Financial Performance of Boeing versus Airbus Research Paper
The Strategies For The Companies and The Comparative Analysis
Boeing and Airbus have dominated the aeronautical industry for a long time. The relationship between the two firms is characterized by intensive rivalry. This report presents a financial and strategic analysis of the two companies. The four types of ratios calculated include profitability, efficiency, liquidity, and gearing. Horizontal, vertical and comparative analyses of the financial statements are also conducted after a detailed examination of the annual reports. The report contemplates the financial statements of Boeing and Airbus in the year 2013 and 2014. According to this report, Boeing has a better financial stability compared to Airbus and is a better choice for an investor. The report also suggests the strategies that the two companies may adopt to achieve higher financial performance.
Boeing is the world’s largest aerospace company, which manufactures airplanes for the most globally prestigious security systems. The company shares market leadership for the manufacture of large commercial jets with Airbus. Boeing’s product line includes military aircraft, launch systems, weapons, satellites, defense systems, and advanced information and communication systems. The headquarters of Boeing is located in Chicago, Illinois in the United States and sells its products to customers in about 150 countries worldwide. Most of Boeing’s customers are the countries in diplomatic agreements and alliances with the American government. In fact, Boeing believed in an increase in point-to-point traffic on long haul and launched the B787 Dreamliner to implement this strategy.
Airbus is a subsidiary of European Aeronautical Defense, which manufactures aircraft. Airbus prides for manufacturing superior products such as the fly-by-wire airliner, A380, and Airbus A350. The product line of Airbus includes commercial and military aircraft and helicopters, missiles, commercial space launch vehicles, defense systems and electronics, and satellites. Airbus also renders supportive services to these activities such as servicing. Airbus believes in high passenger traffic in major airports and strives to implement its strategy of feeder traffic to these airports and a larger volume aircraft operating in major airports.
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Airbus vs. Boeing
The two companies have a number of aspects in common. They have achieved great dominance in the aerospace industry for a long time complicating the entry of new firms into the aerospace industry. The two companies have maintained market leadership after merging with other companies and conducting acquisitions. Aerospace, the parent company of Airbus, started as a European-based consortium, and Boeing began as a strong market leader after its famous takeover of the McDonnel Douglas in 1997. Boeing also merged with Convair and Lockheed Martin in the US. Similarly, Airbus merged with the European-based Fokker and Dornier. The fierce competition in the aerospace industry forced these companies out of the market.
This paper analyzes the financial and strategic performance of the two giant firms in the Aeronautic industry. The rivalry between the companies is also studied by strategy and financial performance. The financial ratios have been calculated from the financial reports of 2012 to 2014 and interpreted for the purpose of analyzing the financial performance. The analysis considers profitability, liquidity, efficiency, and gearing of Boeing and Airbus over the two-year period of 2013 -2014.
Financial Analysis and Ratio Calculations
This section provides calculations of financial ratios and their complete analysis. The financial ratios covered include profitability ratios, liquidity ratios, efficiency ratios, and financial gearing. The section further discusses each of the ratios including the strengths and future opportunities that can be inferred from the ratios.
Profitability ratios are important aspects in financial analysis as they indicate whether the company is generating returns for the shareholders. The management and the investors can use these ratios to make important investment decisions. The ratios inform the managers whether the company utilizes its assets well and whether they should make changes in business operations. The ratios also inform investors whether investing in the company will generate returns and increase the shareholder’s wealth.
Boeing increased its gross profit from 2013 to 2014. The increase in net profit was higher between 2013 and 2014 than between 2012 and 2013. The higher increase in net profit compared to gross profit indicates that Boeing has a good strategy for managing costs. The return on equity between 2013 and 2014 almost doubled. This indicates that the company greatly increased shareholders’ fund. However, the returns on capital employed reduced between 2013 and 2014.
The gross profit and net profit for Airbus Company increased more between 2013 and 2014 than between 2012 and 2013. The increase in gross profit for Airbus was higher than Boeing in the two years. This indicates that Airbus generated more revenue and contained costs better than Boeing. The return on equity also increased over the two years, but the increase was less in Boeing than Airbus. Therefore, Boeing increases the shareholders’ wealth more as compared to Airbus. The return on capital employment for Airbus also increased over the two years but at a lesser rate compared to Boeing.
The two efficiency ratios decreased from 2013 to 2014. The accounts receivable turnover reduced from 13.25 times in 2013 to 12.25 times in 2014. The ratio indicates that the company reduced its efficiency in collecting its debts. The ratios also show that Boeing increased its debt collection days from 28 to 30. The company reduced its efficiency to collect its debts. The accounts payable turnover also reduced from 2.7 times to 0.15 times. The decrease in this ratio indicates that Boeing reduced its efficiency to pay creditors quickly.
The efficiency ratios for Airbus increased across the two years. The accounts receivable turnover increased between 2013 and 2013, which indicates that Airbus increased its efficiency of collecting a debt. The company collected its debts every 44 days in 2013 but increased debt collection to 43 days in 2014. The accounts payable turnover also increased between 2013 and 2014. This proves that Airbus collected its debt more quickly. The company also increased its accounts payable turnover from 2013 to 2014. The increase indicates that Airbus paid its debts more quickly. The improved efficiency can attract more creditors since they will be assured of timely payments.
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The current ratio of Boeing improved from 2013 to 2014. Although the current ratio in the two years is still below the acceptable level of 2, the company can pay all its short-term financial obligations using its current assets. Boeing should strive to increase its current ratio to 2. The liquidity of the company is improving, which reflects a better financial health. The acid test ratio remained constant across the two years. Further, the ratio is low indicating that the company keeps more inventories that lead to a reduction in the current assets.
The current ratio for Airbus is below 1 indicating that the company cannot pay all its current liabilities using its current assets. This ratio depicts an unfavorable liquidity for the company. This proves that the company will have to sell its fixed assets to meet its short-term financial obligations. Though, the current ratio increased slightly between 2013 and 2014 indicating an improving liquidity. The acid test ratio also increased by 0.01 between 2013 and 2014 showing that the company is improving its inventory management. Comparing the two companies, Boeing has a better liquidity than Airbus.
The debt ratio for Boeing is below 1 indicating that the total assets of the company exceed the total liabilities. The ratio increased from 2013 to 2014, and this shows that the company increased the financing of its assets through debt financing. The increase in debt financing means that the company incurs more interest costs. The increase also indicates that the liabilities increased compared to the assets.
The debt ratio for Airbus is also below 1 demonstrating that the company has more assets than liabilities. However, the debt ratio for Airbus is higher than Boeing in the two years. Therefore, Airbus has more liabilities relative to assets compared to Boeing. In this front, Boeing is at a better financial position than Airbus. The ratio is increased across the two years indicating a worsening in an increase in liabilities relative to the capital employed. As the company increases its debt financing, it will pay more interest, which is an additional cost to the company.
The horizontal analysis shows that Boeing reduced its sales over the two years but increased its gross profit. The increase in gross profit indicates an improvement in cost management. The net profit also increased over the two years. The increase shows an improvement in operational efficiency.
The horizontal analysis shows that Airbus also reduced its sales over the two years. However, the gross profit and net profit increased over the two years at a higher rate than Boeing. The lower value of sales for the Airbus Company as compared to Airbus accounted for the higher growth rate of net and gross profit.
The vertical analysis shows that the inventories account for the largest proportion of the total assets. The building up of inventories keeps resources that could be invested in other more productive activities. However, the current assets are high and increasing. This indicates that the company is increasing its ability to pay current liabilities without selling fixed assets.
The accounts receivable for Airbus reduced across the two years. Although the inventories are reduced, the margin was small. The current assets for Airbus are not only less than Boeing in absolute terms but also reduced over the two years. The rate of reduction in the current assets is much higher than the rate of reduction of inventory indicating that the liquidity of the company worsened. In the comparison of the vertical analyses of Boeing and Airbus, Boeing is at a better financial position.
The comparison between Boeing and Airbus places Boeing at a position of greater financial stability. The net profit and the gross profit showed an upward trend over the two years. The company also reduced its liabilities and improved its current ratio. Airbus ranks at a lesser position regarding financial stability because the percentage growth in its gross profit was less compared to Boeing. The liquidity of Airbus is also less compared to Boeing as shown by the current ratio. Airbus only fairs better in the efficiency ratios because of the improvement in the debt ratio. The efficiency ratios of Boeing do not also indicate a company that is experiencing poor financial performance. The overall analysis shows that Boeing is a better choice for investment. The company will grow the shareholder’s wealth and generate returns for the resources invested. It is also a better choice for creditors and suppliers because of its better liquidity.
Vision and Mission Statements, Goals and Objectives
Boeing expresses its long-term strategic purpose in its company vision to work together as a global enterprise and maintain leadership in the aerospace industry. The strategic vision is reinforced by the company’s mission statement that sets the objectives of the company to be an industry leader in profitability, quality, and growth (Kwasiborska & Stelmach 2015). The core competencies of Boeing include focusing on customer knowledge, global system integration and lean enterprise (Bryson & Rusten 2008).
The long-term strategic purpose of Airbus is embodied in its vision to create the best and safest aircraft. The future-orientated message is expressed more by the mission statement that directs the company to satisfy the needs of airlines by producing the most comprehensive and modern aircraft in the market and providing a high standard of product support (Xie, Tang, & Yao 2015). Airbus has made milestones towards achieving this mission. The most recent step was the formulation of the goal of delivering strong results in the most sustainable manner and command more than 50% of the global aircraft market in the next decade (Barmeyer & Mayrhofer 2014). The company has laid the ground to achieve this goal by venturing key geographic markets, internalization, increasing customer services and improving efficiency (Higuera, Kumin, Fagan & Mccartor 2009).
Management Philosophy and Attitudes, Culture and Leadership
The management philosophy of Boeing is best expressed by its vision, which calls all its stakeholders to work together as a global enterprise to maintain leadership in the Aerospace industry. Boeing embraces an honest and open culture, which allows all employees to share perceptions and opinions to resolve issues (Membranes help company meet Airbus’ stringent manufacturing process 2015). The management considers each of the employee’s concerns without targeting those who raise them. The mission statement of Boeing expresses its leadership understanding that it aims at world-class leadership in all aspects of its business. It develops team leadership skills at all levels including management performance, design, product construction and servicing, and financial results (Kotha & Srikanth 2013).
The philosophy of Airbus is to develop the culture of following the requirements of its customers and maintaining forward thinking. The company does not take anything for granted. The management of Airbus tries to connect the value of innovation and excellence with a culture of partnership among the employees, the management, customers and suppliers (Dorfler & Baumann 2014). The philosophy aims at creating a two-way flow of ideas and views. The leadership philosophy of the company is exchanging ideas and sharing responsibilities across all levels to obtain the best results. Airbus pursues strong leadership with clear guidelines (Sharples 2015).
The corporate strategy of Boeing is to maintain its position as the global market leader in the civil and military sectors. This mixed portfolio strategy helps Boeing keep balance and maintain its revenue in case either the civil or military market faces a crisis. Similarly to Airbus, Boeing pursues the diversification strategy.
Boeing’s Differentiation Strategy
The diversification strategy of Boeing is different from Airbus’ hub-and-spoke concept. It rather follows the point-to-point strategy. The company launched the Boeing 787 Dream liner to serve the inter-city nonstop point-to-point flights (Barter 2013). Boeing aimed at building mid-size airplanes with big ranges emphasizing on passenger comfort and introducing higher humidity rates in the cabin.
Airbus’ top management underlines the company’s position as a leader in the world’s major aerospace and defense markets. In its strategy of diversification, Airbus positions itself as the best cost provider in its market segment for large commercial jetliners. Airbus is also expanding worldwide with its strategy of entry into the major global markets and enhancement of its supply chain (Diversity in engineering takes off with Airbus award 2015).
Airbus’ Differentiation Strategy
Airbus introduced A380 to meet the demand of the increasing traffic between major hubs and serve as a solution to the limited slot capacities at the hubs. Airbus’ hub strategy will create feeder traffic and raise the volume of transportation on long haul flights. The overall effect will increase the passenger volume at central airports (Gent 2014).
Enhancements of Efficiency, Quality, Innovation and Customer Responsiveness
To counter future competition, Boeing developed strategies to enhance productivity, efficiency, customer responsiveness, quality, and innovation. An example is the Development Process Excellence initiative, which greatly improved the expediency of R&D, and key development programs such as the 787 Dream liner (Boeing selects Mississippi for the new composite research center 2015). The initiative of outsourcing and global sourcing of parts of its core competencies will achieve greater economies of scale and optimize the global supply chain. Boeing also realized that first-tier suppliers and bulk buyers are an important component of the business. Therefore, it creates strategic alliances and long-term relationships with aircraft leasing companies, major global airlines and engine manufacturers such as Rolls-Roy’s (Chanda n.d).
Airbus seeks to enhance its quality, efficiency, innovation, customer responsiveness and innovation. The company launched the Power 8 program to restructure the whole organization, its production processes, network to global business partners and integrate Airbus with transnational centers of quality (Scanlan 2015). Airbus also launched procurement and supplier network increase collaboration with the global suppliers. In addition, Airbus emphasizes on customer responsiveness when developing its products.
The financial ratios and strategic analysis conducted in the above section indicate that Boeing has maintained a better financial stability over the years. The net profit, return on equity and return on capital employed for Boeing show an increasing trend at a higher rate compared to Airbus. This indicates that the company used the shareholders’ funds to generate more returns for the shareholders. The higher return on capital employed also demonstrates that the company used the available assets to generate more resources to service its expenses and invest in other activities such as research and development.
An investor will prefer a company with a higher return on equity since it guarantees higher dividends than a company with less return on equity. Boeing has a better operational efficiency than Airbus. It has an average 30 debt collection days whereas Airbus has 45 days. An investor will prefer a company that collects its debts in time to make resources available for other investments and payment of bills. Though Airbus improved its efficiency of debt collection, Boeing collects its outstanding debts more quickly by about 15 days compared to Airbus.
The liquidity of Boeing is also higher compared to Airbus. In fact, the current liabilities of Airbus are more than the current assets. This indicates that Airbus cannot meet all its short-term financial obligations without selling its fixed assets. An investor will prefer Boeing with a higher liquidity since it can meet its short-term financial obligations. The suppliers will also prefer a company with higher liquidity as it assures them of timely payment for the goods they delivered. The only aspect where Airbus performs better than Boeing is financial gearing. Boeing should reduce financing through debt and increase equity financing to reduce the cost of capital. The management of Boeing and its financials and policy is also more prudent.
Though, Boeing needs to improve its liquidity to 2 to instill confidence of investors that the company can meet its short-term financial obligations without selling fixed assets in the long term. It should also improve its debt collection system to ensure that the resources owed are collected in time for further investment. As a result,
Boeing is more stable than Airbus and it will be a better preference for both investors and customers. The better performance is seen in the higher growth in returns on capital employed, efficiency and liquidity. The higher numerical and growth figures in these aspects over the past two years place the company in a better financial position. Airbus has a higher growth in gross and net profit though the amounts are lower in numerical terms compared to Boeing. Airbus requires employing considerable efforts to increase its revenue, improve liquidity and raise efficiency. Though Airbus increased its debt ratio, it should increase other metrics both numerically and in regard to growth. Airbus should adopt a better management of funds to compete with Boeing in the aeronautical industry.