Airbus’ (EADSY, Financial) shares went down on Wednesday when the aircraft maker announced that it could further trim the production rate of the A330 aircraft. Earlier this year the company had announced plans to cut A330 production rate from 10 per month to nine in 2015 as demand for the jet is declining. Airbus CEO Tom Enders told its investors that a further rate cut is expected to happen in 2016 as well. The news bore a negative impact on the share price of the company as it raised concerns regarding the company’s revenue and dwindling cash flow.
Picture from Airbus
Impact on the financial results
The A330 is one of the chief revenue contributors of Airbus after its narrow body A320, which is the top selling aircraft. Thereby, trimming the production rate would bear an impact on the company’s top line and cash flows. A production cut quite reasonably raises investor concern.
The first production drop is scheduled for 2015. Airbus has had to reduce the A330 production as orders for this plane haven’t really come after the plane maker announced the A330neo program that offers more fuel efficient engines. The revamped plane would feature Rolls Royce engine that would save 14%25+on+fuel+consumption. Airlines have since then preferred ordering the upgraded version which is slated to enter service in 2017. The new plane would help the carrier reduce the aircraft operating cost.
The A330 currently has a backlog of 255 which translates to over two years’ production at current levels. However to manage a smooth transition a production cut becomes necessary, assuming that no further orders would come for the A330. The company says that a further production cut is possible depending on the undelivered units and the service entry of A330neo. However, this shouldn’t be a matter of concern in the long run for the shareholders. This is a transitory phase. Once the reengineered version hits the sky, Airbus’ revenue growth and cash generation would grow stronger, though the company might see a small interval of cash flow disturbance. The company predicts the cash flows to break even in the current year.
The A330neo – a catalyst for growth
The transition to A330neo could be a little challenging for Airbus, but the upgraded plane would certainly improve Airbus’ hold in the wide-body plane market. American rival Boeing (BA, Financial) dominates the wide-body market with the 777 and 787 Dreamliner. The 777 is facing a similar challenge as the A330 after Boeing announced the 777X program last year at the Dubai air show. Since then airlines have been ordering for the upgraded version, while undelivered units of the 777 is fast evaporating due to lack of orders. The 777X is expected to enter service in 2020, and so Airbus has three years of time advantage before the 777X hits the world’s runways.
Picture from Airbus
The A330neo program was declared at this year’s Farnborough air show and has so far won orders for 121 units from three airline operators. The A330neo will help Airbus compete with the 787 Dreamliner and the 777X. The aircraft is already pretty popular among carriers. Recently the aircraft bagged orders for 25 units from Delta Airlines that preferred the A330neo over the Dreamliner. This should be encouraging news for the investors.
So while investors might be worried about the prospects of the A330, they should bear in mind that the plane in nearing the end of its life. The positive takeaway is that before the A330 lost its charm, Airbus announced its revamped version that has been drawing positive attention. What remains to be seen is whether the A330neo can surpass the glory of its predecessor and take Airbus to the next level with its contest with Boeing.
