Airbus’s (AIR) decision to stop making the A380, the largest passenger aircraft in the world, from 2021 has sent shockwaves through the aerospace industry and prompted fears over a slowdown in European industry and loss of jobs.
The move, just 12 years after the A380 entered service as a rival to Boeing’s iconic 747 jumbo jet, could have a knock-on effect on other sectors and companies at a time when European growth is grinding to a halt: Italy has just entered recession and Germany’s economy posted 0% growth in the last quarter, while Brexit and the US-China trade dispute are obvious headwinds for globalised industries such as aerospace and automotive.
The catalyst for the decision, which was announced by Airbus on February 14, was Dubai-based airline Emirates cutting its A380 fleet size from 162 to 123 aircraft. However, Emirates is shifting to other models made by Airbus and has ordered 70 A330 and A350 aircraft.
FTSE 100-listed Rolls-Royce (RR), for example, makes the engines for the A380, but also for the smaller aircraft ordered by Emirates.
Like the car industry, the business of making planes involves a pan-European chain of logistics and construction. The decision to scrap the A380 could affect up to 3,500 jobs involving 21 sites in the UK, Spain, France and Belgium. The company says the financial impact has already been absorbed in 2018’s costs, but the decision raises wider questions about the financial feasability of making expensive aircraft across multiple locations.
Morningstar analysts were sanguine about Airbus’s prospects despite the decision to stop making the A380 as 2018 results beat expectations. Analyst Chris Higgins argues that Emirates’ decision to order other Airbus models should cushion the blow from the cut to A380 demand. Given the stronger 2019 outlook, he expects to raise the fair value estimate for Airbus by 10% to above €116 per share, higher than the current price of around €100.
No-Deal Brexit
Toulouse-based Airbus has been one of the biggest European companies to warn of the consequences of a no-deal Brexit. The company is spending tens of millions in preparing for a no-deal Brexit, its chief executive Tom Enders said last week. Enders, who steps down in April this year, told people not to listen to the “Brexiteers’ madness” and described the Government’s current approach as a “disgrace”. Airbus employs nearly 15,000 people in the UK, making it one of the country’s largest manufacturers.
Enders said: “Aerospace is a long-term business and we could be forced to redirect future investments in the event of a no-deal Brexit and, make no mistake, there are plenty of countries out there who would love to build the wings for Airbus aircraft.”
Airbus has been locked in rivalry with US giant Boeing (BA) for many years and the A380 was an attempt to tackle the 747's hegemony. Boeing’s 787 Dreamliner is a midsize aircraft, unlike the A380, and the company currently has a backlog for this model. Boeing took out adverts the day after Airbus’s decision to scrap the A380 with the strapline, “The Future of Aircraft is Built Here”. Boeing has also been boosted by President Trump’s increased defence spending, while Airbus has been hit by a reduction in defence procurement by European governments.
