Europe’s aerospace giant Airbus (EPA: AIR) has given investors some hope that the sector will recover from the pandemic crisis with its ambitious production targets for the 2021-2025 period but not everybody is convinced that these targets are realistic.
After posting some fairly lacklustre results at the end of April when it announced a net decline in orders and warned the crisis was not over, there was little movement in Airbus shares. One month later Airbus surprised the market with bold output plans, prompting a jump of about 10% in its stock price.
So bold were its plans though that IATA director general Willie Walsh (formerly BA chief executive), told reporters the next day to wait and see: “Obviously there is a huge disconnect between what the manufacturers say they’re going to produce and what the airlines decide to buy,” he said.
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Investors must now grapple with the questions of whether the air travel industry is set for a big enough rebound from its worst ever crisis to justify Airbus’ targets and if so, then whether there’s potential for further gains in its share price.
Company fundamentals look good despite pandemic
On first glance, Airbus’ figures for the first quarter are on the bleak side. Net airplane orders were minus 61 compared to 290 in the same quarter last year. Meanwhile, its chief rival Boeing (NYSE:BA) reported positive net orders of 76.
But looking ahead and at Airbus’ upbeat guidance (which related to its narrow or single aisle models) there are two factors that put it on a good footing vis-à-vis its largest competitor: it’s predominance in the single-aisle segment and its financial position.
Concerning the first, Airbus’ single-aisle plane range puts it in a good vantage point to capitalise on the recovery as the additional revenue passenger kilometres and the fact that these planes now have a greater range have increased their popularity with airlines.
As for its financial position, Airbus’ balance sheet has of course been hit by the pandemic but its rival has to cope not only with the pandemic but also the debt accrued from the grounding of its 737 MAX planes after a crash in 2019 in Ethiopia.
For the industry as a whole, IATA’s chief Walsh might be sceptical but in a recent economic report, the alliance said there was no doubt that air travel would improve due to strong evidence of pent-up demand (here it pointed to the sharp spike in demand in the UK for travel to ‘green list’ destinations), consumers’ accumulated savings and the recovery in the global economy.
This is the worst crisis the industry has endured if one makes a comparison with recent recessions, SARS and the 9/11 attacks, but most analysts agree that the industry will recover to 2019 levels by 2023. These would still be below what could have been but getting back on track nonetheless.
There’s a relatively new rival in the form of Comac (China’s state-owned aerospace company) which will take some demand, especially for Chinese domestic travel, which has recovered to pre-pandemic levels. Airbus has predicted that the market will become a ‘triopoly’ in the single-aisle segment.
But most analysts certainly remain convinced by Airbus’ outlook. After the targets were published several brokerages – JP Morgan, Deutsche Bank among them – reiterated their ‘buy’ ratings on the stock. AlphaValue upped its recommendation to ‘accumulate’ from ‘neutral’, describing the company’s guidance as “prudent”.
Is the Airbus share price already too high for a Covid play?
If one can be as bullish as Airbus about the recovery in the aerospace sector then the only question to consider is whether the potential has already been priced in and if this is the best opportunity in the sector.
Shares in Airbus were trading on Monday at 109.76 euros which is well below its pre-pandemic level of about 139 euros while the Euro Stoxx 50 is now trading higher than before the Covid crisis hit. Nonetheless, it’s already sharply up on its pandemic low of 57.87 euros.
Analysts’ target prices indicate upside. JP Morgan, which has a ‘buy’ on the stock, targets 138 euros, Barclays (also with a ‘buy’ rating) raised its target price earlier this month to 138 from 113 while Deutsche Bank upped its target to 122 euros from 109 euros and maintained its ‘buy’. Jefferies, however, bucks the positive trend, with a target price of just 90 euros and a ‘neutral’ recommendation.
With everyone expecting air travel to rebound and Airbus’ position in what looks likely to be the most sought after plane models, it’s hard to see how things would not get better for the group but it’s impossible to call at this stage whether Airbus is being realistic in terms of timing, although aerospace companies work years ahead in terms of orders.
There are still several unknowns regarding the pandemic (will the vaccines work against new variants for example? Will business travellers return or continue video conferencing?) but for investors willing to wait it out for some gains, this could be a good addition to their portfolios.
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