Dividends and Airbus jet production plan expose strategy rift with engine makers

When COVID struck and governments around the world closed their borders for public health, the airline industry which had seen greater and greater numbers of people travelling was was basically shut down. Now that vaccinating levels are increasing, people are willing to travel again and demand for aircraft is up. Airlines have to look to the future to have the correct sized plane at the correct terminal on the correct dates and it is a complex business. With increased demand, Airbus which has benefited from Boeing’s troubles wishes to increase production of its planes. That can be seen as a good thing for Airbus, but what about the supplier chain?

In an article by Tim Hepher of Reuters, the business model of Airbus is different than the business model of its supply chain. For example engines, similar to passenger vehicles, fuel efficiency improves every year and that can and does mean significant cost savings to the airlines. Generally as costs go down, profits go up. Airbus gets paid on delivery of new jets, allowing them to absorb fixed costs fairly quickly.

However on the engines supplier side, their business model has two aspects – building engines and servicing engines. If they are building more engines for more planes, the likelihood is some older aircraft will be retired and go to the desert or the engine companies will make less money on servicing older engines where profit margins are high, according to Teal Group analyst Richard Aboulafia.

The large aircraft engine producers are CFM – a GE-Safra venture, and Pratt & Whitney. All their CEOs have expressed concerned over the expanded production and the fact that many planes were not flying during the pandemic. They could come back into service so the engine companies could service them.

Another trend which affects airlines is from governments around the world want airlines to reduce their emissions and newer planes helps them accomplish that goal.

Linking to dividend paying companies, when you are investing part of your research is to understand how the company makes money or its business model. Understanding the business model allows you to have a reasonable idea of how the company makes money or which margins it can control or have influence on and when the company would not make money.

There are more questions than answers, till the next time – to raising questions.

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