Will Airbus Turn Boeing’s Dreamliner Into a Nightmare?

Nikita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Boeing  who is struggling to keep the Dreamliner in the sky is ready to face another storm - this time in the air. The much awaited member of the Airbus’ new family of super-efficient aircraft – A350 –XWB was finally unveiled at the Toulouse-Balgnac airport in France. The aircraft was on its first test flight which went off without a hitch much to Airbus’ relief as the A350 had a turbulent history of the production process. The A350, Airbus’ latest toy in the aviation world will compete with Boeing’s 787 Dreamliner - the most talked about passenger plane in recent history. The company has already received 600 orders which was icing on the cake after the successful test flight.

A child Airbus never wanted to conceive

The A350 has been directly pitched against Boeing’s Dreamliner as a long range, extra wide body aircraft that would set new standards in fuel economy and environment-friendly performance. The launch of the Dreamliner forced Airbus to come up with an equivalent machine as airliners around the world were getting attracted to the new concept of long-range aircraft that also provide significant fuel efficiency to cope with rising oil prices. But the initial design,m which was more of a makeover of the A330, failed to impress the aviation experts as well as the potential customers which includes the head of Singapore Airlines and International Lease Finance Corporation. Airbus came under severe criticism for coming up with a half-hearted effort.

Airbus was forced to come up with a new clean-sheet design that resulted in the birth of the A350.

Boeing vs Airbus

As Boeing struggles to keep its Dreamliner in the skies after the battery-fiasco, it faces a tougher challenge to maintain its market share with the arrival of the A350 in the limelight. Both aircraft offer the most advanced technology in the history of the aviation sector which combines the usage of lighter composites that result in higher fuel efficiency and easy maintenance. Airbus claims that the new aircraft will consume 25% less fuel than the other aircraft in the category.

Dreamliner is made up of 50% composites and it claims to be 20% more fuel efficient than any other aircraft in the category. On the other hand 70% of A350's structure is made up of combined composites (53%), and alloys of aluminum and titanium.  Also, the A350 is the first aircraft from Airbus to have its wings and fuselage completely made up of reinforced carbon polymer. All these facts reinforces Airbus' claim that the A350 would be the most fuel efficient machine in its class. The A350 also comes up with a custom designed power unit designed by Rolls Royce and claims to have lower emissions and noise than permitted at current levels. Airbus learning from the mistakes of Boeing is sticking to the traditional proven technology of nickel-cadmium.

Airbus expects that the global demand for this category of passenger planes would reach 6,500 by the year 2020. The company expects to obtain the necessary approvals for the aircraft for commercial flying in the next one year and deliver the first aircraft by 2014.

Missing the big party!!!

Even though the first flight test was a success, Airbus is in no mood to get complacent and rush things. The company is keen to complete the series of flight tests instead of rushing the aircraft to Paris Air Show. Boeing for the time being can have the last laugh at the upcoming edition of the Air Show as both Airbus and Bombardier (TSX: BBD.A) (TSX: BBD.B), which is coming up with its CSeries narrow bodied aircraft are at critical junctures of their development.

Bombardier is a leading manufacturer of regional and business jets based in Canada. The company is very optimistic about its upcoming passenger jet in the CSeries family which is yet to make its first flight. However, it has a tough task ahead entering in the narrow-body market which has always been dominated by Boeing and Airbus with their flagship models - Boeing's 737 and Airbus' 319 and 320. The company claims that its CSeries aircraft is made up of lighter materials and an advanced engine which makes the aircraft quieter and more fuel efficient that has the potential to compete with the best in class.

Who's the best to invest in?

Boeing and Airbus have always had a duopoly in the industry. Even though Boeing had been ahead of Airbus in the past, Airbus seems to have turned the tables. Learning their lessons from the experience of A380 as well as the problems faced by Boeing in its Dreamliner project, Airbus has taken a very cautious approach with A350 which might go in its favor. Bomabardier is not expected to pose a threat in the segment for both the big players. The company failed to get any orders for its Cseries aircraft at the Paris Airshow.

Lets do a relative valuation of the three players. We have included European Aeronautic Defence and Space Company (NASDAQOTH:EADSY), the parent company of Airbus as its proxy for valuation purpose.

Company

Trailing Price-to-Earnings Ratio

Forward Price-to-Earnings Ratio

Total Enterprise Value to LTM Revenue

Total Enterprise Value to LTM EBITDA

Boeing

14.15x

10.32x

0.64x

9.76x

EADS

26.39x

14.95x

0.55x

7.23x

Bombardier Inc

19.53x

16.33x

0.94x

9.80x

On a trailing P/E ratio basis, Boeing appears to be the cheapest of all. The company is trading at 14.15 times earnings. The investors seem to be optimistic about the performance of the Dreamliner. Airbus on the other hand is struggling with the performance of its A380 aircraft and appears overvalued on the basis of the multiple. Like the company, the investors are taking a cautious approach as well.

Airbus seems to be cheaper in terms of the Enterprise Value multiples trailing at a LTM Revenue multiple of 0.55 and EBITDA multiple of 7.23.

The Foolish bottom line

The aviation sector is getting ready to witness an interesting battle between long time rivals Boeing and Airbus. As the Dreamliner struggles to keep its wings in the sky, Airbus is playing smart in launching its new baby the A350. The company been proactive in the development of the new aircraft and has also taken feedback from the mistakes committed by Boeing – the battery fiasco.

Even though Boeing appears to be cheaper it does not mean its a buy. The markets are yet to recognize the synergies of A350 which means its a good time to invest in Airbus. In my opinion, Boeing will have tough times ahead and the the Foolish investors should avoid boarding the US giant as the stocks may nosedive when the Airbus would force it to switch off its auto pilot.


Nikita Bajaj has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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