1. AIRBUS & BOEING
A FINANCIAL ANALYSIS
Airline Industry
May 31, 2014
Taposh Dutta Roy
& Team
2. Boeing Overview
• Founded 1916 in Washington State; HQ in Chicago
• Leader in commercial and defense aircraft; defense,
satellite and space systems
• Acquired several aerospace pioneers (e.g. McDonnell
Douglas, Rockwell International)
• Ambitious 787 Dreamliner – composite materials, fuel
efficient - $32B program cost
• 2013 – 648 aircraft delivered, $86.6 billion revenues
3. Boeing Corporate Governance
• James McNerney:
• Elected to serve as CEO and chairman of the board July 1,
2005
• Salary for 2013 $1.9 million
• Awarded $3.7 million in stock option grants
• 20 analysts cover Boeing
• CEO is the only insider on the Board
• None of the individual Board members hold a
disproportionate amount of stock
• Most of the top owners are equity firms
4. Boeing Corporate Governance
“The Board’s compensation should be a mix of cash and equity-
based compensation with a significant portion of such
compensation in the form of the company’s stock or stock-
equivalent units. Non-employees directors receive a substantial
portion of their compensation in deferred stock units, which must
be held until retirement or other termination of Board service.”
-Boeing filing SEC
None of the individual board members or the companies for which
they work own a disproportionate share of stock. Many of the top
firms are equity firms.
5. Airbus Overview
• HQ in Blagnac, France
• 1967 – consortium of European aerospace firms to
compete with US firms
• 1970 – Airbus Industrie formed: French, German,
Spanish, British government backed entities
• 2001 – consortium is merged as European Aeronautic
Defense and Space Company (EADS)
• 2013 – 626 aircraft delivered, € 59.3 billion revenues
• 2014 – Rebranded Airbus Group: Airbus, Airbus
Defense and Space and Airbus Helicopters
6. Airbus Governance
• Prior to December 2012, the governments of Germany
France and Spain had effective veto power over
management decisions
• Dec 2012 – ownership overhaul – more “normal”
shareholder democracy – state entities own 28%
• Board makeup and insider holdings do not reflect
management balance of power
• 28 analysts covering; information broadly available
• CSR – adopting industry goals, not leading
• Ranked 73 of top 100 in Reputation Institute survey
7. • 72.6% held by institutional investors
• Four executives are in the top five direct holders
• Institutional ownership is down 12 million shares
Stockholder Analysis — Boeing
8. Stockholder Analysis — Airbus
• Merger with BAE
systems stopped by
company insiders
Sogepa & GZBV
(2012)
• Gov’t influence
relinquished allowing
Airbus to make major
business decisions.
9. Risk & Return: Boeing
Debt $43,427,702,772
Equity $103,136,011,176
Tax 27%
β(L) 1.28
β(U) 0.89
R(f) 2.73%
MRP 5.00%
R(e) 9.11%
R(d) 3.73%
WACC 7.22%
Used weekly data from 2009 through
2013 from Boeing and S&P 500 to
calculate regression:
y = 0.00036 + 1.28x
The weekly return averaged 0.32%
which results in estimating that Boeing
performed 0.12% better than expected.
R(f) (1 – β ) = -0.096%
Intercept – R(f) (1 – β ) = 0.1161%
Annualized return yields 5.97%
10. Risk & Return: Airbus
Debt $4,260,048,961
Equity $43,549,799,506
Tax 27%
Beta(L) 0.96
Beta(U) 0.89
R(f) 2.43%
MRP 5.60%
R(e) 7.44%
R(d) 3.43%
WACC 7.00%
Used weekly data from 2009 through
2013 from Airbus and CAC 40 to
calculate regression:
y = 0.0041 + 0.958x
The weekly return averaged 0.46%
which results in estimating that Airgus
performed 0.36% better than
expected.
R(f) (1 – β ) = 0.085%
Intercept – R(f) (1 – β ) = 0.36%
Annualized return yields 19.7%
11. Dividend Policy & Analysis — Boeing
• Payout ratio consistent over 5 years
• 2009 was different – program problems = lower earnings
• Maintained dividend but paused stock repurchase for 3
years
Boeing 2013 2012 2011 2010 2009
Cash Dividends $1,642 $1,360 $1,263 $1,245 $1,233
Dividend per Share $2.19 $1.81 $1.70 $1.68 $1.68
Stock re-purchase $2.8 B 0 0 0 $50M
Payout Ratio 0.36 0.35 0.32 0.37 0.89
Dividend Yield 2% 3% 3% 2% 3%
12. Dividend Policy & Analysis — Airbus
• Payout ratio growth over 5 years
• 2009 saw challenges with programs and orders
• Company posted a loss for the year
• Paused both dividends and stock repurchase
• Shareholder mix maybe have made this easier option
Airbus 2013 2012 2011 2010 2009
Dividend payout €587 €492 €366 €178 --
Dividend per share 0.75 0.6 0.45 0.22 0
Stock re-purchase €500M €31M €12M €40.5 M 0
Payout Ratio 0.41 0.40 0.35 0.32 0.00
Dividend Yield 1% 2% 2% 1% 0%
13. Dividend Policy & Analysis
• Last 5 years paid lower
dividend than max Possible
• Manage a stable dividend
growth
• Last 5 years paid higher
dividend than max possible
FCFE
• Manage a stable dividend
growth
14. Dividend Policy & Analysis
Boeing pays lower dividend as compared to the free cash flow
to equity. There is more room for Boeing to pay higher dividend
to its shareholders. Airbus has maintained a consistent dividend
policy and has paid more than their free cash flow. We would
recommend Boeing to pay more dividends and Airbus to
maintain their current dividend to shareholders
15. Measuring Investment Returns
• 2013 Equity Return Spread
44.21ROE - 9.11Re = 35.10%
• Equity growth significantly
outpaced net income in
2012 and 2013 trending
ROE downward
• 2013 Capital Return Spread
23.68ROC -7.22WACC = 16.46%
• Debt decreased from $12B
to $8B over previous 5 yrs.
• Creating surplus value over
past 5 years
16. Measuring Investment Returns
• 2013 Equity Return Spread
13.64ROE – 7.44Re = 6.20%
• Net income growth trending
ROE upward
• 2013 Capital Return Spread
8.20ROC -7.00WACC = 1.20%
• Positive Firm EVA in 2012 &
2103 after 3 prior years of
negative value
18. Capital Structure Choices
Benefits /Costs
Tax Benefits
Management
Discipline
Bankruptcy Costs
Agency Costs
Flexibility
Boeing
Low
Medium
Medium
Medium
Medium
Airbus
Low
Low
Medium
Medium
Low
Risk associated with A380
& 777 Production
19. Valuation
• Stable growth model used
• Mature companies and markets
• Intense competition
• Significant growth expected in China & India
• Large back log of orders
• Valued using FCFF model
• Changing debt ratios
20. Valuation
• Higher valuation due to higher growth rate based on 5
year CAGR of revenue
• Airbus lower valuation:
• Higher costs (97% of sales vs. Boeing 93%)
• Twice the WC as Boeing, main cause is inventory
Firm Value
$(MM)
Value per
Share
Market Value per Share
as of 12/13/2013
Boeing $202,744 $213 $136
Airbus $64,590 $77 $56
