to the 55 jets delivered in the month prior. The delivery mix consisted of 60 narrow body airplanes and 11 wide body airplanes with an estimated value of $4.7 billion:

• Airbus delivered nine Airbus A220s.
• Airbus delivered 51 Airbus A320neo family airplanes consisting of 23 Airbus A320neo airplanes and 28 Airbus A321neo airplanes.
• Three Airbus A330 airplanes were delivered consisting of one Airbus A330-200 to be converted to a tanker configuration and two Airbus A330-900s.
• Airbus delivered eight Airbus A350s, all of which were the -900 variant.

The delivery profile showed sequential increase as well as year-over-year increase. In October 2022, Airbus delivered 60 jets valued $3.9 billion. The increase of 11 units, was driven by an increase of four units for the Airbus A220 program, an increase of four units for the Airbus A320neo program and an increase of three units for the Airbus A350 program. In my report discussing the September deliveries, I noted that the delivery numbers do provide some signs that the supply chain issues are easing, and I would say that October provided even more support to that view. Year-to-date deliveries add up to 559 units valued $39 billion compared to 497 deliveries valued $32.8 billion a year ago.

To achieve the delivery target of 720 units, Airbus needs to deliver an average of 81 airplanes for November and December. While steep, I do believe that the company should be able to do this. In November and December last year, the company delivered 166 airplane and with higher year-to-date deliveries, I think Airbus should be able to reach its delivery target.

For the month, the book-to-bill ratio was 1.7 measured by units and 1.6 measured by dollar value. The numbers for the first 10 months of the year look even stronger, with a book-to-bill of 2.5x measured by units and a value book-to-bill of 2.6x reflecting the high order inflow from Indian carriers this year.

What Is Airbus' Delivery Target For 2023?

Airbus expects a total of 720 deliveries this year, replicating its missed delivery target of last year. Given the easing supply chain constraints, Airbus has a significantly higher chance to reach its delivery target which is just five units shy of the 725 units I expect Airbus to deliver this year.

How Do Airbus Deliveries Compare To Boeing?

At the time of writing, Boeing (BA) has not yet provided its official order and delivery data for October. However, preliminary figures suggest there have been 33 deliveries, which would be less than half of the deliveries that Airbus achieved during the month, driven by continued inspection and rectification on some Boeing 737 MAX airplanes. Year-to-date, this would put the deliveries of Boeing at 404, compared to 559 for its European competitor.

Conclusion: Airbus Lined Up To Meet Delivery Target

After a dull September month, October order numbers looked significantly better, including orders for all programs excluding the Airbus A330neo. The order inflow was driven by the orders for 60 Airbus A321neo airplanes by United Airlines and 32 orders from Cathay Pacific. Delivery numbers showed sequential as well as year-over-year improvement and with an average of roughly 80 airplanes per month to be delivered in the next two months I do believe the European jet maker is positioned well to meet its delivery targets.

The bigger question centers more on timing of rate increases. We do see a strong order inflow and delivery numbers that should allow and the next thing to look at is actually how much Airbus can ramp up its deliveries to convert backlog to revenues and profits faster. While there might not be as much clarity and certainty on that as we want since the ramp up planning has slipped several times by now, I do think that Airbus stock is positioned well to benefit from the continued strength in demand for commercial airplanes. As a result, I am maintaining my buy rating for Airbus SE stock.

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