28 April 2020 by jbchevrel
Airbus (AIRFP) will report tomorrow. Today the 5y CDS closed at 195bp. That is the wide (widest since the sovereign crisis). Pre covid, seemingly a long time ago, the 5y protection was worth around 35bp. CEO told employees in a letter that the company is “bleeding cash at an unprecedented speed, which may threaten the very existence of our company”. Q1 cash flows are deeply negative at both AIRFP and its main competitor Boeing (BA). In the area of -E6.5bn at AIRFP according to company guidance (although some analysts call closer to -E10bn) and in the area of -$8bn at BA. Vs Q1-19, AIRFP CF was -E4.3bn back then. The E3.6bn regulatory fine will weigh, and that may well take CF through -E8bn. On March 23, AIRFP pulled earning guidance. On April 8, AIRFP pulled production guidance. They said they will cut production by -1/3 (60 A320s to 40, 40 A330s to 24, 10 A350s to 6). Production-wise, AIRFP had a solid Q1, it produced 182 aircraft (vs 162 delivered in Q1-19). But among the 182 aircrafts, just 122 were effectively delivered to the clients… The 60 planes in inventory are, vs Q1-19, another factor to argue we may well see CF through -E10bn. In the current context, airlines obviously don’t need/accept new planes. Some airlines such as Virgin Australia are in administration, or close to be. Southwest Airlines Co. (LUV) is in talks with banks about raising billions of dollars in new common equity, convertibles and debt. LUV reported before the open. They posted a narrower-than-expected Q1 loss (-$77mn) and cut their Q2 cash-burn rate by about half vs pre-covid. Lufthansa is considering court protection as a last resort should the sides fail to reach an agreement on the multi-billion (could be >E8bn loan), although German leaders had promised not to let Lufthansa fail, under their terms. The timeline of capacity reductions will be key to AIRFP. But it feels unlikely to see demand for airplane travelling picking up significantly before Q4, making plane orders unlikely to recover before 2021.