Friday, December 23, 2016

Airbus Clinches $18B Iran Air Deal, Beats Boeing

Airbus announced that it has secured a multi-billion contract with Iran’s national airline, Iran Air, for 100 aircraft. The value of the contract amounts to nearly $18 billion.
Notably, value of this deal is higher than the one awarded to Airbus’ international rival, The Boeing Co. Boeing had won an order for 80 aircraft from Iran Air for a total value of $16.6 billion around the beginning of this month. 

Details of the Deal

This contract comes as part of the initial agreement inked between Iran Air and Airbus, which was announced this January. The original deal had called for 118 planes, from which Iran Air cancelled 12 A380s and 6 other planes.The order now includes 46 single-aisle A320 and 38 A330 jets and 16 wide-body A350 XWB planes. Airbus is expected to begin deliveries from the beginning of 2017.

Iran Air’s Focus on Fleet Replacement

Note that Iran had found itself cornered by the international community for its nuclear ambitions, which led to the imposition of economic sanctions in 1979. However, the U.S., along with a few other major powers reached an agreement last year, under which these restrictions were lifted after Iran promised to curb its nuclear activities.Being isolated for more than three decades, the country’s fleet of aircraft is quite understandably outdated and dilapidated. Out of the 250 aircraft that were purchased before 1979, only 162 were operational as of June. Naturally, Iran is in dire need of replacing these planes.In order to revive its fleet, Iran plans to buy 400 commercial planes over the next decade. This means that Airbus and Boeing would continue to compete for orders of over 220 jets in the upcoming days.

Long-Term Outlook

The Boeing’s latest research report projects about 39,620 deliveries in the next two decades, which covers all categories of aircraft. The entire value of new deliveries is estimated to be $5.9 trillion. Note that the larger commercial aircraft category is dominated by Boeing and Airbus.However, these two aerospace behemoths stand to face tough challenges from Chinese state-owned aircraft manufacturer The Commercial Aircraft Corporation of China, Ltd. (Cormac). Cormac will start producing airplanes with a capacity of over 150 passengers, thereby becoming a viable alternative for airline operators.Meanwhile, the smaller airplane market is dominated by Embraer ERJ. Embraer expects demand for the 70−130+ seat category to reach nearly 6,400 in the next two decades, representing a market value of $300 billion. The company is poised to benefit from the surge in demand for the 130-seat aircraft category.

Price Movement

Shares of Airbus have lost 3.9% over the last 12 months, while the Zacks categorized Aerospace – Defense industry gained 11.0%.Note that Airbus is likely to miss EU subsidies as a The World Trade Organization (WTO) investigation found that the support received from the EU enabled Airbus to unfairly beat Boeing in several major multi-billion dollar contract wins in Europe, China, India and other countries.

If and when the subsidies dry out, Airbus’ cost of operations will undoubtedly go up, leading to higher prices for its airplanes. Meanwhile, a Boeing report recently projected an exponential rise in demand for aircraft over the next two decades. So, increased prices of Airbus’ planes could prove to be fatal for Airbus over the long run. These developments could adversely impact the company’s future performance.

Airbus Group currently has a Zacks Rank #3 (Hold). A better-ranked stock in the same space in Northrop Grumman Corporation NOC, sporting a Zacks Rank #1 (Strong Buy).

In the third quarter of 2016, Northrop Grumman surpassed the Zacks Consensus Estimate by 7.5%. In the last 60 days, estimates for the full year were up 5.9% to $11.74.

(Zacks Equity Research - Zacks)

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