Investment Tip: Airbus on InvestorGeeks

Airbus is in deep do-do (2). The company that was heralded as the role model of a European Corporation, is well, getting bogged down in the reality of Europe. If there is one thing that the European governments and the American Federal government share it’s getting bogged down in details and bickering. Conventional wisdom says that Airbus is a dud stock! After all there are financial problems, A380 shipping problems, and let’s not even talk about the hen pecking between France and Germany.

The A380 was supposed to be the flagship product for Airbus. It was supposed to revolutionize air travel. The A380 will carry at least 555 with a maximum of 853 people, and that scares me. To understand the dimensions of this size, while waiting for a plane at the Frankfurt airport I was timing how fast a 747’s luggage can be unloaded. If you have ever seen the 747 unloaded there are no individual pieces of luggage, instead huge boxes are mechanically transported off the plane. A 747 can carry a maximum of approx 524 people, and unloading this particular 747 required 28 minutes. Extrapolating passenger count, I am guessing an A380 will require about 45 minutes to empty. Think about that, imagine waiting over an hour for your luggage to come rolling down the conveyor belt!

Now imagine trying to board a plane of such dimensions. The A380 is an example of cattle class where the only solution to boarding will be to herd people. And of course the airports that are already stressed with too many travelers are going to have a field day with a dozen A380’s on the tarmac. The economics of this beast for traveling is horrible, and I for one am going to avoid this beast like the plague.

Yet I am bullish on EADS, Airbus, and the A380. The reason why I am bullish relates to a topic my sister and I discussed. It seems Ecuador is trying to become one of the world’s largest rose producers. As I talked to her about this a light-bulb went off. Roses cannot be shipped by water, but have to be shipped by air. And companies like Fedex, and UPS do quite a bit of shipping. Recently UPS expanded its European operations at the Cologne/Boon hub. The Cologne Boon hub is a small airport, but UPS does fly quite a few flights. This asks the question are Fedex and UPS buying A380’s? Yes they are (1,2).

The fact that FedEx and UPS are interested in the A380 should tell us that shipping could be revolutionized. The A380 has intercontinental reach with a huge payload while still remaining efficient, meaning kiwi’s from New Zealand could be shipped to a local European or North American market within 24 hours. It will bring new meaning to freshness and globalization. It will also mean that I in the future could buy my computer directly from Asia, instead of a middle person in my local market. That monetary potential should make us all bullish on the A380, and the shipping companies. Though, it does not mean I will buy Airbus stock tomorrow, but might later on.

Hello There Mr Roboto!
(the song and era says it all... http://www.devspace.com)

Tuesday, Oct. 31, 2006 by Christian

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25 Comments Add your own Subscribe

1. Phil John | November 1st, 2006 at 9:32 am

Aren’t you forgetting that oil prices are going up. If they keep going up, we may see a situation where it is cheaper to produce fruit and vegetables locally and not transport them, rather than grow them in a cheap location and fly them on an Airbus 380. I know that in Australia, we export largely by boat as it is generally far cheaper (e.g. wheat, sheep, cattle) etc.

More to the point, why would that future favour Airbus over Boeing? As I see it, if your thesis is right, then the A380 must be more economical than Boeing’s revised planes. Most airports need converting to accept the A380 - Sydney has had its runways widened. I am unsure if smaller airports, like NZ, can take the A380 right now. Can the Cologne airport receive the airbus?

Why would we buy Airbus and not FedEx or UPS?

I recall reading recently that someone involved in purchasing the 380 said “to not expect further delays in the delivery of the 380 would be foolish”. I also recall reading something about Airbus focussing on the 380 first, and so losing the jump to Boeing on the smaller planes, sold in higher volume.

Don’t get me wrong - I like Airbus and I want them to succeed, I just think your article was light on facts of why we should favour Airbus over Boeing.

Here - I did a quick google search and found this:

http://stocksadvice.blogspot.com/

Scroll down to 22 October 2006.

Then there is this article here:

http://www.usatoday.com/money/biztravel/2006-06-13-a-380-usat_x.htm

And this here:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/10/03/cnairbus03.xml

This would be a good article to talk about why Airbus is hamstrung in operational decisions – it has to answer to multiple governments, some of whom get angry when they invest money in plants that then get shut down or recharacterised.

I also found this here:

http://money.cnn.com/services/tickerheadlines/for5/200610310446DOWJONESDJONLINE000174_FORTUNE5.htm

Anyone who has been to Japan knows that JAL transports a LOT of cargo (little islands – lots of people. Guess where they get their food from?) You should also know that the Japanese love:
a) exotic food;
b) fresh food; and
c) food from ‘organic’ or ‘clean’ suppliers.

I don’t know if they eat a lot of kiwi fruit, but I am sure they see NZ as a clean source of food. If JAL is moving to a fleet of smaller planes, doesn’t that favour Boeing?

I would like to see a bit more of a story weaved into InvestorGeeks posts. Maybe some numbers, some technical or fundamental analysis – a nice P/E or dividend yield that says “yep, Airbus has problems, but it is now half the price of Boeing – average company, cheap stock vs. good company, expensive stock”.

Phil
2. Christian | November 1st, 2006 at 12:37 pm

Hmmm

* Regarding the price of oil. It’s all relative. Shipping requires oil, trucking requires oil, and so does a train. Trucking is very expensive fuel wise, yet it has not stopped people from running trucks across continents. Ships and trains are the most efficient, yet they are only used when necessary. If I am not mistaken in Australia don’t they use the super-long-trucks?

* If growing locally were a better option then I why am I buying Granny Smith apples from Chile. Shipping by water is cheaper for those items that can be shipped by water. As in my rose example, it is cheaper to produce them in Ecuador and then ship them to North America or Europe. For South America an A380 cargo plane would make everything more economical.

* I have no idea why you are making this an Airbus vs Boeing discussion. I only mentioned Boeing because right now the jumbo is the biggest plane, and I mentioned how long it takes to unload a jumbo so that I could extrapolate to an A380. From there I made the comment that I would avoid the A380 like the plague.

* I am not debating the topic of using the A380 for humans, instead of smaller lighter planes. What I am saying is that the A380 will probably not do well for humans, but its silver lining may be shipping. Right now the focus has not been on planes where its primary use is shipping (outside of the armed forces). Most cargo planes are humans oriented planes converted into cargo.

* Regarding your links. In my first paragraph I did address the issues:

You said, “This would be a good article to talk about why Airbus is hamstrung in operational decisions – it has to answer to multiple governments, some of whom get angry when they invest money in plants that then get shut down or recharacterised.”

I said in my first paragraph, “and let’s not even talk about the hen pecking between France and Germany.”

* You critique me that I did not do enough analysis. Well, I could could ask if you followed my A380 link and clicked on the freight icon? If you had it would have said:

“The A380 opens up exciting new possibilities for airline freight operations.
…
In its all-cargo version, the A380-800F will be the first commercial freighter with three full cargo decks – offering the unprecedented capability to carry a 150 tonne payload over distances of 5,600 nm. This range enables the A380-800F to fly most major cargo routes non-stop, enhancing productivity by spending more time in the air. On a 5,000 nm. sector, the A380’s direct operating cost is a full 21 per cent lower than the largest competing freighter.”

Look at those stats, and then think about what this means to a company like FedEx, UPS, DHL, etc.

Regarding the fundamental analysis, I am going to create a blog entry about what I feel are misconceptions regarding P/E, etc.
3. Jason | November 1st, 2006 at 9:02 pm

Thanks for the thorough analysis, Christian.
4. John Rhodes | November 1st, 2006 at 9:16 pm

I’ve been very lucky, yes lucky, with two stocks recently…

Microvision (MVIS)
8X8 (EGHT)

I’ve been using some sort of weird heuristic to pick stocks and I’ve done very well. I chalk it up to luck. I mean, total luck. But I have to tell you, luck has been filling up the piggy bank without much effort.

What is it about our intuition that guides us to higher profits and smart investments? Why is our gut so smart? Just something to ponder, eh?

On the specific topic of your posting, I see the relation between Airbus and FexEx, but at the same time, I’m not sure I care enough to make an investment decision. The comments about oil are also intersting but they don’t drive me too much.

To me, Airbus is a good buy (or bad buy) based on long term prospects and value, along with management, alternatives, and more.

My apologies for wandering all over the place…
5. Dan | November 2nd, 2006 at 3:56 am

Seems to me Boing is going to do very well with the 787 (as a next generation efficient plane). They’ve also recently announced plans to come up with a new 747 configuration that boosts passenger count by moving the galley to the upper deck.
Not that I’d necessarily rush out and by Boeing, but it has been rising steadily and might well have a way to go.
6. Phil John | November 2nd, 2006 at 5:38 am

More to the point - FedEx, the launch airline for the A380, has only ordered 10 planes (begins delivery in 2009, which suggests late 2007 could be a good time to buy before people start pricing in the good news of delivery).

However, they just ordered NINETY Boeing 757s to replace their aging 727 fleet. If you look at their current fleet, you will see it is weighted towards Boeing.

Also, FedEx are only using the A380 for flights from asia to the US - likely because, as I discussed, if you want to land an A380, you need a wider runway and it is only the major airports that have gone to the expensive of upgrading (e.g. in Australia, I believe only Sydney airport has widened its runways so far). I doubt low cost countries, such as Chile, are in a mad rush to upgrade their airports to accept the A380. I could be wrong though.

As I also mentioned, there is a push by some cargo airlines, such as JAL, to move to smaller planes. With the A380, you can move large quantities, but you can’t place it where you want it - both to load and unload. Once you are at a hub, the goods must be shipped, trucked or sent by rail to their destination. If you are FedEx, with an integrated distribution network, that might work. Otherwise, you might purchase the smaller, economical Boeing planes.

Honestly, I don’t know - its all just opinion.

Phil
7. Christian | November 2nd, 2006 at 6:26 am

Phil: I agree before you can start pricing in the news I would also look at Airbus again in 2007. The reason why I mention Airbus now is because when I trade a stock I would like to follow it based on headlines for a year or so. I like to get a good feel for the company, and its perception in the industry. I also like to look for a good story.

What lead me to thinking about the A380 was the air freight story. Consider the following links.

http://en.wikipedia.org/wiki/Cargo_ship

http://en.wikipedia.org/wiki/Freight_aircraft

http://en.wikipedia.org/wiki/Air_freight

http://en.wikipedia.org/wiki/Cargo_aircraft

I pulled the following quotes:

“Larger cargo airlines tend to use new or recently built aircraft to carry their freight, but many use older aircraft, like the Boeing 707, Boeing 727, Douglas DC-8, Ilyushin Il-76.”

“Most conversions are carried out on older aircraft no longer suitable for passenger use, often due to changing safety or noise requirements, but there is also a market for new-build freighter designs.”

For the wikipedia link Air freight look at the companies doing business with cargo only. These are the companies buying A380’s.

Regarding the hubs, the reason why I mentioned Cologne is because something very interesting applies to cargo. I watched a Discovery program about the Cologne hub. Cargo has a different set of rules than passenger planes. The different rules apply to runways, take-off/landing times, etc. The rules are biased towards the freight companies.

http://news.bbc.co.uk/2/hi/americas/6059742.stm

The airports that serve humans are not the same airports that serve cargo, and thus the cargo companies don’t need access to the big airports or human airport hubs.

http://www.flyrichmond.com/HTML/Air_Cargo_Pages/Air_Cargo.html
http://www.nemacargo.com/about.php

I think that the A380 will be the first “Mac Truck” of the skies that is not military as air freight does not yet have the super tanker of the sky. There are lots of vans in the skies, but not super tankers.

I dug around a bit more:

http://en.wikipedia.org/wiki/A380

Fedex ordered 10 with options for another 10, as did UPS that ordered 10 with options for another 10. Lufthansa another big cargo company ordered 15 with options for another 10.

Though I do agree at this stage it is opinion, but I am tending to think it will become a growth area once the A380 hits its stride.
8. Steve | November 2nd, 2006 at 4:45 pm

Just from a stock trading point, I’d rather invest in FedEx or UPS because too many things can kill airbus dead. 1) Lack of orders 2) Delays 3) A plane crash 4) Lack of airports that can accomodate the plane, 4) Delays.

Even if any of these things occur, FedEx and UPS will stay in business. They could even buy a Boeing instead of the Airbus. I think it’s a safer bet. If the Airbus stuff works, FedEx and UPS would probably reap the benefits and if Airbus fails, FedEx and UPS would still be fine.

I avoid airlines/airplane stocks like the plague, but that’s just me.
9. Christian | November 3rd, 2006 at 4:23 pm

Latest Airbus News: Here in the business news the following has been said:

1) Airbus has plenty of work, as their order books are full for years to come.
2) The problem with Airbus is R&D monies. They ran out. The new planes are swallowing more R&D costs than anticipated.
10. Nagel | November 5th, 2006 at 9:04 am

Airbus has been in trouble for months now. Government issues in a company like this will never be good for the long run.
11. Phil John | November 7th, 2006 at 7:54 pm

Christian

Is that an emotional decision or a logical one?

From what I can see, your theory has been pummelled.

http://news.moneycentral.msn.com/provider/providerarticle.asp?feed=OBR&Date=20061107&ID=6176106

This could be the start of a wave of cancellations, especially since I bet Airbus would have tried everything possible to keep its “launch airline” and biggest customer. If FedEx are going, who is next? Are Airbus going to slow down production, or try and sell the 10 A380s to another airline on the cheap? Falling profits you say?

Unless they get horrendously cheap from here, there is no buying opportunity. Looks like they are down 3% so far… I would think 10% or 20% would be more like it. Lets see what happens in the coming months.

Phil

PS This is a long term play and I would not be buying for around 2 years. At that point, all this bad news will be fully priced in and they may have some potential that is unappreciated. Time will tell.
12. Phil John | November 7th, 2006 at 7:58 pm

BTW - did you notice FedEx purchased 15 Boeing 777s - “the worlds largest twin enginged cargo plane”?

See my posts above on why smaller aircraft might be more valuable to a company like FedEx. They appear to be following the trend of JAL and avoiding four engined planes.

….perhaps I should be writing for Investor Geeks.

Phil
13. Vince | November 7th, 2006 at 10:55 pm

It sounds simply like an emotional gut check. I re-read the article.. and where are any solid numbers to back all this “logic” up? Hoping deals get done isn’t investing, it’s pure speculation.. speculations that are mere hopes and gut checks often get dashed.
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