February 14, 2019 / 1:04 PM / 4 months ago

Breakingviews - Jumbo reality check frees Airbus to fly higher

An Airbus A380, the world's largest jetliner, takes part in flying display, during the 52nd Paris Air Show at Le Bourget Airport near Paris, France June 25, 2017.

LONDON (Reuters Breakingviews) - European politicians, as well as passengers who appreciate more leg room, will lament Airbus sounding the death-knell of the A380. Few others will shed tears for the gas-guzzling behemoth. As with the supersonic Concorde, another engineering marvel, the superjumbo owed more to regional political ambition than commercial logic. The aerospace group can now focus on closing its valuation gap with U.S. rival Boeing by churning out more of the nimbler, greener two-engine jets that airlines want to fly.

Airbus shares reveal what investors thought of the 12-year-old A380. The stock leapt 5 percent on Thursday, approaching July’s record high of 111.16 euros. Investors also applauded a robust 2019 outlook that will build on the forecast-beating adjusted EBIT of 5.8 billion euros reported for 2018.

The Toulouse-based firm hopes to sell between 880 and 890 planes this year, compared with the 800 that it delivered in 2018. Scrapping the A380 and selling customers more smaller planes over the next two years will make it easier to hit a target that Airbus says should translate into a 15 percent rise in adjusted EBIT. For example, Credit Suisse estimates that losing 39 superjumbos ordered by Emirates is financially neutral since the Gulf airline will instead take 70 of the fuel-efficient two-engine jets that form the bulk of Airbus production.

True, knocking the A380 on the head has costs: the firm has booked a 463 million euro charge. But the decision gets Chief Executive Tom Enders out of the shrinking market for very large aircraft that has been dominated by Boeing. Airlines are increasingly bypassing big hubs and want more, smaller planes. And environmental and cost pressures make the superjumbo harder to justify. For instance, Boeing’s 787 Dreamliner manages 39 passenger-kilometres for every litre of fuel, compared with 24 for the A380 and a measly 22 for its own 747, according to the International Council on Clean Transportation.

Boeing’s market capitalisation is double that of the $96 billion Airbus and that gap won’t narrow much. But freeing the latter from a millstone-like flagship could help its 18.1 times forward-price-to-earnings multiple close in on Boeing’s 19.8 times. In the aircraft business, big isn’t necessarily beautiful.

Breakingviews

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