Airbus / Boeing: parabolic flight
Order backlogs are stable, but investors should keep their seat belts fastened
Those investors attuned to the smooth hum of the aerospace industry have been hearing some discordant rumblings recently. After some good years after the financial crisis, aircraft orders have slowed. On Wednesday Airbus announced that third-quarter earnings declined year on year by 21 per cent. This was down to supply chain problems, though, more than a zenith in the order cycle. Boeing cut forecasts earlier this year, but results have held up this quarter. Yet, the slowdown’s effect on margins matters more than any sputtering execution.
Previously, aeroplane orders had been rising in reflection of similar increases in passenger numbers. Recently traffic growth has petered out, according to the International Air Transport Association. Load factor, a capacity utilisation measure, declined if only slightly. Airlines will not likely buy many more jets should this continue.
No wonder that aircraft makers are greedily eyeing their suppliers’ margins. Boeing’s total operating margin declined two-fifths to 5.1 per cent in the first nine months of 2016 compared with last year. Although this was in part due to one-off charges in the second quarter, it compares poorly with a 10 per cent margin at Pratt & Whitney, the jet engine supplier owned by United Technologies. Boeing says it wants to “partner for success” — a euphemism for pushing margin pressure further down the chain. Suppliers have countered by consolidating.
Both Boeing and Airbus aim to replace all aeroplanes delivered this year with new sales, to keep the order backlog stable. Nevertheless, analysts expect the earnings of both to decline in coming years, as lower demand for aeroplanes puts pressure on selling prices, and suppliers fight to defend margins.
Order backlogs may keep Airbus and Boeing busy for a while. But investors should have their seat belts fastened in case margins begin a downward spiral.