Like the automotive industry, the aircraft industry faces pressure to begin preparing for a greener future. Although aircraft emissions account for only 2.8% of global CO2 emissions, this is purely because air travel is far less common than other forms of travel; travelling by plane is the single most carbon-intensive thing that most individuals can do. CO2 emissions from planes have also been rising rapidly as air travel becomes more common.
The heat is on for aircraft manufacturers to begin looking into ways to reduce emissions, not only for the sake of limiting climate change but also for the sake of their long-term market demand. If the price of fossil fuels continues rising as supply dwindles, the cost of air travel could stunt growth more and more as time goes on. There’s also the risk of government regulations eventually being levelled at companies and industries that lag behind on addressing climate change.
Despite facing the same issues, Airbus SE (XPAR:AIR, Financial) and Boeing Co. (BA, Financial), the world’s only major manufacturers of commercial passenger aircraft, seem to be taking very different approaches to engineering a greener future. While Airbus is pushing the bill for research and innovation, Boeing maintains that a more realistic, pragmatic approach is necessary.
As both companies work on developing the next generation of commercial aircraft, the question for investors is, which of these companies has the right strategy to dominate the global market? Up until this point, these two giants have pursued very similar strategies. As their strategies diverge and customers are increasingly able to pick and choose which supplier they want to buy from, there is a huge opportunity for one to take market share from the other.
Airbus pushes innovation
Last year, Airbus announced an ambitious goal to develop a hydrogen-powered airplane that could enter service by 2035. Based on emissions tests, the company claimed that radical change is needed if the aviation industry is to have any hope of reaching net-zero carbon emissions by 2050.
At the time, the company released details of three hydrogen-powered concept planes. Named ZEROe, the class of concept planes would use turbofan engines and carry between 120 and 200 passengers with a range of 2,000 nautical miles. Airbus says the planes will be powered with “a modified gas-turbine engine running on hydrogen, rather than jet fuel, through combustion.”
"Reaching net zero will be the result of a truly unparalleled act of cooperation," Executive Vice President Julie Kitcher said at the "Airbus Summit."
While alternative fuels, lightweight materials and an overhaul of air traffic systems are all needed, Airbus believes these changes will not be sufficient to achieve climate change goals in a timely manner, and these changes could also force up fares.
Faster innovation is needed to lessen the pain. The longer the transition is, the more costly it will be in the long run. However, as with anything investing-related, in order to save money in the long run, a significant up-front cost is needed, and that cost is all too often unaffordable.
Boeing is sticking with proven methods
Unlike Airbus, which is embracing faster innovation as the way to meet climate change goals and reduce operating costs in the long run, Boeing is sticking with a more cautious approach, arguing that proven methods are better than wasting money on something you can’t possibly know the cost of.
For now, Boeing is keeping the development of zero-emission technologies on the backburner as it focuses on more sustainable fuels for existing aircraft. While biofuels made from processing vegetable oils and waste fats can cost twice as much as conventional jet fuel, they also result in lower emissions.
The price of sustainable aviation fuels isn’t likely to drop with economies of scale, and these fuels also don’t cut emissions to zero, instead reducing emissions by anywhere form 30% to 60% on average, depending on quality. However, “drop-in” fuels need very few changes in aircraft design and infrastructure, so while operating costs will increase with sustainable fuel use, at least Boeing will not be putting up the money to research and develop entirely different types of planes.
Sustainable fuel for everyone
While Boeing’s pragmatic approach may appeal to some investors, Airbus has not thrown pragmatism to the wind - in fact, like Boeing, it is also investing in more sustainable fuels. It’s going to be more than a decade for even optimistic estimates of when the first zero-emission planes could become commercially available, so in the meantime, Airbus knows it needs to transition to more sustainable fuels.
Airbus remains conscious of the Air Transport Action Group's 2008 CO2 emission goals, which include improving the fuel efficiency of the worldwide fleet by an average of 1.5% per annum between 2009 and 2020 (which has been achieved), capping net carbon emissions from aviation after 2020 and cutting the industry’s CO2 emissions by at least 50% by 2050.
Sustainable aviation fuels are currently the only viable way to meet the goal of capping the industry’s emissions, but their use has been hindered by a combination of undersupply and high costs. Things were set back further by the pandemic, which plunged many major airlines deep into debt and has thus limited their ability to take on additional costs.
Just trying to survive
It may seem at first glance that Airbus and Boeing taking different approaches to reducing carbon emissions is due to differences in business strategy. Airbus is focusing more on innovation, while Boeing is focusing more on pragmatism.
However, Airbus is also investing in sustainable fuels, and while Boeing says it believes zero-emission planes are unlikely to be developed by 2050, it also plans to eventually develop more innovative aircraft. It just might take a few decades longer for it to consider zero-emission aircraft to be a viable investment.
What it really boils down to is that Airbus has the money to invest in innovation, while Boeing is just trying to survive after a difficult few years have decimated its balance sheet. The company was still dealing with the 737 Max disaster when the pandemic hit, and it also disappointed buyers and shareholders alike on some of its other aircraft. The 737 Max crisis is still far from being over, as just last month, a Delaware judge ruled that Boeing’s board of directors must face a lawsuit from shareholders over the model’s two fatal crashes.
With lawsuits regarding the 737 Max still making their way through the courts and a cash-debt ratio of 0.34 compared to Airbus’ 1.28, it is clear that Boeing is holding back on innovation for the simple reason of not being able to afford it.
This is the same rule that investors who started with nothing know by heart: those with money can afford to take investment risks, but those without money need to be very careful with their funds, even if it limits upside potential.
Valuation
If there’s one thing investors can rejoice on when it comes to Boeing, it’s the stock’s low valuation. On Oct. 27, shares of Boeing traded around $206.61 for a market cap of $121.10 billion. The GuruFocus Value chart rates the stock as modestly undervalued.
The company has earned its low valuation, but it remains one of the only two major commercial passenger aircraft manufacturers in the world. As demand for its products grows, Boeing’s profits should also recover. Analysts surveyed by Morningstar are expecting earnings per share to turn positive for full-year 2021 and rise above the $10 mark by 2023, though this would still lag 2018’s earnings per share of $17.85.
Airbus, on the other hand, is rated as modestly overvalued by the GF Value chart. Shares were changing hands for around 109.94 euros ($127.57) on Oct. 27 for a market cap of 86.40 billion euros.
Analysts are estimating that Airbus’ earnings will continue growing at a steady pace, reaching 4.27 euros in 2021 and growing to 6.10 euros by 2023.
Given its undervaluation and negative investor sentiment, Boeing seems like it could be the better short-term investment, but it still carries significant risk in the form of ongoing lawsuits related to the 737 Max tragedies. While Airbus seems to have a richer valuation, it is investing in innovative new aircraft designs even as Boeing holds off due to its financial concerns. Thus, long-term investors may find Airbus the more attractive of the two to buy and hold for decades to come.
