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Wednesday was a bad day for two major airline giants, one a manufacturer and the other a commercial airline. The share prices of Airbus (EU:AIR) and Lufthansa (LS:LHA) both suffered following very unflattering reports.
Airbus Loses Order. Share Price Drops More Than 3%.
Emirates airline cancelled an order for 50 Airbus A350-900s and 20 A350-1000s, scuttling $16 billion in anticipated revenue for Airbus. Although the cancellation may seem to come as a surprise, it actually came as a result of the terms of the original 2007 order lapsing. While a shock to the public and investors, it should have been no surprise to Airbus. They knew the terms quite well.
Tim Clark, president of Emirates, put his company’s perspective on it by indicating that Emirates has never intended the A350s to fill more than “a niche role” in the airline’s inventory.
Although the cancellation decreased the Airbus order book by 9%, John Leahy, head of sales for Airbus, said, “It is not good news commercially, but not bad news financially.” After all, what’s an estimated $16 billion between friends.
Lufthansa Predicts Rough Skies Ahead. Shares Fall by Almost 14%.
Lufthansa, Europe’s biggest-selling airline, followed a strong month of May by issuing a profit warning for both 2014 and 2015, with the former now expected to generate €1 billion (down from original forecasts of 1.3 to 1.5 billion) and 2015 expected to come in at €2 billion (down from 2.65 billion).
CFO Simone Menne said, “The main reason for this lower forecast is significantly weaker than expected revenue development in the passenger and freight businesses compared to what we anticipated at the beginning of the year. There is overcapacity in the North Atlantic.” She went on to say that airlines such as easyJet, Ryanair, Emirates, Qatar and Etihad have been able to carve out, as it were, larger pieces of the pie.
Atlantic routes have become much more price sensitive than in the past. Lufthansa had originally anticipated a significant increase in freight-generated income, but based on current figures is now expecting only a marginal increase over the previous year.
Meanwhile, Bystander Rolls-Royce Gets Hammered.
You can’t fly an Airbus 350 without engines. Those engines come exclusively from Rolls-Royce. Cancelled aircraft orders mean cancelled engine orders, proving once again the most things roll downhill. The idea that Rolls will lose orders in the amount of £2.6 billion did not seem to set well with its investors Wednesday as the Rolls-Royce share price close down 5.48% to 1,017.00, a decline of 59.00.
Lest we forget, airline manufacturers are largely the same as automotive manufacturers. For the most part, they are assemblers of components manufactured to their specifications. That’s important because Rolls-Royce will not be the only company affected by the now defunct Airbus order.
Keep a close watch on this sector and expect at least some additional fallout.
