Oxford Brookes

University
BSc (Hons) in Applied
Accounting
Research and Analysis Project

An analysis and evaluation of the business

and financial performance of Airbus SE
over a three year period

Mentor: Alisher Shoumarov

Student: Elyor Rustamov
Table of Contents
Research and Analysis Project......................................................................................................1
1. Project objectives and overall research approach – (approx 1,000 words) now 696.............1
1.1 Reasons for choosing topic and organization.................................................................1
1.2 Research Objectives (Oxford Brookes University, 2017)................................................1
1.3 Approach to Research....................................................................................................2
2. Information gathering and accounting/business techniques - approx 2,000 words – now
1430...............................................................................................................................................3
2.1 Sources of information....................................................................................................3
2.2 Methods used to collect the information, including online access...................................3
2.3 Limitations of the information gathered...........................................................................3
2.4 Ethical issues that arose during research process and how these were resolved..........4
2.5 Explain account and business techniques used and their limitations.............................4
3. Results, analysis, conclusions and recommendations - approx 4,500 – Now around 6600. .6
3.1 Company Profile..............................................................................................................6
3.2 Financial Analysis............................................................................................................6
3.2.1 Revenue analysis........................................................................................................6
3.2.2 Profitability - Gross Margin and Operating profit/EBIT................................................8
3.2.3 Book-to-Bill Ratio.......................................................................................................10
3.2.4 DuPont Analysis........................................................................................................11
3.2.5 Cash Flow & R&D Expenses.....................................................................................14
3.3 PESTEL ANALYSIS......................................................................................................16
3.3.1 Political Factors.........................................................................................................16
3.3.2 Economic Factors......................................................................................................17
3.3.3 Social Factors............................................................................................................17
3.3.4 Technological Factors...............................................................................................18
3.3.5 Environmental Factors...............................................................................................19
3.3.6 Legal factors..............................................................................................................20
3.4 Porters Five Forces Model............................................................................................22
3.4.1 Threat of New Entrants..............................................................................................22
3.4.2 The Power of Suppliers.............................................................................................23
3.4.3 The Power of Buyers.................................................................................................24
3.4.4 Threat of Substitutes.................................................................................................24
 3.4.5 Competitive Rivalry....................................................................................................25
3.5 SWOT ANALYSIS.........................................................................................................26
3.6 TOWS ANALYSIS.........................................................................................................27
3.7 Conclusion.....................................................................................................................28
References..................................................................................................................................29
4. Appendices...........................................................................................................................39
4.1 Airbus SE Financial Statements – Income Statement..................................................39
4.2 Airbus SE Financial Statements – Balance Sheet........................................................40
4.3 Airbus SE Financial Statements – Cash Flow Statement.............................................41
4.4 Boeing Financial Statements – Income Statement.......................................................42
4.5 Boeing Financial Statements – Balance Sheet.............................................................43
4.6 Boeing Financial Statements – Statement of Cash Flow..............................................45
4.7 Bombardier Financial Statements – Income Statement................................................46
4.8 Bombardier Financial Statements – Balance Sheet......................................................47
4.9 Bombardier Financial Statements – Statement of Cash Flow.......................................48
4.10 Embraer Financial Statements – Income Statement.....................................................49
4.11 Embraer Financial Statements –Balance Sheet...........................................................50
4.12 Embraer Financial Statements – Statement of Cash Flow...........................................51
4.13 Appendix – CAGR........................................................................................................52
4.14 Appendix – World Bank Group – Real GPD (2018).....................................................53
4.15 Calculation details of Orders Value for Airbus SE.........................................................54
4.16 Appendix – DuPont Analysis.........................................................................................55
4.17 Appendix – Comparison of Air Travel and High Speed Train.......................................56

LEGEND:
Green highlighting black text – important point to cover
Yellow highlighting black text – section under questions
Red highlighting black text – section to be removed.
1. Project objectives and overall research
approach – (approx 1,000 words) now 696
1.1 Reasons for choosing topic and organization
When studying for ACCA papers F3, F5, F9 and P3 (for which I am still currently preparing) I
was able to obtain extensive knowledge in the area business analysis. This subject area always
was interesting to me as I was fascinated by the ability to make accurate inferences on
company’s activities, its strength and weakness and adequate predictions on its future
performance based on financial and other analytical data. During more than 9 years of
experience as a finance professional, I have worked with financial statements more from
accounting perspective and rarely had an opportunity to add value from the analytical
standpoint. Therefore, when choosing the project topic I had little doubt on which one to choose
and I chose:
- Topic 8: An analysis and evaluation of the business and financial performance of an
organization over its most recent three-year period.
In accordance with Information Pack 2017-2018 (Oxford Brookes University, 2017), I had to
choose from three sectors for current period:
1. 2713 – Aerospace
2. 3577 – Food Products
3. 5753 – Hotels
Out of these sectors, I find Aerospace as most interesting for me and upon doing some prior
research, I have decided to write my Research and Analytical Report on performance of Airbus
SE - one of the leaders and innovators in the aerospace industry.

1.2 Research Objectives (Oxford Brookes University, 2017)

Currently, I plan to perform my research by analysis and critical review of Airbus SE’s financial
statement for last three years (2015, 2016 and 2017). After preliminary research I found out that
last year the company issued its financial statements for 2016 at the second decade of the
February, therefore, I have come to conclusion that there will be enough time to analyze reports
issued for 2017.
Main research’s objective is to perform SWOT (Strength, Weaknesses, Opportunities and
Threats) analysis of the Company. This analysis will be based on analysis of financial
performance of the Company (internal analysis), how does it stack up against the competition
and review of overall operating environment.
Additional objective is to understand which factors contributed to the past financial performance
of the company.
Following questions were set to meet research objectives:
 How did Airbus SE performed financially during last three years in comparison
with competitors? What has been the financial performance of ABC Co. over the
last three years, and how does this affect the future growth strategy?
  What are the current key external factors that impact the business and its
financial performance?
 What is the current position (SWOT analysis) of the Company considering its
past financial performance and current external environmental factor?
 What are the future prospects sustaining growth and its competitive edge based
on its current position?

1.3 Approach to Research

This Research will follow gradual approach of uncovering relevant information to identify the
Company’s current position using SWOT strategic analysis framework:
 First stage of the research will be the analysis of financial statements of the Company for
2015, 2016, 2017 using ratio and other similar analysis tools. This includes the analysis
of profitability, liquidity, gearing, investment return, production rates and future orders
backlog of the Company.
 Second stage will be analysis of the competitive environment using the Porter’s Five
Forces Framework. Using it I will identify how intense the rivalry within industry where
the Company operates.
 Third stage will be the analysis of broader environment where the Company operates,
namely PESTEL analysis. Apart from rivalry factors that affect the Company, there are
range of other important factors, which are covered by PESTEL analysis.
 Fourth and final stage will be derivative out above analysis in form of SWOT analysis. It
will summarize main Strengths, Weaknesses, Opportunities and Threats of the
Company that are identified during previous three stages. In addition, in this stage I will
provide prospects and possible recommendations on how should the Company is going
to perform based on its current position and its strategy based on results found.
ACCA P3 Revision Seminars (Kirtisis, 2017) were main inspiration of current approach. In
particular, where author discussed overall idea of SWOT analysis as derivative of internal and
external analysis of the company, which may includes partly financial analysis, Porter Five
Forces Framework and PESTEL analysis.
Research Analysis Project Airbus SE 2015-2017

2. Information gathering and

accounting/business techniques - approx 2,000
words – now 1430
2.1 Sources of information
Due to nature of the task chosen, my main sources of data for the research will be data from
internal sources – meaning published audited financial statements of Airbus SE, its competitors
and analytical reports on the aerospace industry. Followings is the list of main sources of
information that will be used to achieve research objective:
a. Secondary research
a. Oxford Brooks University Information Pack for Research and Analysis Project
and RAP Exemplars were continuously read and referred to throughout the
process of writing this research paper in order to be within set guidelines,
regulations and best practice recommendations.
b. Books and reference materials on financial and strategic analysis models for:
Mostly P3 Business Analysis paper textbook for strategic analysis models like
SWOT, Porter’s five forces analysis. CFA Financial Reporting and Analysis
Textbook – for detailed insight on using ratios in Financial Statements Analysis
c. Online materials: Expert analyses on aircraft manufacturing industry, important
industry statistics and further information on analytical methodologies from
special industry reports.
d. Financial statements of Airbus SE and its main competitors – from respective
corporate investment sites and investment data and research providers as
Morningstar.. Although, online corporate investment hubs provided extensive
information on financial performance of reviewed companies, for purposes of
faster processing, the data from Morningstar was used as it was mostly already
harmonized for purposes of review and analysis and made the comparative
analysis more efficient.

2.2 Methods used to collect the information, including online

access
Internet electronic search was the major information search and collecting tool throughout the
project as the nature of topic and the type of entity chosen for analysis implied that the internet
search would be mostly sufficient to cover research objectives. The only exception was the
information and insight on strategic analysis models and financial analysis methodology. As I
already had access to abovementioned textbooks on ACCA and CFA curriculum, which
contains very comprehensive information on those methodologies and samples of their
application, I decided to use them as reference source on said methodologies.

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Research Analysis Project Airbus SE 2015-2017

2.3 Limitations of the information gathered

Limitations of information contained in financial statements: The Airbus SE and its main
competitors within the aerospace industry, are comprised of a number of divisions/segments
that apart from commercial aircrafts products also produce military aircrafts, space satellites and
other aerospace equipment. The financial data, which is publicly available, is mostly aggregated
for all the divisions where particular company operates except for some figures as Division
Revenues and Capital Expenditures. Hence, specific figures on Commercial Aircraft divisions
performance were used for analysis only when required information was available in respective
financial statements. When this information could not be found, I used general or group
performance figures. In addition, notes to the financial statements and managements
representations on future performance prospects of companies reviewed might be subject to
certain degree of bias as these were prepared and presented by the interested parties.

2.4 Ethical issues that arose during research process and how
these were resolved
The main ethical issue that aroused during the research is the issue of plagiarism or in other
words, using other persons work as your own (Cambridge University Press, 2018). Considering
how important this issue is all the materials reviewed and accessed during research process
were diligently recorded and cited within present research paper. This eventually required
additional time so that any information used is appropriately cited and referenced. Based on
guidelines set in Oxford Brookes University Information Pack (Oxford Brookes University, 2017)
when public secondary data is used precise references should be made using Harvard
Referencing System. Even though appropriate referencing took significant time, I am content
with the final result.

2.5 Explain account and business techniques used and their

limitations
General: Nature of present research paper and the requirement set on its contents implied
usage of mix of financial analysis of entity and its competitors/industry and one or number of
strategic analysis models. However, real life research paper with practical recommendations
based on such a broad set of tools would be much comprehensive and would not “squeeze in”
within set limits. In “real life” comprehensive and detailed financial, SWOT, PESTEL and
Porter’s Five Forces analyses should be separate research papers on their own, if the intention
is to get practical insight from research and to base practical recommendations from them.
Therefore, present research focuses on most prominent features or aspects of each analytical
tool that could have been found or identified within present framework and its limits.
Ratio Analysis: Investopedia (Investopedia, 2018), states that the Ratio Analysis is a
quantitative analysis of information contained in a company’s financial statements. It shows one
quantity in relation to another (CFA, 2013, p307) and this feature allows to compare two
different companies with different financial performance figures in absolute terms. Ratio analysis
allows to evaluate entity’s activity, liquidity, solvency, profitability and valuation (CFA, 2013,
p320). Even though it is widely used in financial and business community it is subject to certain
limitations which are important to be aware of. Main limitation of the ratio analysis is that it show

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Research Analysis Project Airbus SE 2015-2017

only the historical performance or position of the company, but fails to reveal the underlying
reasons why this happened and how (CFA, 2018, Indicator, p307) . In addition, its historical
nature cannot be used as an accurate predictor of future performance of a company. Therefore,
when making ratio analysis it is important to enforce the analysis with review of accompanying
notes to financial statements, industry analysis papers, company strategic plans and other
relevant data. Using this approach a researcher can obtain more insight from the ratio analysis.
PESTEL analysis: PESTLE is macroenvironment analysis model (Kaplan 2017, Business
Analysis Textbook, p30) which overviews the environment from perspectives of Political,
Economical, Social, Technological, Environmental and Legal factors within which a company
operates. It is very broad analysis tool and the fact that Airbus SE operates in a number of
segments of aerospace industry, has production and services facilities worldwide and sells its
products all over the world adds even more depth and complexity for PESTLE analysis. As it
was already mentioned above, it is impractical to encompass all the relevant factor within
PESTLE model within present research. Hence, only the most prominent factors which has
global character will be discussed and revealed within present report. Another factor to consider
is the fact that some of the factors cannot be designated some particular factor. There are some
factors that can be attributed to two, or may be more categories. For example, regulation
concerning environmental pollution levels can be categorized both as environmental and legal
factors or even political.
Porters Five Forces: This is a competitive position analysis tool identifying competitive strength
and current position of the business (AICPA, 2013). The underlying assumption is that five main
factors or “forces” determine the intensity of the rivalry in the market and how desirable it is.
These main forces are:
1. Bargaining power of Suppliers: Is considered with how suppliers are positioned in the
market and can they exert their power on the business with respect to purchase prices.
Strong suppliers with niche products that are hard to reproduce inherently have stronger
position and ability to dictate the prices. This is also characteristics of monopolistic only
one suppliers.
2. Bargaining power of buyers: It is about the position of the customers and their ability to
exert their influence on the business. This factor is influenced by number of customers in
the market and how easily they can switch between products.
3. Competitive rivalry: Related to a number of competitors in the market and how intense
the rivalry is.
4. Threat for substitution: Reviews how particular product in the market or niche can be
replaced by substitute products.
5. Threat of entry: This factor is concerned with how easily the new entrants can come and
penetrate the market. This factor is affected by how investment intensive the market is,
know-how level required to enter and other factors.
Main limitation of the model is that it is intended to analyze the market rather than the individual
company (Investopedia, 2018, (Beattie, 2018). Considering the fact that Airbus SE operates in a
number markets with respect of their geographical location (i.e. in Europe or US) and type of
product (i.e. civil or military, product or services, planes or helicopters, business vs commercial
aircrafts, narrow body or wide body planes and others) it is difficult to encompass all it’s
activities within one model. Therefore, I chose global commercial aircraft sector as a subject for
analysis within present report.
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Research Analysis Project Airbus SE 2015-2017

3. Results, analysis, conclusions and

recommendations - approx 4,500 – Now around
6600
3.1 Company Profile
Established in 1970, Airbus SE is the 2nd largest aircraft manufacturer in the world and (Airbus
SE, 2018) with around 130 thousand employees worldwide. Based in Amsterdam the Company
has final assembly locations in France, Germany, Spain, China and United States (Airbus SE,
2018). Currently, the Company is listed in Paris, Frankfurt Am Main, Madrid, Barcelona,
Valencia and Bilbao. As of the end of 2017, the Company manufactured and delivered 10,926
aircrafts (Airbus SE, 2018). In addition, to commercial aircrafts Airbus SE is engaged in
manufacturing and servicing military products (i.e. planes and helicopters and related
equipment), helicopters and space satellites.

3.2 Financial Analysis

3.2.1 Revenue analysis
Revenue is one of the first indicators of financial performance of the company that comes into
one’s mind when thinking about performance indicators. It provides information about the size of
the company and its relative share in the market.
Airbus SE’s total revenue has been increasing for last three years. However, the growth rate
has been slowing down from 6.16% in 2015 to mere 0.28% in 2017. Compound Annualized
Growth Rate (CAGR) (Se Appendix 4.13 for definition and formula) (Investopedia, 2018) for
three years was only 1.18%. Nevertheless, Airbus performed considerably better than its main
competitor – Boeing, which has been experiencing decrease in its revenues since 2015.
Boeing’s CAGR for last three years was minus 3.03%.
One can notice that in 2015 Boeing experienced drastic increase in Revenue – 25.56%.
However, this increase for most was due to drastic fall of EUR against USD (from 1.28 in 2014
to 1.07 in 2015 (Internal Revenue Service, 2018), which resulted in inflation of Boeings revenue
when translated from USD to EUR. Actual increase for 2015 was 4.56% from USD 90,762
million to USD 96,114 million.
Table 1 -Airbus SE vs Boeing Total Revenue for period - 2015-2017. In EUR mln (Airbus SE, 2018)
(Airbus SE, 2017)
2017 2016 2015
Airbus Revenue, in EUR mln 66,767 66,581 64,450
Airbus Revenue growth rate 0.28% 3.31% 6.16%
Airbus Compound annual growth rate (CAGR) 1.18%
Boeing Revenue, in EUR mln 86,201 88,897 90,059
Boeing Revenue growth rate -3.03% -1.29% 26.56%
Airbus CAGR -3.03%

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Research Analysis Project Airbus SE 2015-2017

The group reports its financial statement across three reportable segments (Airbus SE, 2018) –
Airbus Commercial Aircraft, Airbus Helicopter and Airbus Defense and Space. As it can be seen
in below Table 2, Commercial Aircraft is the largest segment and experienced actual revenue
increase of 3.53% within last 3 years. However, due to decrease in revenue in Airbus
Helicopters (-0.98%) and Airbus Defense and Space (6.07%) total Group Revenue suffered.
Table 2 - Airbus SE Group Revenue by Segments 2015-2017. In EUR mln mln (Airbus SE, 2018)
(Airbus SE, 2017)
2017 2016 2015 CAGR
Airbus Commercial Aircraft 50,039 48,591 45,090 3.53%
Airbus Helicopters 5,974 6,204 6,153 -0.98%
Airbus Defence and Space 10,704 11,736 12,917 -6.07%
Other/HQ 50 50 290 -44.34%
Total 66,767 66,581 64,450 1.18%

Underlying reason behind stable revenue increase of Airbus Commercial Aircraft is assumed to
be the consistent increase in a number of delivered aircraft throughout the reviewed period
(Table 3) In 2015, Airbus delivered 635 aircrafts while in 2017 this figure was 713, which is
around 12% increase. In particular, the increase in deliveries was fueled by its traditional
bestseller, Airbus A320 and by the fact that Airbus A350, new wide-bodied twinjet aircraft’s
production rates have been increasing since its first commercial delivery in 2015. Decrease in
Defense and Space segment’s revenues was due to disposal of stakes in several subsidiaries
within the segment, which resulted in loss of revenue from the latter (Airbus SE, 2018). Airbus
Helicopters performed fairly stable without notable increase nor decrease in revenue.
Table 3 - Airbus aircraft deliveries 2015-2017 (Wikipedia, 2018)
Aircraft types 2017 2016 2015
A320 558 545 491
A330 62 66 103
A350 78 49 14
A380 15 28 27
Total Deliveries 713 688 635

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Research Analysis Project Airbus SE 2015-2017

3.2.2 Profitability - Gross Margin and Operating profit/EBIT

Gross profit margin or gross margin in short is derived by subtracting cost of revenue (cost of
sales) from the revenue It indicates how much revenue is generated to cover operating
expenses (CFA, 2012). Higher gross profit margin may mean combination of higher price and a
lower cost than competition. Higher price could be explained well differentiated products that
have advantages over competitors, while lover prices could mean some product deficiencies
relative to competition.
Airbus’s analysis shows that highest GM in three years was recorded in 2015 – 13.7% (Table 4
- Gross Profit Margin of Airbus SE ). In following year the GM significantly fell to 7.9%.
According to Airbus (Airbus SE, 2017) this was mainly due additional EUR 2,210 million net
expense charges on A400M programme (EUR 290 million in 2015) and EUR 385 million on
A350 XWB programme. IncreaseA400M programme charges were due to faulty gearbox issues
in military transport planes (Defense News, 2016), which resulted in excessive wear signs in the
engines and whole fleet of previously delivered planes were grounded. Investigation efforts to
identify the reasons and searches for resolution for the problem led to massive cost overruns.
Cost escalation in A350 XWB in 2016 was mainly due fact that it was just the second year of the
aircraft being produced and the production process was still in early stages of learning curve
(Airbus SE, 2017). Increase of GM in 2017 to 11.4% was due to fact A400M programme did not
require any additional charges while the production issues of A350 XWB had been resolved at
that time.
Table 4 - Gross Profit Margin of Airbus SE (Morningstar, 2018a)
2017 2016 2015
Airbus Revenue, in EUR mln 66,767 66,581 64,450
Cost of Revenue 59,160 61,317 55,599
Gross Profit 7,607 5,264 8,851
Gross Margin 11.4% 7.9% 13.7%

When gross margin of Airbus for last 3 years is compared with its main competitors it is evident
that its figures are lagging behind. In particular, in all three years Boing’s gross margin was
higher. In 2015 difference was minimal while in 2017 Boeing’s gross margin was 18.6% against
14.6% Airbus’s. Embraer also had higher results while Bombardier was the only of three
competitors to demonstrate lower gross margin except in 2016.
Table 5 - Gross Margin for Airbus and its main competitors (Morningstar, 2018a) (Morningstar,
2018e) (Morningstar, 2018h) (Morningstar, 2018l)
2017 2016 2015
Airbus SE 11.4% 7.9% 13.7%
Boeing Co 18.6% 14.6% 14.6%
Bombardier 12.0% 10.5% 10.9%
Embraer 18.3% 19.9% 18.7%

If looked further to earnings before interest and tax (see Table 6) it can been seen that Airbus’s
profitability is in all three years observed was lower than of Boeing. Although, it was better than
of Bombardier and Embraer, comparison with Boeing seems more relevant, considering their

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Research Analysis Project Airbus SE 2015-2017

sizes and positon in the market. Largest gap was in 2016, when again due to extraordinary
charges incurred (see above) the amount of EBIT was significantly lower. In 2017 Airbus
improved its EBIT and it was even higher than in 2015 (7.6% against 6.1%). However, it was
still behind Boeing, as the main rival of Airbus was able to generate higher operating income
from its Commercial Airplanes division despite lower total sales and due to lower Research &
Development cost (The Boeing Company, 2018).
Table 6 - EBIT of Airbus and Competitors (Airbus, 2017-2017) (Morningstar, 2018)
2017 2016 2015
Airbus - EBIT margin 7.6% 2.7% 6.1%
Boeing Co - EBIT Margin 11.0% 6.2% 7.7%
Bombardier - EBIT Margin 3.1% 1.8% 2.2%
Embraer - EBIT Margin 5.6% 3.3% 5.6%

There are also some hints from industry analyst on why Airbus’s EBIT is lower. First off all it is
important to note the specifics of commercial aircraft market, as according to The Wall Street
Journal (2012), it is common practice among major aircraft manufacturers to provide large
discounts to customers and usually ‘no one pays catalog price for airplanes”. In 2016, on
average Airbus gave around 54% discounts from catalog price for its customers. In the same
time average discounts for Boeing planes was 51% (AirInsight, 2016). Three of the most
discounted aircraft in the market in 2016 were aircrafts produced by Airbus (AirInsight, 2016).
Namely, these are A319 and two modifications of A330, which had average discount of 59%.
This heavy discounting practice could be major factor that is affecting the profitability of Airbus.
This discounting practice in the example of A330 can be explained by fact that its main
competitor Boeing’s 787 is on average 20% more efficient (AirInsight, 2016). Therefore, Airbus
has to offer bigger discounts in order to compensate higher total cost of ownership of A330.
According to Motley Fool (Motley Fool, 2018), another explanation is that lower profitability is
part of the strategic choice made by Airbus to build up larger backlog in pursuit of larger market
share in a long term as the competition in the market is very intense. Analyst also point out that
Boeing better manages its supply chain and has very strong bargaining power over its suppliers,
which allows it to negotiate lower costs and have closer relationships with them. While Airbus
had some difficulties with suppliers. Recent example, delays in delivery of Pratt & Whitley
engines from United Technologies Corp had resulted in Qatar cancelling 4 Airbus planes
(Motley Fool, 2018).

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Research Analysis Project Airbus SE 2015-2017

3.2.3Book-to-Bill Ratio
Book-to-Bill ratio is a key indicator of future revenues (Deloitte, 2017) for an aircraft
manufacturing business where orders for products are made years ahead. Ratio is used by
investors to evaluate revenue generation capabilities of a company in a foreseeable future. The
ratio is calculated by dividing value of orders received in a year with total revenue generated in
a respective period. In all three years reviewed, Airbus managed to surpass its orders value
over its revenue, even considering the fact that the revenue has been consistently growing year
by year. If compared with Industry Average, Airbus has been consistently beating benchmark.
Its main competitor, Boeing, beat the Industry Average in 2016 and matched Airbus, but in 2015
and 2017 it has lagged behind. According to Deloitte (Deloitte, 2017) main reason for decrease
of industry book-to-bill ratio in 2016 was the slowing orders for Embraer and General Dynamics.
However, this slump in orders was offset by generally higher book-to-bill ratio of Airbus, General
Dynamic and Embraer. Total Aerospace & Defense sector’s backlog in 2016 increase for 3.7%
and reached USD 2.78 trillion, out of which 42% pertains to Airbus with its incredible USD 1.17
trillion backlog.
Table 7 - Book-to-Bill ratio for 2015-2017
2017 2016 2015
Value of net orders* in EUR mln 63,868 57,698 68,542
Revenue for a year** in EUR mln 50,039 48,591 45,090
Airbus - Book-to-Bill Ratio (Value of Orders/Revenue) 1.28 1.19 1.52
Industry average for Aerospace and Defense*** n/a 1.16 1.34
Boeing Book-to-Bill ratio**** 1.20 1.19 1.00
* - See Appendix 3 for details of calculation
** - Airbus SE (Airbus SE, 2017) (Airbus SE, 2018)
*** - Average for Aerospace and Defense sector (Deloitte, 2017)
**** - 2017 (Ausick, 2018), 2016 (Cameron, 2017), 2015 (Hepher, 2015)

Main reason for this consistent ability to obtain large orders is in Airbus’s bestselling A320 family
of aircrafts. In 2015 Airbus obtained orders for 1,010 of A320 family of aircrafts with estimated
sales value of around USD 49 billion. Sales orders of A330 series also contributed significantly
in 2015, when Airbus managed to sell 156 units of this aircraft. In addition, as it was said in
previous section (see section 3.2.2). Airbus provides higher discounts to its customer in a
pursuit to increase its backlog for future deliveries.

Table 8 - Aircraft orders and their value for 2015-2017

Net orders* of Commercial Aircrafts, in Units Orders Value**, in EUR mln
2017 2016 2015 2017 2016 2015
A380 - 2 3 - 458 685
A350 44 51 16 6,359 7,506 2,347
A330 25 106 156 2,560 11,055 16,218
A320 Family 1,143 790 1,010 54,949 38,679 49,292
Total 1,212 949 1,185 63,868 57,698 68,542
* - Gross orders minus cancellations for that year (Airbus SE, 2018)
** - See appendix for more details and Excel spreadsheet for calculations

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Research Analysis Project Airbus SE 2015-2017

3.2.4DuPont Analysis
Breakdown of ROE to main components
DuPont analysis was developed by DuPont Fabros Technology Inc in 1920s (Goldberg, 2016).
It is a valuable to tool to understand the driving forces for changes in Return on Equity (ROE)
ratio. DuPont analysis dissects ROE into three components:
Figure 1 - DuPont Analysis- Original Model (CFA Institute, 2012)

Asset Financial Return on

Profitability
Efficiency Leverage Equity

 Profitability measures net income return for each unit of revenue.

Formula: Net Profit Margin = Net Profits / Revenue
 Assets Efficiency measures how much revenue is generated for each unit of asset.
Formula: Asset Turnover ratio = Revenue / Average Total Gross Assets.
 Financial Leverage measures the solvency of the company by comparing total
company assets relative to its equity.
Formula: Equity Multiplier = Net Profit / Average Total Gross Assets.

DuPont analysis performed on Airbus’s show that its ROE has just slightly increased since 2015
from 31.2% to 32.7%. There was a large dip in the ratio in 2016, to 11.4%. Dissection of ROE to
three components as described above indicates that (see Table 9) this dip in ROE was mostly
due to the decrease of net profit margin (from 4.2% in 2015 to 1.5% in 2016). As this was
discussed in section 3.2.2, this happened due to substantial charges incurred related to A400M
and A350 XWB programs. Overall dissection shows that net profit margin and the equity
multiplier has increased since 2015 while the asset turnover has been slowing down.

Table 9 - DuPont Analysis of Airbus SE (2015-2017) (for details see 4.16 Appendix – DuPont
Analysis)
2017 2016 2015
(a) Net Profit Margin 4.3% 1.50% 4.2%
(b) Asset Turnover 0.50 0.52 0.54
(c) Equity Multiplier 15.06 14.64 13.89
Airbus Return on Equity (ROE*= a x b x c) 32.7% 11.4% 31.2%
* ROE is calculated without including: Treasury Stocks and Accumulated other comprehensive income, as they
distort the ROE so rendering it impossible to compare it with other companies’ ROE.
Source: (Morningstar, 2018a)

Increase in Airbus’s financial leverage (equity multiplier) and slowdown in asset turnover is
mainly due to consistent increase in total assets value followed by increase in amount of cash in
hand (USD 7,576 million in 2015 and USD 12,021 million in 2017) (see Appendix Airbus SE
Financial Statements – Cash Flow Statement for details).

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Comparison of ROE of Airbus against its main (see Table 10) competitors reveal that Airbus’s
performance is significantly better than of competitors’. Boeing, Airbus’s main competitor has
significantly lower ROE, while Bombardier has demonstrated negative ROE for last three years.
Although, amount of net profit generate by Boeing is higher, its significantly higher equity
balance (Morningstar, 2018d) resulted in lower ROE figures.

Table 10 - ROE of Airbus and Competitors (2015-2017)

2017 2016 2015
Airbus ROE 32.7% 11.4% 31.2%
Boeing Co - ROE 14.3% 9.7% 10.6%
Bombardier - ROE -22.2% -44.8% -232.4%
Embraer - ROE 6.1% 4.3% 1.8%
* ROE is calculated without including: Treasury Stocks and Accumulated other comprehensive income, as they
distort the ROE so rendering it impossible to compare it with other companies’ ROE.
Source: (Morningstar, 2018a), (Morningstar, 2018e), (Morningstar, 2018h), (Morningstar, 2018l)

Further Breakdown of Net Profit Margin

Above analysis reveals that changes in net profit margin are the main reason for ROE
fluctuations during reviewed years. Therefore, further and more detailed analysis of this ratio
would give more insight to underlying reasons for those fluctuations. This can be done by further
decomposing it to three components (CFA Institute, 2012):
Figure 2 - Decomposition of Net Profit Margin (CFA Institute, 2012)

Tax Interest EBIT Net Profit

Burden Burden Margin Margin

 Tax burden measures the ratio of the pretax profits that the company is left with after
taxes. If we deduct 1 from the ratio we will get the rate of the average tax.
Formula: Tax Buden = Net Profits / Earnings Before Tax
 Interest Burden is measures the average interest rate paid by the company to finance
its borrowings.
Formula: Interest Burden = Earnings Before Tax / Earnings Before Interest and Tax
 EBIT Margin measures effect of operating margin to the ROE.
Formula: EBIT Margin = Earnings Before Interest and Tax / Revenues.

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Table 11 - Decomposition of Net Profit Margin of Airbus SE (2015-2017)

2017 2016 2015
Net Profit Margin 4.3% 1.5% 4.2%
Tax Burden 0.63 0.77 0.80
Interest Burden 0.90 0.71 0.86
EBIT Margin 7.6% 2.7% 6.1%

Tax Burden: Decomposition of net profit margin demonstrates (see Table 11) that average tax
rate of the company has been steadily increasing from 20% in 2015 (tax burden of 0.80) to 37%
in 2017 (tax burden of 0.63). According to notes to 2017 financial statements (Airbus SE, 2018)
this increase in mainly attributable to the non-realized tax losses and to increased income tax
rates in France (see Table 12 (Airbus SE, 2018)Table 12 - Main income tax rates - Airbus
(2015-2017) (Airbus SE, 2018). Tax rate in France increased in 2016 to 34.4%.

Table 12 - Main income tax rates - Airbus (2015-2017) (Airbus SE, 2018)
2017 2016 2015
Netherlands 25.0% 25.0% 25.0%
France 34.4% 34.4% 25.8%
Germany 30.0% 30.0% 30.0%
Spain 25.0% 25.0% 25.0%
United Kingdom 19.0% 19.0% 17.0%
Source: (Airbus SE, 2018)

Interest Burden: The ratio has been improving since 2015. In 2017 it was 0.90, up from 0.71.
Improvement resulted in decrease of average interest rates paid by the company (see Table 13)
from 6.3% to 4.8%. In absolute terms interest expenses decreased from EUR 551 million to
EUR 517 million.

Table 13 - Airbus SE Total Borrowings and Interest Expenses (2015-2017)

2017 2016 2015
Interest expenses, EUR mln 517 522 551
Total amount of debt, EUR mln 10,854 10,089 8,737
Average Interest Rate 4.8% 5.2% 6.3%
Source: (Airbus SE, 2018)

EBIT Margin: During reviewed period EBIT margin has also improved from 6.1% to 7.6 (for
EBIT comparison with main competitors see 3.2.2). Increase is mainly attributable to increase in
revenue generated by Commercial Aircraft segment (see Table 2).

Overall, insignificant increase of net profit margin from 4.2% in 2015 to 4.3% in 2017 was due to
fact that increase in EBIT margin and lower interest burden was compensated by increase in
average tax rate. Otherwise, without negative effect of increased tax burden net profit margin
theoretically could be 5.5%.

3.2.5Cash Flow & R&D Expenses

Stable net profit margins during last three years and disposal of Dassault Aviation in 2016
(Reuters, 2016) allowed Airbus to increase its cash balances USD 8 billion in 2015 to USD 13
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billion in 2017. If compared with other aircraft manufacturers, Airbus’ cash balances are the
largest. Airbus was able to increase its cash balances for around 61% within three years, while
its main competitor Boeing have experienced decrease in cash balances for around 23%.
Decrease is mainly due to share repurchases constantly done by Boeing throughout last three
years. Cash balances of Bombardier and Embraer are significantly lower than Airbus or Boeing.
Overall, cash position and cash generation abilities of Airbus seems to be solid and potentially
allows the company to finance its further growth.
Table 14 - Airbus and competitors cash balances and their growth (2015-2017) (Morningstar,
2018c) (Morningstar, 2018f) (Morningstar, 2018i) (Morningstar, 2018m)
2017 2016 2015
Airbus SE
Cash Balances, EUR mln 13,024 10,809 8,085
Growth rate, % 20.5% 33.7% -13.0%
Boeing Co
Cash Balances, USD mln 8,733 8,834 11,330
Growth rate, % -1.1% -22.0% -3.4%
Bombardier
Cash Balances, USD mln 3,057 3,384 2,720
Growth rate, % -9.7% 24.4% 9.3%
Embraer
Cash Balances, USD mln 1,271 1,242 2,166
Growth rate, % 2.3% -42.7% 26.4%

Research & Development (R&D) expenses of the company is the indicator whether company
can innovate and stay relevant in the market, which particularly important in aerospace industry.
Within last 3 years Airbus experienced some decreased in R&D expenses (around -18%).
However, these expenses are somewhat in line with Boeing’s R&D expenses who also
experienced a slight decrease in R&D expenses (around -5%). R&D expenses of Bombardier
and Embraer are far lower than of Airbus or Boeing. Co. If compared with revenue of said
companies, Airbus has highest ratio of R&D expenses of around 4.2%, while Boeing has around
3.4%, Bombardier has around 1.5% and Embraer has around 0.8%. Considering the facts that
Airbus has largest R&D expenses ratio (4.2%) among its main competitors and is still able to
generate stable cash flow, Airbus SE prospects of staying innovative are positive.

Table 15 - Research & Development (R&D) expenses of Airbus and competitors (2015-2017)
(Morningstar, 2018c) (Morningstar, 2018f) (Morningstar, 2018i) (Morningstar, 2018m)
2017 2016 2015
Airbus SE
R&D Expenses, USD mln 3,041 3,160 3,693
Growth rate, % -5% -14% 2%
Boeing Co
R&D Expenses, USD mln 3,179 4,627 3,331
Growth rate, % -31% 39% 9%
Bombardier
R&D Expenses, USD mln 240 287 355
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Growth rate, % -16% -19% 2%

Embraer
R&D Expenses, USD mln 49 48 42
Growth rate, % 2% 14% -11%

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3.3 PESTEL ANALYSIS

Through PESTEL analysis I will try assessing macro environmental factors that are affecting
Airbus SE and its competitors.

3.3.1Political Factors
Political factors are mostly related to governments intervention in economy and business and
how does it affect and may affect them. This also includes issues of taxation and foreign trade
regulation (Kaplan, 2016 – P3).
There is impression that aerospace industry highly politicized, the underlying reason could be
hinted from Joan Johnson-Freese’s book “Space as a Strategic Asset” (Johnson-Freese, 2007),
were author discusses the issues of US aerospace industry and indicates that political
importance of the industry in US comes from the fact that major aerospace manufacturers serve
dual purpose, both civil and military. These companies are the major innovators and are vital for
sustaining military capabilities of the state. Loosing edge in aerospace industry could mean
losing edge in military and in political power. If we look closer, this fact holds true for all major
countries and their respective leading aerospace companies as they all engaged in
manufacturing and serving both civil and military customers. In Europe it is Airbus (Airbus SE,
2018)Boeing (The Boeing Company, 2018) and Lockheed Martin (Lockheed Martin, 2018) in
US, Bombardier (Bombardier, 2018) in Canada, Embraer (Embraer, 2018) in Brazil, United
Aircraft Corporation (United Aircraft Corporation, 2018) in Russia and AVIC (Aviation Industry
Corporation of China, 2018) in China. Major states are trying to support their domestic
producers in order to keep them relevant and competitive in global market. Another reason
could be the fact that these companies are also powerhouses that have large contribution to the
economy and have hundred of thousand employees.
Therefore, every large aircraft sales are in some ways tied to politics and sometimes the
companies and their products are products of some political agendas. Fresh example is China’s
imposing additional duties of 25% on 106 products imported from US in a recent escalation of
US-China trade disputes (The Guardian, 2018). This list of products includes also aircrafts with
unladen weight between 15 to 45 tons (Ministry of Finance of China, 2018) meaning all of the
variants of Boing single-aisle, narrow-body aircrafts of “737 Next Generation” and “737 MAX”
certified by Chinese regulator just in October 2017 (Chanel 3000, 2018) series will be subject to
this duty (The Boeing Company, 2017). China is the going to become largest market for civil
aircrafts in coming 5 years (Ostrower, 2017) and expected to spend around USD 1.1 billion in
coming 20 years to purchase around 7,000 aircrafts (Reuters, 2017). Considering fact that 75%
of those aircrafts are expected to be single-aisle narrow body regional aircrafts, it is apparent
that it is going to be a considerable blow to a Boeing’s business prospects in China.
Although, above-mentioned issue could potentially mean more sales for Airbus, not everything
is so well with it too. As of January 2018, dozens of Airbus’s narrow-body, mid rang aircrafts
A320neo and A321neos could not be delivered to customers in China due to long process of
certification by Civil Aviation Administration of China (Chanel 3000, 2018). Some of the
airplanes were ready back in spring 2017 and were still waiting for sign-off from regulator.
Although, all involved parties are denying political background to the issue, there are
speculations that these long delays in certification process are in fact political in nature.
Considering the importance of its market to aircraft manufacturers, Chinese regulators are
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feeling the leverage to link the process of certifying any aircrafts in its territory with other trade
and political agendas with Europe and US leaders. The issue is also fueled by the fact that the
China itself has an ambition to squeeze into global aircraft manufacturing industry. In May 2017,
China has completed the first flight of its Comac C919 (Phillips, 2017) narrow-body twinjet
airliner which has potential to compete with Boeings 737 Max and Airbus A320neo.
Considering abovementioned, it is apparent that although, the aerospace industry usually has
strong political support within its operating country, it is still very susceptible to political influence
and can easily become playing card in political game in international arena.

3.3.2Economic Factors
Economic factors include economic business cycles, inflation, interest rates, economic growth
rates, disposable income, unemployment and energy costs (Kaplan, 2016 – P3).
According to Global Economic Prospects (World Bank Group, 2018) the global economy is
experiencing a cyclical recovery as Global GDP growth in 2017 was 3%, up from 2.4% in 2016.
Most of the growth is coming from Emerging Market and Developing Economies (EMDE’s) with
4.3%, as these countries benefited from recovery of their exports. It is estimated that the Global
GDP growth will be around 3% in 2018-2020 and again most of the growth will come from
EMDE’s with average growth rate of 4.6% in 2018-2020, while growth rate in High-Income
countries is expected to be on average around 2%. This global upturn “is expected to be
sustained over the next couple of years” (World Bank Group, 2018).
According to Boeing (The Boeing Company, 2017) and Airbus (Airbus SE, 2017) prospects for
2017-2036, there will be global demand for 34,900 (Airbus estimations) to 41,030 (Boeing
estimations) new aircrafts within given period. Both companies point to fast development pace
of Asia Pacific region and estimate that around 40% of global demand for aircrafts will come
from these countries while demand from US and Europe is expected to be around 36%. This
demand significantly bolstered by China and India, both of which are experiencing growth in air
passenger numbers – for 10% and 20% respectively (Airbus SE, 2017). Bearing in mind
economic conditions set above, it is expected that Asia Pacific shall be priority market for
aircraft manufacturers.

3.3.3Social Factors
Social factors encompass issues of population demographics, social mobility, distribution of
income, education level and other factors (Kaplan, 2016 – P3). .
Global population is continuing to increase and it is estimated that in 2030 the world population
will reach 8.5 billion and in 2050 to 9.7 billion (United Nations, 2015). China and India will
remain countries with largest population, but India is expected to surpass China in 2022. Out of
nine highest growth countries, five are in Asia, two in Latin America, and one in Africa, North
America and in Europe. However, global fertility rates are falling and as indicated by UN (United
Nations, 2015) this will results in decrease in population growth rates and increase the
proportion of older population (60 years old and over). Increase in life expectancy, which is
being experienced currently, will also contribute to the increase of older population. However,
young population proportion will still remain high in many developing countries like China, India
and Nigeria.
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As Asia-Pacific accounts for 60% of global workforce (International Labor Organization, 2018),
trends in this region affect employment outlook for the whole world. In 2016 alone, net
employment of the region has expanded for 20 million (growth of 1.1%). Largest contribution
was made my Southern Asia with its 13.4 million new employees, while least growth in Eastern
Asia as workforce growth is shrinking in China. This trend is explained by structural
transformation as capital and the workforce are shifting from “low to high value added sectors”
(International Labor Organization, 2018).
As population is increasing, so the number of middle class population. According to Homi
Kharas from Brookings Institute (Kharas, 2017), at the end of 2016 there were 3.2 billion people
in the middle class and this number keeps growing for around 140 million annually. It is
expected that in 2020 the middle class will become majority of the world population. Largest
contribution from this is coming from Asia and China with India have the largest share in
increase of middle class. While Asia is experiencing growths, Stagnation in population growth in
Europe and US also resulting in stagnation in growth of middle class in respective regions
(Kharas, 2017). As the number of middle class population is increasing so do their consumption.
By 2022, the middle class is expected to consume USD 10 trillion more than it was in 2016, with
most of this coming from Asia – USD 8 trillion. According to World Tourism Organization and
Global Tourism Economy Research Center (UNWTO/GTERC, 2016) increase in disposable
income is expected to affect tourism sector significantly: annual international tourist arrivals are
expected to increase for 331 million by 2030 (+4.9% increase annually). These projections are
also cited by Boeing (The Boeing Company, 2017) and are used in estimating future demand for
aircrafts in the region.

3.3.4Technological Factors
Technological factors include the pace of general technological advancements, industry’s focus
on Research & Development and innovation, automation of processes, speed of technological
transfer and other factors (Kaplan, 2016 – P3).
Rapid technological advancement of last decades and ever spreading internet access are
completely transforming the industries within all spectrum of economy. The aerospace industry
is not an exception for that. Current technological advancements significantly affecting the
industry, starting from production and ending with demand for air travel and means of travel.
Following are the main technological factors assumed to be affecting the aircraft manufacturing
industry:
Internet and sharing economy: Popularization of internet is affecting the way people look for
travel services and how they purchase them. According to (UNWTO/GTERC, 2016), there is a
rise of Free and Independent Travelers (FIT) who do not use the services of conventional travel
agents and turn to Online Travel Agents (OTAs) and sharing platforms like [Link],
because internet alternatives are claimed to be cheaper and are more convenient for the new
generation of consumers. Furthermore, access to larger set of data on consumers and
increased capabilities to process and aggregate that data has enabled the companies to
automatically generated tailored offers, including travel services (Inside Big Data, 2017). Hence,
as travel getting more affordable, demand for air travel is going to rise. In coming years, the

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power and importance of these platforms are only going to increase and will even more
influence the travel industry.
Composite materials, efficient engines and emission: Fast paced technological
advancements are affecting how aircraft are built and from what. According to (IndustryWeek,
2012) half of the Airbus A350 and Boeing 787 are made of composite materials. These
materials are more resistant to corrosion, easier to handle, are great insulators and most of all,
stronger and lighter than conventional materials used in aerospace (Haines, 2015). Hence, this
is making aircrafts more fuel-efficient. Use of composite materials and advances in design also
greatly improving efficiency of aircraft engines. According to the International Council on Clean
Transportation (Kharina, 2015)aircrafts, fuel efficiency has improved for 45% since 1960s. This
trend is going to continues as engines that are more efficient are being designed and produced
by engine manufacturers. For example, new Pratt & Whitney’s PurePower PW1000G engine, or
CFM’s Leap engine already could use up to 20% less fuel than conventional engines (Martin,
2016). These trends not only making aircrafts more efficient, air travel more affordable, but also
making the industry much cleaner in terms of carbon emissions. Considering that aviation
industry accounts for 2% of all human-induced CO2 emission (Cederholm, 2014) this is very
important for the environment and sustainability
Large investments in supporting infrastructure: Aircrafts require whole set of complex
infrastructure in form of airport terminals, runways, servicing equipment and others in order to
operate. Increasing demand for air travel requires also significant investments in this area. More
countries are investing in airport infrastructure in order to tap on promised economic gains from
increased passenger flows. This includes both improvement of existing facilities and building
new ones. It is estimated that around USD 2 trillion will be invested in this area within period
from 2017 till 2030 around the world (The Boeing Company, 2017).
Focus on alternative engine types: As environmental concerns are rising and technologies to
generate and store sustainable energy are getting more attention from aerospace industry. One
of the examples is the Airbus teaming up with British jet-engine producer Rolls Royce and
German electrical group Siemens (The Economist, 2017a) to work on small “flying test best” to
test the feasibility of hybrid-electric propulsion. If this concept is proven successful this has
potential to make commercial aircrafts more fuel efficient, quieter, make commercial flights even
more affordable, and greatly expand the market for commercial aircrafts.

3.3.5Environmental Factors
Environmental factors that affect the Company include the impact of the aircraft manufacturing
and airline industries on the environment, regulations on limiting the pollution levels and others
(Kaplan, 2016 – P3).
As it was already mentioned, 2% of global human-induced CO2 emissions are generated by
aviation. By 2050 this number is expected to rise to 3% (The Boeing Company, 2017) if no
action is taken. Raised concerns on impact that aerospace industry is making on the
environment forcing the regulating bodies to impose frameworks to reduce the emission the
industry making. One of the examples is the recently adopted airplane fuel efficiency standard
by the International Civil Aviation Organization (ICAO, 2017). Ultimate goal is to reduce Net
CO2 emissions to 50% by 2050 (see below

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)
. These standard are to be applied to all aircraft designs starting from 2020. In order to comply
these standards major aircraft and aircraft engine manufacturers are working hard and investing
significant resources to improve existing aircraft designs and develop new ones considering
these standards. Boeing’s 787, 737 and 777x (Carey, 2017) and Airbus’s A350 XWB, A330neo,
A380 (Airbus SE, 2016) designs already meeting or exceeding the new emission standards.

Figure 3 – Industry CO2 Emission Goals (The Boeing Company, 2017)

Although, abovementioned facts indicate that aerospace industry is managing to cope with
newly set CO2 emission and fuel consumption standards, it is evident that it is coming for a
price in form of Research & Development (R&D) costs. Major aircraft and engine manufacturers
are spending billions of dollars annually on (R&D) in order to design and produce products that
comply with the regulations (see section 3.2.5).

3.3.6Legal factors
Legal factors is concerned with issues such as employment laws, monopoly legislations and
environmental protection laws. One of the main factors that had and still have profound effect on
aerospace industry was the Airline Deregulation Act, enacted by United States Senate in 1978
(Fred L. Smith Jr., 2008). Before the act the investment and operating decisions were strictly
controlled by Civil Aeronautics Board, including pricing decisions, agreement between carriers,
consumer issues, mergers and acquisitions. Liberalization brought in by the Act led to reduced
airfare which in consequence increased demand for air travel. Another effect was the
emergence of Low Cost Carriers (LCC) (The Boeing Company, 2017), which started to provide
“no frills” services for significantly reduced prices which further increased demand. Similar
legislations were adopted in Europe and Asian countries.

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Adoption of Open Skies agreements between countries had similar effect and further liberalized
the aviation industry and allowed regional airlines to start operating on global scale, which
increased completion and gave more options for the consumers (The Boeing Company, 2017).
As illustrated above liberalization of aviation industry increasing demand for air travel, which in
consequence increasing demand for new aircrafts.
However, there are other legal issues between major players in aerospace industry which is
affecting the competitive landscape. Intense completion in aerospace industry sometimes also
leading to legal actions against competitors. One of the most vivid current example is the issue
over Bombardiers C Series aircrafts. C Series is a family of mid-range, narrow body, twin-
engine jet aircraft. It is claimed by Bombardier (Bombardier, 2017) that it is the only aircraft that
was purposefully designed from ground up to serve 100-150 seat market and now is the most
efficient aircraft in the skies. If accepted in US market it has potential to be sold in thousand of
units in coming decades, as major player in US market, Boeing does not real contender against
the C Series (The Economist, 2017b). Nonetheless, following the sales of 75 planes to Delta
Airlines, Boeing filed complaint to US Commerce Department claiming that Bombardier used
illegal subsidies and used “dumping” practices to sell the aircraft below its cost (Alwyn Scott,
2017). This resulted in import duties being raised to 300 percent which has potential could bury
the C Series project and would be serious blow to its owner, Bombardier.
Therefore, following this raise in import duties, Bombardier offered and Airbus obtained 50%
stake in C Series program for free of charge (The Economist, 2017c) Airbus has plans to
produce C Series aircrafts in Mobile, Alabama, which potentially would allow the company to
circumvent excessive import duties imposed. Recent reports indicate that Boeing is in talks with
Embraer (Reuters, 2018) to establish some strategic alliance. Although, there is no specific
information in what form this alliance could be, the observers (FlightGlobal, 2018) expect that it
might be related to Embraer’s E-Jet project which poses direct competition to C Series.

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3.4 Porters Five Forces Model

Porter’s Five Forces model looks at how attractive the industry and how easy it is to make
above average profits in the industry. The analysis is usually done for whole industry and not
recommended to use for individual companies (AICPA, 2013). According to this analysis model,
industry’s attractiveness depends on five forces (Kaplan Publishing UK, 2016). Analysis of these
forces were reviewed in the context of Aerospace industry and in particular civil aviation to
assess the level of attractiveness and intensity of the intensity of rivalry in the market where
Airbus SE operates.
Figure 4 - Porter's Five Forces Model (Kaplan Publishing UK, 2016)

Threat of
New
Entrants

Buyer Competitive Suppliler

Power Rivalry Power

Threat of
Substitutes

3.4.1Threat of New Entrants

New market entrants intensify competition by bringing extra capacity and eroding profits
(AICPA, 2013). The more difficult it is to enter the market the stronger is the position of
companies operating in this market. Barriers to entry include capital requirements government
policies and regulations, economies scale, patents and others. Upon generalized analysis it is
assumed that the threat of new entrants is LOW due to HIGH entry barriers.
Capital intensity: Aerospace industry market is very capital intensive and in order to
successfully compete in the market new entrants have to have designated research and
development, testing and manufacturing facilities (Porter Analysis, 2017).
Oligopoly: The fact that largest two manufacturers control around 66% and largest four control
around 80% of the market (in 2016, (Aviation Week, 2016)) imposes greater difficulties for new
entrants as the competition in every segment of the market is already quite intensive.

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Considering that, aerospace industry participants spend billions of dollars on R&D (Materna R.,
2013) it is assumed that it is practically impossible for new company to enter the market without
some breakthrough/disrupting technology or without some sort of state support or subsidy. It is
claimed that largest players in the market receive government support in form of subsidies,
preferential loans, orders and others in order to stay competitive (EDI Weekly, 2016). So it is
assumed that one of the viable options to enter the market, could be establishing joint venture
with existing market participants who already have necessary facilities, know-how and
knowledge of the market.

3.4.2The Power of Suppliers

The power of suppliers lies in ability to exert pressure on companies by affecting the pricing of
goods, their quality and availability (Wilkinson, 2013). Strong suppliers increase the competition
in the market and lower the profit margins of the buyers while weak suppliers make it less
competitive and increase the profits of the buyers. Aerospace industry suppliers are divided into
four categories (Rice, 2016):
1. Engine, propulsion systems and related auxiliary equipment and parts;
2. Prototype development and production;
3. Aircraft modification/upgrading services;
4. Aircraft overhaul and rebuilding services.
The power of these suppliers is estimated to be from HIGH to MEDIUM (Rice, 2016) due to
following reason:
The industry is very dependent on advanced technologies and not many companies can
manufacture products and render services for aerospace industry (Rice, 2016). For example, 6
largest aircraft manufacturers generate around 97% of total revenue in the segment (Statista,
2018). This level of concentration in suppliers market is somewhat balanced with even more
concentration in aircraft manufacturers segment (i.e. mainly Airbus and Boeing). Recent history
saw tendency for suppliers to scale up by merging with peer companies in order to have more
negotiating power (The Economist, 2017d). This allowed suppliers to have nearly twice-higher
profit margins than Boeing or Airbus (FlightGlobal, 2017).
However, this is not without opposition from the same Airbus and Boeing, as Airbus and Boeing
dominate majority of the aircraft market. Thus they also have good advantage when negotiating
prices with suppliers. Major aircraft manufacturers were fighting the pressure from suppliers by
offering larger orders for cheaper prices (FlightGlobal, 2017). However, there are also some
more radical actions taken. Recently, Boeing even warned that it may initiate lobbying to stop
the merger between United Technologies (supplier of Pratt & Whitney jet engines and other vital
equipment) and Rockwell Colling (avionics producer) (The Economist, 2017d). Boeing has
actually a record of giving “blessings” for merger and acquisitions in the suppliers segment as it
has ability to “veto” the transactions by not transferring existing contracts with suppliers to the
new owner (Scott, 2015). Considering the fact that usually these contracts are the main source
of revenue for suppliers, loosing ability to sell their products to major aircraft producers could
have devastating effect on the suppliers.

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3.4.3 The Power of Buyers

“Buyer power is the assessment of how easy it is for buyers to drive prices down” (AICPA,
2013). Factors that affect buyer’s power are the proportion of sales made to particular buyer,
level of profit of the buyer, the cost for buyer to switch from one manufacturer to another and
availability of alternatives (Kaplan Publishing UK, 2016).
Although, there are hundreds of airlines, due to fact that every purchase is a significant and is
done considering long term perspective (Porter Analysis, 2017) it can be said that customers
have sizable power over aircraft manufacturers. Especially, when considering large and growing
airlines, winning these buyers can generate tens of billion dollars in future revenue. Recent
examples include the sales of 430 planes by Airbus to the low cost airlines for total amount of
USD 50 billion and sales of 150 planes by Boeing to the Emirates airlines for total amount of
USD 99 billion (Ostrower, 2017).
However, limited number of manufacturers in the market still limit the power of the buyers up to
certain extent. Therefore, their power can be assessed as MEDIUM.

3.4.4Threat of Substitutes
“The threat of substitute is the level of risk that company faces from replacement by its
substitutes” (Cleverism, 2014). Availability of substitutes provide the customers with alternatives
to fulfill their needs within or across the industries. In case with Aerospace industry and its main
product (which generates most revenue), commercial aircrafts used for passenger and cargo
transportation, there are following types of alternatives:
 Automobile transport;
 Railway transport
 Maritime transport
High Speed Train: Considering the fact that air travel is faster and relatively affordable,
especially with popularization of low cost carriers air travel has no real alternative for long
distance travels and travels where large bodies of water are required to be crossed. There is
however trend in popularization of high-speed train transportation which is competing with air
travel in some popular short travel routes in Europe, China and Japan (see Appendix 4.17)
(Justin Bachman, 2018). One of future developments of train transport could be the Hyperloop,
which would allow travel even at even faster speeds - over 1,100 km per hour (Cellan-Jones,
2018). There are claims that this technology could be delivered within this decade (London,
2017), but its feasibility or commercial viability is still under question
In case with freight transportation, air transport is still more expensive than other types of
transportation. Therefore, only 2-3% of global trade is transported by air, but the in terms of
value this ratio is 40% (Wright, 2012).
Notwithstanding above facts, if compared with existing modes of transportation the position of
air travel seem quite solid. Main aircraft producers are expecting the market for commercial
airplanes to expand further in coming 20 years (Airbus SE, 2017) (The Boeing Company, 2017),
owing to growing global economy, rising demand in emerging economies and development of
new technologies that are making air transport cleaner and more efficient (see sections 3.3.2,
3.3.3 and 3.3.4). Therefore, threat of substitutes is assumed to be from LOW to MEDIUM.
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Research Analysis Project Airbus SE 2015-2017

3.4.5Competitive Rivalry
Level of competitive rivalry between market participants is measured by the concentration of
major companies in the market, how differentiated their products, how each companies actions
affect profitability of others (Wilkinson, 2013) and market growth rate (Wilkinson, 2013) Level of
competitive rivalry in aerospace industry and in particular manufacturing commercial aircraft is
assumed to be Medium due to following reasons:
Market concentration level: Concentration level on the market is quite high as major four
commercial aircraft manufacturers accounted for around 80% of existing fleet of aircrafts in
2016 (Aviation Week, 2016) and this ratio is not expected to get smaller. Among these four,
Airbus and Boeing account for 66% of the market and competition is intense in all segments of
commercial aircrafts, except in narrow body, single aisle aircrafts were Bombardier and
Embraer are exerting pressure on majors with their C Series and E2 program aircrafts
respectively.
Market growth rate: As it was noted in section 3.3.2, market for civil aircrafts is expected to rise
significantly in coming 20 years (around 30-40 thousand new aircrafts). Even though,
companies intensely compete for each order, it is assumed that there will be enough market
growth to sustain growth of each market participant.
Long lifespan of products: Aircrafts by their nature have quite long life span of over 20 years.
There are cases when some Boeing 747s were still operational when were 25-30 years old.
(Maksel, 2008). Considering this, there are small chances of repeat sales to the same airlines,
except only if the airline is growing rapidly. Therefore, there is certain pressure for aircraft
manufacturers to compete in order to gain orders to guarantee future revenues.

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Research Analysis Project Airbus SE 2015-2017

3.5 SWOT ANALYSIS

Below is the SWOT matrix (Figure 5) with identified strength, weaknesses, opportunities and
threats and respective sections were these factors were identified.
Figure 5 - Airbus SWOT Matrix (Kaplan Publishing UK, 2016)
STRENGTHS WEAKNESSES
- Strong sales growth and consistent 3.2.1 - Slow sales/orders of new A380 3.2.1
increase of annual deliveries (elaborate) 3.2.3
- Success of A320 series 3.2.1 - Operational inefficiencies and 3.2.2
- High book-to-bill ratio and largest 3.2.3 issues with supplier’s which lead
backlog in the industry to lower Gross Margin
- Higher Return on Equity 3.2.4 - Increased tax burden 3.2.4
- Large cash balances 3.2.5
- High R&D Expenses 3.2.5
OPPORTUNITIES THREATS
- Expanding passenger traffic 3.3.2 - Rise in popularity of high speed 3.4.4
- High global demand for narrow body 3.3.1 rail transport;
regional aircrafts - Consolidation of suppliers 3.4.2
- Minimal acquisition cost of Bombardiers 3.3.6 - Possible US sanctions against 3.3.6
C Series program Bombardier C Series
- Liberalization of air travel - Strong sales of Boeing’s 787 3.2.2
Dreamliner
- Development of new aircrafts in 3.3.1
China and Russia.

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Research Analysis Project Airbus SE 2015-2017

3.6 TOWS ANALYSIS

The TOWS Matrix is a variation of SWOT analysis with one distinct, TOWS matrix enables not
only identify main strength, weaknesses, opportunities to and strength but also to develop
strategic alternatives for the company based on analysis results (Kirtisis, 2017). In particular it
allows to evaluate possibilities to (Mind Tools, 2018):
- To use Strength to take advantage of Opportunities – SO strategy;
- To avoid or mitigate the effect of Threats by utilizing the Strength – ST strategy;
- To use Opportunities to overcome the Weaknesses – WO strategy;
- To mitigate the Weaknesses and avoid Threats – WT strategy.

Figure 6 - Airbus TOWS Matrix (Mind Tools, 2018)

STRENGTHS WEAKNESSES
S-O STRATEGIES W-O STRATEGIES
- Focus on embedding Bombardiers C - Seek ways to raise popularity of A380
Series aircrafts within existing portfolio series and capitalize on increasing
of aircrafts and ramp up the marketing global demand for aircrafts.
OPPORTUNITIES

efforts in order to take advantage from - Evaluate possibility to transfer

increasing global demand for narrow- production of aircrafts from Europe to
body jets. Asian countries (i.e. China) to
- Further improve the existing bestselling capitalize on increasing demand and
A320 series in terms of using composite possibly lower tax rates (25% in
materials and seek ways to enable China (KPMG, 2018)).
installing even more efficient engines in
order to capitalize on increasing
demand for aircrafts.

S-T STRATEGIES W-T STRATEGIES

- Use existing large cash balances on - Use large cash balances and R&D
acquisition of essential parts makers in expertise find ways to make A380 more
order to vertically integrate so to popular (i.e. marketing efforts or making
circumvent the effects of consolidation it even more fuel-efficient).
of suppliers. - Find ways to increase operational
THREATS

- Use existing resources to improve A350 effectiveness in order to match the

aircrafts efficiency to effectively competitors.
compete with rising popularity of - Seek legal and ethical ways to optimize
Boeings 787 series aircrafts. tax expenses in order not to lose the
- Embed the Bombardier’s C Series in competitive edge to Boeing.
order to be able to compete against - Transfer production of Bombardiers C
upcoming narrow-body jets from China series to US soil in order to avoid
and Russia. increased import duties be able to sell
the aircraft to US airlines.
-

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Research Analysis Project Airbus SE 2015-2017

3.7 Conclusion
My research conclusion is that although the Airbus SE has its own weaknesses and there are
some significant threats, it has necessary capabilities and resources to mitigate its own
weaknesses and overcome the threats. Possible strategic options of the Airbus are all shown in
TOWS matrix given above ((Mind Tools, 2018)Figure 6 - Airbus TOWS Matrix (Mind Tools,
2018)Figure 6)

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[Link]
4.1 Airbus SE Financial Statements – Income Statement
AIRBUS SE (AIR) Income Statement
Fiscal year ends in December
EUR in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12

Revenue 66,767 66,581 64,450 60,713 59,256

Cost of revenue 59,160 61,317 55,599 51,776 50,895
Gross profit 7,607 5,264 8,851 8,937 8,361
Operating expenses
Research and development 2,807 2,970 3,460 3,391 3,160
Sales, General and administrative 2,439 2,723 2,651 2,601 2,913
Other operating expenses -683 2 -161 62 547
Total operating expenses 4,563 5,695 5,950 6,054 6,620
Operating income 3,044 -431 2,901 2,883 1,741

Interest Expense 517 522 551 462 497

Other income (expense) 2043 2244 1025 792 733
Income before taxes 4570 1291 3375 3213 1977

Provision for income taxes 1693 291 677 863 502

Net income from continuing operations 2877 1000 2698 2350 1,475

Other -4 -5 -2 -7 -10
Net income 2,873 995 2,696 2,343 1,465

Net income available to common

shareholders 2873 995 2696 2343 1465

Earnings per share

Basic 3.71 1.29 3.43 2.99 1.85
Diluted 3.7 1.29 3.42 2.99 1.84
Weighted average shares outstanding
Basic 774 774 786 783 792
Diluted 779 779 788 783 794
Source: (Morningstar, 2018a)

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4.2 Airbus SE Financial Statements – Balance Sheet

AIRBUS SE (AIR) BALANCE SHEET Fiscal year ends in December
EUR in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12
Assets
Current assets
Cash
Cash and cash equivalents 12,016 10,143 7,489 7,271 7,765
Short-term investments 4,135 3,330 3,368 4,514 4,328
Total cash 16,151 13,473 10,857 11,785 12,093
Receivables 8,358 8,101 7,877 6,798 7,239
Inventories 31,464 29,688 29,051 25,355 25,060
Other current assets 3,821 3,686 5,458 3,744 2,706
Total current assets 59,794 54,948 53,243 47,682 47,098
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 36,753 36,180 36,712 34,024 32,535
Accumulated Depreciation (20,144) (19,267) (19,585) (17,703) (16,679)
Net property, plant and equipment 16,610 16,913 17,127 16,321 15,856
Intangible assets 11,629 12,068 12,555 12,758 13,653
Deferred income taxes 3,598 7,557 6,759 5,717 3,840
Other long-term assets 22,306 19,647 16,997 13,624 12,864
Total non-current assets 54,143 56,185 53,438 48,420 46,213
Total assets 113,937 111,133 106,681 96,102 93,311
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 2,195 1,672 2,777 1,061 1,632
Capital leases 17 15 13 12 13
Accounts payable 13,444 12,532 11,763 10,183 10,372
Taxes payable 1,481 1,126 908 738 616
Other current liabilities 38,888 40,356 38,547 36,183 35,948
Total current liabilities 56,025 55,701 54,008 48,177 48,581
Non-current liabilities
Long-term debt 8,659 8,417 5,960 6,092 3,797
Capital leases 325 374 375 186 159
Deferred taxes liabilities 981 1,292 1,200 1,130 1,487
Deferred revenues 199 288 263 267 239
Minority interest 3 (5) 7 18 43
Other long-term liabilities 34,397 41,409 38,902 33,171 27,994
Total non-current liabilities 44,564 51,775 46,707 40,864 33,719
Total liabilities 100,589 107,476 100,715 89,041 82,300
Stockholders' equity
Additional paid-in capital 2,826 2,745 3,484 4,500 5,049
Retained earnings 7,007 4,987 6,316 2,989 2,300
Treasury stock (2) (3) (303) (8) (50)
Accumulated other comprehensive income 3,517 (4,072) (3,531) (420) 3,712
Total stockholders' equity 13,348 3,657 5,966 7,061 11,011
Total liabilities and stockholders' equity 113,937 111,133 106,681 96,102 93,311
Source: (Morningstar, 2018b)

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Research Analysis Project Airbus SE 2015-2017

4.3 Airbus SE Financial Statements – Cash Flow Statement

AIRBUS SE (AIR) Statement of CASH FLOW
Fiscal year ends in December
EUR in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Cash Flows From Operating Activities
Net income 2,873 995 2,696 2,343 1,465 2,873
Depreciation & amortization 2,298 2,294 2,466 2,150 1,968 2,298
Deferred income taxes 1,693 291 677 863 502 1,693
Change in working capital 266 1,245 (777) (2,386) (2,164) 266
Inventory (2,572) (3,477) (4,133) (3,252) (3,151) (2,572)
Prepaid expenses 1,268 4,628 3,752 1,715 1,268
Other working capital 1,570 94 (396) (849) 987 1,570
Other non-cash items (2,686) (456) (1,462) (410) 160 (2,686)
Net cash provided by operating activities 4,444 4,369 3,600 2,560 1,931 4,444
Cash Flows From Investing Activities
Investments in property, plant, and
equipment (2,558) (3,060) (2,924) (2,548) (2,949) (2,558)
Acquisitions, net 354 611 1,587 966 (151) 354
Purchases of investments (4,680) (2,971) (7,151) (5,526) (1,401) (4,680)
Sales/Maturities of investments 3,066 2,799 4,790 3,510 2,673 3,066
Purchases of intangibles (2,558) (3,060) (2,924) (2,548) (2,949) (2,558)
Sales of intangibles 177 72 78 232 60 177
Other investing activities 3,669 4,779 3,085 2,691 2,975 3,669
Net cash used for investing activities (2,530) (830) (3,459) (3,223) (1,742) (2,530)
Cash Flows From Financing Activities
Debt issued 1,703 3,297 1,254 2,038 1,679 1,703
Debt repayment (419) (1,725) (262) (1,108) (534) (419)
Common stock issued 102
Common stock repurchased (736) (264) (1,915)
Dividend paid (1,043) (1,008) (945) (587) (467) (1,043)
Other financing activities 80 56 192 50 169 80
Net cash provided by (used for) financing
activities 321 (116) (25) 495 (1,068) 321
Effect of exchange rate changes (374) 60 171 256 (112) (374)
Net change in cash 1,861 3,483 287 88 (991) 1,861
Cash at beginning of period 10,160 6,677 7,289 7,201 8,756 10,160
Cash at end of period 12,021 10,160 7,576 7,289 7,765 12,021
Free Cash Flow
Operating cash flow 4,444 4,369 3,600 2,560 1,931 4,444
Capital expenditure (2,558) (3,060) (2,924) (2,548) (2,949) (2,558)
Free cash flow 1,886 1,309 676 12 (1,018) 1,886
Source: (Morningstar, 2018c)

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4.4 Boeing Financial Statements – Income Statement

BOEING CO (BA )INCOME STATEMENT
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Revenue 93,392 94,571 96,114 90,762 86,623 93,392
Cost of revenue 76,066 80,790 82,088 76,752 73,268 76,066
Gross profit 17,326 13,781 14,026 14,010 13,355 17,326
Operating expenses
Research and development 3,179 4,627 3,331 3,047 3,071 3,179
Sales, General and administrative 4,094 3,616 3,525 3,767 3,956 4,094
Other operating expenses (225) (296) (273) (277) (234) (225)
Total operating expenses 7,048 7,947 6,583 6,537 6,793 7,048
Operating income 10,278 5,834 7,443 7,473 6,562 10,278
Interest Expense 360 306 275 333 386 360
Other income (expense) 129 40 (13) (3) 56 129
Income before taxes 10,047 5,568 7,155 7,137 6,232 10,047
Provision for income taxes 1,850 673 1,979 1,691 1,646 1,850
Net income from continuing operations 8,197 4,895 5,176 5,446 4,586 8,197
Net income from discontinuing ops (1)
Net income 8,197 4,895 5,176 5,446 4,585 8,197
Preferred dividend 6 3 4 6 6
Net income available to common
shareholders 8,191 4,892 5,172 5,440 4,585 8,191
Earnings per share
Basic 14 8 8 7 6 14
Diluted 13 8 7 7 6 13
Weighted average shares outstanding
Basic 602 636 687 728 759 602
Diluted 610 643 695 737 768 610
EBITDA 12,476 7,784 9,263 9,376 8,462 12,476
Source: (Morningstar, 2018e)

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4.5 Boeing Financial Statements – Balance Sheet

BOEING CO (BA) BALANCE SHEET
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12
Assets
Current assets
Cash
Cash and cash equivalents 8,813 8,801 11,302 11,733 9,088
Short-term investments 1,179 1,228 750 1,359 6,170
Total cash 9,992 10,029 12,052 13,092 15,258
Receivables 10,516 7,804 8,003 7,729 6,546
Inventories 44,344 43,199 47,257 46,756 42,912
Deferred income taxes 18 14
Other current assets 309 1,456 922 190 344
Total current assets 65,161 62,488 68,234 67,785 65,074
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 30,313 29,690 28,362 26,696 25,294
(15,070
Accumulated Depreciation (17,641) (16,883) (16,286) (15,689) )
Net property, plant and equipment 12,672 12,807 12,076 11,007 10,224
Equity and other investments 1,260 1,317 1,284 1,154 1,204
Goodwill 5,559 5,324 5,126 5,119 5,043
Intangible assets 2,573 2,540 2,657 2,869 3,052
Deferred income taxes 341 332 265 6,576 2,939
Other long-term assets 4,767 5,189 4,766 4,688 5,127
Total non-current assets 27,172 27,509 26,174 31,413 27,589
Total assets 92,333 89,997 94,408 99,198 92,663
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 1,283 327 1,181 929 1,563
Capital leases 52 57 53
Accounts payable 12,202 11,190 10,800 10,667 9,498
Deferred income taxes 8,603
Taxes payable 380 89 262 6,267
Accrued liabilities 13,907 13,736 13,031 12,706 13,589
Deferred revenues 20,027
Other current liabilities 28,445 24,735 25,085 23,812 542
Total current liabilities 56,269 50,134 50,412 56,717 51,486
Non-current liabilities
Long-term debt 9,782 9,487 8,730 8,141 8,072
Capital leases 81
Deferred taxes liabilities 1,839 1,338 2,392
Accrued liabilities 5,545 5,916 6,616
Pensions and other benefits 16,471 19,943 17,783 23,984 17,002
Minority interest 57 60 62 125 122
Other long-term liabilities 2,015 2,221 2,078 1,566 1,106
Total non-current liabilities 35,709 39,046 37,661 33,816 26,302

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Total liabilities 91,978 89,180 88,073 90,533 77,788

Stockholders' equity
Common stock 5,061 5,061 5,061 5,061 5,061
Additional paid-in capital 6,804 4,762 4,834 4,625 4,415
Retained earnings 45,320 40,714 38,756 36,180 32,964
(17,671
Treasury stock (43,454) (36,097) (29,568) (23,298) )
Accumulated other comprehensive income (13,376) (13,623) (12,748) (13,903) (9,894)
Total stockholders' equity 355 817 6,335 8,665 14,875
Total liabilities and stockholders' equity 92,333 89,997 94,408 99,198 92,663
Source: (Morningstar, 2018d)

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4.6 Boeing Financial Statements – Statement of Cash Flow

BOEING CO (BA) Statement of CASH FLOW
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Cash Flows From Operating Activities
Net income 8,197 4,895 5,176 5,446 4,585 8,197
Depreciation & amortization 2,069 1,910 1,833 1,906 1,844 2,069
Investment/asset impairment charges 113 90 167 229 96 113
Stock based compensation 202 190 189 195 206 202
Change in working capital 2,495 3,045 1,795 897 1,078 2,495
Accounts receivable (1,821) 112 (1,069) (1,328) (879) (1,821)
Inventory (1,085) 3,755 (1,110) (4,330) (5,562) (1,085)
Accounts payable 130 622 (238) 1,339 (298) 130
Accrued liabilities 573 726 2 98 2,603 573
Other working capital 4,698 (2,170) 4,210 5,118 5,214 4,698
Other non-cash items 268 369 203 185 370 268
Net cash provided by operating activities 13,344 10,499 9,363 8,858 8,179 13,344
Cash Flows From Investing Activities
Investments in property, plant, and
equipment (1,739) (2,613) (2,450) (2,236) (2,098) (1,739)
Property, plant, and equipment
reductions 92 38 42 34 51 92
Acquisitions, net (324) (297) (31) (163) (26) (324)
Purchases of investments (3,601) (1,719) (2,036) (8,617) (15,394) (3,601)
Sales/Maturities of investments 3,639 1,209 2,590 13,416 12,453 3,639
Purchases of intangibles (131) (140) (131)
Other investing activities 2 2 39 33 2
Net cash used for investing activities (2,062) (3,380) (1,846) 2,467 (5,154) (2,062)
Cash Flows From Financing Activities
Debt issued 2,077 1,325 1,746 2,077
Debt repayment (953) (1,359) (885) (1,601) (1,434) (953)
Common stock repurchased (9,236) (7,001) (6,751) (6,001) (2,801) (9,236)
Excess tax benefit from stock based compensation 157 114 128
Dividend paid (3,417) (2,756) (2,490) (2,115) (1,467) (3,417)
Other financing activities 179 204 303 1,010 1,325 179
Net cash provided by (used for) financing
activities (11,350) (9,587) (7,920) (8,593) (4,249) (11,350)
Effect of exchange rate changes (87) (29)
Net change in cash (68) (2,468) (403) 2,645 (1,253) (68)
Cash at beginning of period 8,801 11,302 11,733 9,088 10,341 8,801
Cash at end of period 8,733 8,834 11,330 11,733 9,088 8,733
Free Cash Flow
Operating cash flow 13,344 10,499 9,363 8,858 8,179 13,344
Capital expenditure (1,870) (2,613) (2,450) (2,236) (2,238) (1,870)
Free cash flow 11,474 7,886 6,913 6,622 5,941 11,474
Source: (Morningstar, 2018f)

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4.7 Bombardier Financial Statements – Income Statement

BOMBARDIER INC (BDRBF) INCOME STATEMENT
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Revenue 16,218 16,339 18,172 20,111 18,151 16,218
Cost of revenue 14,276 14,622 16,199 17,534 15,658 14,276
Gross profit 1,942 1,717 1,973 2,577 2,493 1,942
Operating expenses
Research and development 240 287 355 347 293 240
Sales, General and administrative 1,194 1,133 1,213 1,358 1,417 1,194
Other operating expenses (140)
Total operating expenses 1,434 1,420 1,568 1,705 1,570 1,434
Operating income 508 297 405 872 923 508
Interest Expense 365 375 157 37 271 365
Other income (expense) (619) (729) (5,434) (1,575) 119 (619)
Income before taxes (476) (807) (5,186) (740) 771 (476)
Provision for income taxes 77 174 154 506 199 77
Net income from continuing operations (553) (981) (5,340) (1,246) 572 (553)
Other 37 (41) (7) (14) (8) 37
Net income (516) (1,022) (5,347) (1,260) 564 (516)
Preferred dividend 27 32 23 27
Net income available to common shareholders (543) (1,054) (5,370) (1,260) 564 (543)
Earnings per share
Basic (0) (0) (3) (1) 0 (0)
Diluted (0) (0) (3) (1) 0 (0)
Weighted average shares outstanding
Basic 2,195 2,213 2,083 1,742 1,739 2,195
Diluted 2,195 2,213 2,083 1,742 1,741 2,195
EBITDA 203 (61) (4,591) (286) 1,433 203
Source: (Morningstar, 2018h)

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4.8 Bombardier Financial Statements – Balance Sheet

BOMBARDIER INC (BDRBF) BALANCE SHEET
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12
Assets
Current assets
Cash
Cash and cash equivalents 2,988 3,384 2,720 2,489 3,397
Short-term investments 415 336 450
Total cash 3,403 3,720 3,170 2,489 3,397
Receivables 1,136 1,165 1,336 1,414 1,386
Inventories 5,890 5,844 6,978 7,970 8,234
Other current assets 4,684 567 621 1,246 1,624
Total current assets 15,113 11,296 12,105 13,119 14,641
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 4,285 4,453 4,475 4,444 4,388
Accumulated Depreciation (2,589) (2,504) (2,414) (2,352) (2,322)
Net property, plant and equipment 1,696 1,949 2,061 2,092 2,066
Equity and other investments 1,316 1,247 1,226 294 318
Goodwill 2,042 1,855 1,978 2,127 2,381
Intangible assets 3,581 5,286 4,089 6,823
Deferred income taxes 603 705 761 875 1,231
Other long-term assets 655 488 683 2,284 8,726
Total non-current assets 9,893 11,530 10,798 14,495 14,722
Total assets 25,006 22,826 22,903 27,614 29,363
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable 2,888 2,126 2,812 3,037 2,959
Accrued liabilities 954 141 767 690 739
Other current liabilities 9,434 7,666 8,244 9,708 10,088
Total current liabilities 13,276 9,933 11,823 13,435 13,786
Non-current liabilities
Long-term debt 9,200 8,738 8,908 7,627 6,988
Pensions and other benefits 2,633 2,159 2,629 2,161
Minority interest 1,970 1,754 13 13 23
Other long-term liabilities 3,629 7,644 4,067 3,868 3,979
Total non-current liabilities 17,432 18,136 15,147 14,137 13,151
Total liabilities 30,708 28,069 26,970 27,572 26,937
Stockholders' equity
Preferred stock 347 347 347 347 347
Common stock 2,154 2,152 2,195 1,381 1,380
Additional paid-in capital 171 128 106 92 92
Retained earnings (8,182) (7,677) (6,299) (1,510) 2,598
Accumulated other comprehensive income (192) (193) (416) (268) (1,991)
Total stockholders' equity (5,702) (5,243) (4,067) 42 2,426
Total liabilities and stockholders' equity 25,006 22,826 22,903 27,614 29,363
Source: (Morningstar, 2018g)
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4.9 Bombardier Financial Statements – Statement of Cash Flow

BOMBARDIER INC (BDRBF) Statement of CASH FLOW
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Cash Flows From Operating Activities
Net income (553) (981) (5,340) (1,246) 572 (553)
Depreciation & amortization 314 371 438 417 391 314
Amortization of debt discount/premium and issuance costs 10
Investment/asset impairment charges 51 4,300 1,266 51
Deferred income taxes 34 31 63 354 74 34
Stock based compensation 45 14 2 11 45
Inventory (836) 786 87 (631) (836)
Accrued liabilities (104)
Other working capital 1,611 (188) 19 990 1,611
Other non-cash items (135) 706 (53) 52 (27) (135)
Net cash provided by operating activities 531 137 20 847 1,380 531
Cash Flows From Investing Activities
Investments in property, plant, and equipment (1,389) (1,255) (1,879) (1,982) (2,357) (1,389)
Property, plant, and equipment reductions 72 54 17 18 70 72
Acquisitions, net 25 83
Purchases of investments (64) (53) (122)
Sales/Maturities of investments 204 53
Other investing activities (5) 6 (12) (17) 65 (5)
Net cash used for investing activities (1,322) (1,195) (1,734) (1,956) (2,261) (1,322)
Cash Flows From Financing Activities
Debt issued 1,367 1,820
Debt repayment (651) (1,566) (831) (1,334) (51) (651)
Common stock repurchased (9)
Dividend paid (18) (17) (19) (182) (196) (18)
Other financing activities 1,099 2,190 2,908 66 1,970 1,099
Net cash provided by (used for) financing activities 430 1,974 2,049 370 1,723 430
Effect of exchange rate changes 34 (252) (104) (169) (2) 34
Net change in cash (327) 664 231 (908) 840 (327)
Cash at beginning of period 3,384 2,720 2,489 3,397 2,557 3,384
Cash at end of period 3,057 3,384 2,720 2,489 3,397 3,057
Free Cash Flow
Operating cash flow 531 137 20 847 1,380 531
Capital expenditure (1,389) (1,255) (1,879) (1,982) (2,357) (1,389)
Free cash flow (858) (1,118) (1,859) (1,135) (977) (858)
Source: (Morningstar, 2018i)

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4.10 Embraer Financial Statements – Income Statement

EMBRAER SA ADR (ERJ) INCOME STATEMENT
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Revenue 5,839 6,218 5,928 6,289 6,235 5,839
Cost of revenue 4,773 4,981 4,817 5,038 4,819 4,773
Gross profit 1,066 1,237 1,111 1,250 1,416 1,066
Operating expenses
Research and development 49 48 42 47 75 49
Sales, General and administrative 486 501 544 627 665 486
Restructuring, merger and acquisition 6 117 6
Other operating expenses 195 365 194 33 (37) 195
Total operating expenses 737 1,031 780 707 703 737
Operating income 329 206 332 543 713 329
Interest Expense 217 209 177 133 128 217
Other income (expense) 176 162 182 94 17 176
Income before taxes 288 159 336 504 602 288
Provision for income taxes 26 (9) 255 156 256 26
Net income from continuing operations 263 168 81 348 346 263
Other (16) (2) (12) (13) (4) (16)
Net income 247 166 69 335 342 247
Net income available to common shareholders 247 166 69 335 342 247
Earnings per share
Basic 1 1 0 2 2 1
Diluted 1 1 0 2 2 1
Weighted average shares outstanding
Basic 184 184 183 183 182 184
Diluted 184 184 183 184 183 184
EBITDA 848 736 830 923 1,021 848
Source: (Morningstar, 2018l)

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4.11 Embraer Financial Statements –Balance Sheet

EMBRAER SA ADR (ERJ) BALANCE SHEET Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12
Assets
Current assets
Cash
Cash and cash equivalents 1,271 1,242 2,166 1,713 1,684
Short-term investments 2,366 1,776 623 711 940
Total cash 3,636 3,017 2,788 2,424 2,624
Receivables 903 808 873 706 583
Inventories 2,149 2,496 2,315 2,405 2,287
Other current assets 364 460 436 276 274
Total current assets 7,052 6,782 6,412 5,811 5,768
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 3,758 3,724 3,462 3,412 3,263
Accumulated Depreciation (1,653) (1,570) (1,434) (1,386) (1,269)
Net property, plant and equipment 2,105 2,154 2,027 2,026 1,993
Equity and other investments 257 172 751 46 45
Goodwill 12 21 16 38
Intangible assets 1,870 1,644 1,389 1,223 1,109
Deferred income taxes 3 3 4 8 8
Other long-term assets 638 889 1,070 1,259 1,218
Total non-current assets 4,884 4,883 5,258 4,600 4,375
Total assets 11,936 11,665 11,670 10,411 10,142
Liabilities
Current liabilities
Short-term debt 406 533 230 100 91
Accounts payable 825 952 1,035 981 1,014
Taxes payable 87 70 189 134 152
Deferred revenues 963 1,028 1,064 836 1,050
Other current liabilities 501 598 563 502 586
Total current liabilities 2,783 3,181 3,080 2,553 2,893
Non-current liabilities
Long-term debt 4,156 3,601 3,686 2,808 2,503
Deferred taxes liabilities 251 263 417 270 209
Deferred revenues 202 254 164 176 131
Minority interest 113 92 102 100 99
Other long-term liabilities 363 425 478 739 774
Total non-current liabilities 5,085 4,635 4,847 4,093 3,716
Total liabilities 7,868 7,816 7,928 6,646 6,609
Stockholders' equity
Common stock 1,438
Additional paid-in capital 1,438 1,438 1,438 1,438
Retained earnings 2,645 2,307 2,354 2,205
Treasury stock (52) (49) (38) (60) (104)
Accumulated other comprehensive income 37 2,460 35 33 (6)
Total stockholders' equity 4,069 3,849 3,742 3,765 3,533
Total liabilities and stockholders' equity 11,936 11,665 11,670 10,411 10,142
Source: (Morningstar, 2018j)
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4.12 Embraer Financial Statements – Statement of Cash Flow

EMBRAER SA ADR (ERJ) Statement of CASH FLOW
Fiscal year ends in December
USD in Million except per share data 2017-12 2016-12 2015-12 2014-12 2013-12 TTM
Cash Flows From Operating Activities
Net income 263 168 81 348 346 263
Depreciation & amortization 343 368 317 286 291 343
Amortization of debt discount/premium and issuance costs (31) (41) (31)
Investment/asset impairment charges 83
Deferred income taxes (15) (146) 136 79 193 (15)
Stock based compensation - 1 2 5 7 -
Change in working capital 112 (495) 310 (276) (307) 112
Accounts receivable (83) 156 (73) (83)
Inventory 405 (137) 137 (109) (157) 405
Accounts payable (127) (94) 72 (28) 258 (127)
Income taxes payable 21 (153) 63 (52) (62) 21
Other working capital (104) (268) 111 (88) (346) (104)
Other non-cash items 86 42 16 40 36 86
Net cash provided by operating activities 757 (20) 862 482 565 757
Cash Flows From Investing Activities
Investments in property, plant, and equipment (238) (392) (342) (284) (438) (238)
Property, plant, and equipment reductions 19 3 52 - 19
Acquisitions, net 2
Purchases of investments (409) (3) (1) - (17) (409)
Sales/Maturities of investments 28
Purchases of intangibles (470) (505) (428) (415) (317) (470)
Other investing activities 1 (82) (699) 5 1
Net cash used for investing activities (1,097) (980) (1,417) (672) (764) (1,097)
Cash Flows From Financing Activities
Debt issued 973 576 1,697 799 891 973
Debt repayment (540) (524) (419) (386) (650) (540)
Common stock repurchased (15) (17) (15)
Dividend paid (54) (28) (61) (99) (71) (54)
Other financing activities 6 2 7 20 23 6
Net cash provided by (used for) financing activities 370 9 1,224 333 192 370
Effect of exchange rate changes (1) 67 (217) (115) (106) (1)
Net change in cash 29 (924) 452 29 (113) 29
Cash at beginning of period 1,242 2,166 1,713 1,684 1,797 1,242
Cash at end of period 1,271 1,242 2,166 1,713 1,684 1,271
Free Cash Flow
Operating cash flow 757 (20) 862 482 565 757
Capital expenditure (708) (898) (769) (699) (754) (708)
Free cash flow 49 (918) 93 (217) (190) 49
Source: (Morningstar, 2018m)

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4.13 Appendix – CAGR

According to Investopedia (Investopedia, 2018) compound annual growth rate (CAGR) is the
mean of annual wroth rate of an investment over a specified period of time longer than one
year. To calculate compound annual growth rate, divide the value of an investment at the end of
the period in question by its value at the beginning of that period, raise the result to the power of
one divided by the period length, and subtract one from the subsequent result. Below is the
formula for CAGR:

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4.14 Appendix – World Bank Group – Real GPD (2018)

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4.15 Calculation details of Orders Value for Airbus SE

Calculation of net orders value of Airbus SE for 2017-2015
B. Net orders of Commercial Aircrafts (Airbus SE,
A. Estimated Market Price (See table below for calculation) 2018) A*B - Orders Value, EUR mln
Net in Year Orders* 2017 2016 2015 2017 2016 2015 2017 2016 2015
A380 225 229.12 228.39 - 2 3 - 458 685
A350 145 147.18 146.71 44 51 16 6,359 7,506 2,347
A330 102 104.29 103.96 25 106 156 2,560 11,055 16,218
A320 Family 48.07 48.96 48.80 1,143 790 1,010 54,949 38,679 49,292
Total Orders 1,212 949 1,185 63,868 57,698 68,542
*See table below *Gross orders minus cancellations for that year

Discounts recorded in 2016 for Airbus SE airliners

A330-
A320 A321 A330- A330-800 A330-200 A330- 900 A350- A350- A350-
Aircraft type A320 A321 neo neo 200 (neo) Freighter 300 (neo) 800 900 1000 A380
List Price* 101 118 111 130 239 260 242 264 296 281 317 367 446
Average discount** 54.70% 54.30% 54.80% 54.80% 62.60% 57.57% 57.57% 57.30% 52.80% 51.30% 51.30% 51.30% 45.30%
Estimated Market Price 46 54 50 59 89 110 103 113 140 137 155 178 244
Average price USD mln 52 111 157 244
2015 Avg. price EUR mln 48.80 104 147 228
2016 Avg. price EUR mln 48.96 104 147 229
2017 Avg. price EUR mln 48.07 102 145 225
* - (Airbus SE, 2018) (Airbus SE, 2018)
** - (AirInsight, 2016)

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4.16 Appendix – DuPont Analysis

2017 2016 2015

Return on Equity 32.7% 11.4% 31.2%
Net profit margin (Net income/Revenue) 4.3% 1.5% 4.2%
Net Income, EUR mln 2,873 995 2,696
Revenue, EUR mln 66,767 66,581 64,450
Tax Burden 0.63 0.77 0.80
Net Income , EUR mln 2,873 995 2,696
EBT*, EUR mln 4,570 1,291 3,375
Interest Burden 0.90 0.71 0.86
EBT, EUR mln 4,570 1,291 3,375
EBIT**, EUR mln 5,087 1,813 3,926
EBIT Margin 7.6% 2.7% 6.1%
EBIT, EUR mln 5,087 1,813 3,926
Revenue, EUR mln 66,767 66,581 64,450
Total Asset Turnover (Revenue/Average Total Assets) 0.50 0.52 0.54
Revenue, EUR mln 66,767 66,581 64,450
Average total assets*, EUR mln 132,241 128,333 120,036
Financial Leverage 15.06 14.64 13.89
Average total assets, EUR mln 132,241 128,333 120,036
Average shareholders Equity, EUR mln 8,782.50 8,766 8,645
*CFA (2012)
* EBT - Earnings before tax
*** - Earnings before interest and tax

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4.17 Appendix – Comparison of Air Travel and High Speed Train

Source: (Justin Bachman, 2018)

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