How Will Airbus’ U.S. Manufacturing Unit Impact Boeing?

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Airbus will formally inaugurate its new U.S. manufacturing facility in Mobile, Alabama on September 14th, 2015. This will be Airbus’ fourth A320 family assembly line after France, Germany and China. The new production line will also impact Boeing (NYSE:BA) as Airbus’ plant will further challenge Boeing’s position in the U.S. single-aisle aircrafts market. Also, Airbus will start delivering A320neos as early as 2015, two years before Boeing’s competing version, 737MAX is rolled out. Furthermore, Airbus’ entry into different markets outside of Europe gives it a flexibility to reduce the production rate, if the need be in future. It won’t be easy to do that in Europe due to strict labor laws and unions. On that note, we discuss below the impact of Airbus’ new production line on Boeing.

See our complete analysis of Boeing here

Increased Competition In The U.S. Market

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With Airbus rolling out aircraft from its Alabama facility as early as 2016, Boeing now faces increased competition in the U.S. market in single-aisle aircraft. Airbus will now have the capacity to cater to increasing demand for single-aisle aircraft from U.S. airlines, which are looking to replace their aging fleets with more fuel-efficient aircraft. Now Airbus’ A320neo offers 15% fuel savings and lower levels of noise production and emissions in comparison to A320. Boeing is also upgrading its single-aisle aircraft with the Boeing 737MAX, that according to its specs will offer even higher fuel savings than the A320neo.  But the first 737MAX is not expected to roll out before 2017, providing Airbus with significant lead. Airbus expects to start deliveries of A320neos as early as this year from its other plants. As a result, Airbus has now positioned itself for a larger share in single-aisle aircraft category in the U.S. market.

While both Airbus and Boeing have a strong order book, Airbus is running ahead in the race. This year Airbus has received 708 net new plane orders as compared to 447 for Boeing. Overall the backlog for Airbus currently stands at 6,697 planes as compared to 5,710 for Boeing. [1] [2] It will take 10 years for Airbus and more than 8 years for Boeing to complete these orders at current production rate. While this is good for both the companies as it supports long-term cash flows, the former would seem to have greater momentum.  As we have noted previously, however,  Airbus has greater market share in the single-aisle segment of the market, largely on the strong position of the A320.  Boeing has the strong position in the wide-body segment, where lower unit counts and higher selling prices prevail.   Also, its not just Airbus it is competing with, there are more new players, such as China’s Comac, Russia’s Irkut and Mitsubishi’s Regional Jet. All these aircrafts already have an order book to cater to, reflecting the high demand for aircrafts and impatience of airlines for long lead times to delivery. If the order cancellations intensify for Boeing going forward, it will result in lower global market share of airplane deliveries. While we believe that Boeing will be able to maintain its current market share of 45%, if Boeing’s market share falls to 40%, then there could be a potential downside of around 10% to our price estimate. This is possible as the waiting period for airlines is very long with Boeing as well as Airbus. And Airbus’ lead in upgraded planes could spoil the party for Boeing (see – Boeing Will Sustain Its Current Market Share In Commercial Airplane Deliveries).

Labor Rates And Production Flexibility More Favorable For Airbus

Airbus’s new facility in Alabama offers lower wage rates as compared to Washington, which will help it compete with Boeing on per-head cost basis. Also, most of the workforce will be non-union, which will help Airbus avoid union-related production delays. Having said that, Boeing will benefit from economies of scale as it clustered its entire 737 manufacturing in one place as compared to four locations for Airbus.

Airbus’ expansion outside of Europe will also offer it a flexibility to tune the production rate as the time demands, a benefit which was long enjoyed by Boeing, evident from its workforce pattern. Boeing’s workforce dropped from 122,000 in 1998 to 53,500 in 2004 and currently stands at 84,000. [3] Such swings are next to impossible for European companies amid strict labor laws and union bodies. Now that Airbus has expanded its assembly lines outside of Europe, it will have the flexibility to reduce the production rate, if the demand turns subdued. While that may not be the case at least for a decade, given the current order book, it will surely be of great advantage in the very long run. Now that Airbus’ Alabama facility will soon be operational, Boeing must ensure that there is no delay in 737MAX rollout, as that would give Airbus further lead to grow its global market share of airplane deliveries.

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Notes:
  1. Orders & Deliveries, Boeing []
  2. Orders & Deliveries, Airbus []
  3. Opinion: Unspoken Benefit Of Airbus’s Alabama Site, Aviation Week, Sep 8, 2015 []