Airbus shows the limits of duopoly power

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Picture the following: you are one of a duopoly in a sector that is seeing skyrocketing demand, and your competitor is grounded by operational and financial difficulties. In most industries, that would be a recipe for profit lift-off. 

Not so, it would appear, for aircraft maker Airbus, whose stock plummeted more than 10 per cent on Tuesday as it warned about the pace of aircraft deliveries and continuing troubles in its Space division. The combination will lop €1.2bn — or about 18 per cent — off consensus expectations for earnings before interest and tax for this year, thinks Philip Buller at Berenberg.  

The problem is not that Airbus lacks a growth runway. Far from it. It has steadily pulled ahead of struggling rival Boeing in new orders. Before the shock warning, analysts had been expecting profits to roughly double to €7.5bn between 2023 and 2026, according to S&P Capital IQ estimates. 

Rather, Airbus’s problem is one of execution. It finds itself hamstrung by an inelastic supply chain, citing bottlenecks in aerostructures, cabin equipment and — most recently — engines to explain why it will deliver 30 aircraft fewer than planned this year. Its target of ramping up to 75 A320 jets a month has been pushed out by a year to 2027. That should have been on investors’ radar: the 12-month moving average for monthly deliveries is still below 50 according to Sash Tusa at Agency Partners. 

The unfortunate message from Airbus’s woes for airline passengers is to expect unprecedented fare increases to continue. For everyone else, it is that making planes is a complicated business. Ramping up production means training highly skilled staff and certifying parts and processes. Cutting corners is inadvisable, as Boeing has found to its cost. 

Duopoly power has its limits: supply capacity is not an area where Airbus is able to profit from Boeing’s distress. While the two share some suppliers, manufacturing is usually linked to specific programmes and is not easily fungible. Indeed, in the worst case, disruptions at one client can create ripple effects for the other — as highlighted by Airbus’s move to acquire some parts of Boeing’s supplier Spirit AeroSystems. 

Expectations for how much Airbus can truly benefit from Boeing’s woes have returned to earth. Even now, its production ramp-up looks challenging. And at this reduced valuation, the shares still trade on 28 times this year’s earnings, according to Deutsche Bank estimates. None of this points to a smooth journey for the stock.

camilla.palladino@ft.com