Airbus Can Deliver, Just Not Right Now - The Wall Street Journal

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July 30, 2020 8:00 am ET

Can Airbus EADSY 2.35% deliver? When it comes to jets, it will struggle in the coming years. As for long-term shareholder returns, the horizon looks clearer.

On Thursday, the European plane maker reported results that missed analyst expectations at the profit level but beat them on cash. With the market laser-focused on aircraft manufacturers’ ability to generate cash again, the shares surged close to 3%. Airbus recorded €12.9 billion of free cash outflows during the first half of the year, but believes it is possible to return to positive numbers in the second.

How the stock trades in the medium term will probably be all about the amount of jets that Airbus manages to deliver.

Unlike Boeing, BA -2.41% which is still bleeding money at the operating level due to the suspended production of its grounded 737 MAX jet, Airbus’s cash gap relates mostly to an accumulation of inventory during the Covid-19 crisis. A wave of order deferrals by airlines and lessors, which didn’t want to take new jets amid travel bans, left the manufacturer with 145 parked aircraft. Releasing the newly accumulated stocks would be a €5 billion windfall.

Chief Executive Guillaume Faury has been quite aggressive when it comes to pushing carriers to make good on their purchase commitments, and he said Thursday that Chinese airlines should now start picking up many of their jets. Airbus’s order backlog now stands at a remarkable 7,584 commercial aircraft.

But it would be a mistake to overestimate how far airlines can stretch over the next couple of years, given their dire financial situation and the recent rebound in new coronavirus cases in the U.S. and Europe. For now, investors can’t count those inventories as cash in the bank.

The market also needs to contend with the company’s production challenges, which are similar to Boeing’s. On Thursday, Airbus trimmed the manufacturing rate of its wide-body A350 from six a month to five. It had already cut the production rate on all its models, including the bestselling narrow-body A320 family, by about a third, but that seems to be proving insufficient. The company confirmed that shrinking further would come with added costs: The A320 is built in four different plants across the globe, making consolidation a big challenge. The need to keep key suppliers afloat complicates the picture.

All this leaves Airbus’s medium-term targets exposed to a plethora of risks. The good news for investors is that the company’s strategic advantages remain mostly intact. It doesn’t make long-term sense that its stock hasn’t done better than Boeing’s in 2020.

Whereas its American rival has come to rely on the wide-body market, Airbus’s might rests on the A320 and its stretched variant, the A321. These are smaller planes that will see a much faster rebound, as short-haul flights return while long-haul ones struggle to fill up.

Directly taking market share from Boeing is complicated, because airlines seldom switch to another plane family. Yet Airbus has a chance to gain a head start in developing the next generation of planes for the 2030s—be it using hybrid engines or other technological advances. Meanwhile, Boeing will be dealing with a $58 billion long-term debt pile. The crisis has already pushed it to table former product plans and acquisitions.

Airbus’s stock is in line for a lot of turbulence. As long as seat belts are well-fastened, though, what should matter is getting to the destination.