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OXFORD BROOKES UNIVERSITY

RESEARCH ANALYSIS PROJECT

BUSINESS & FINANCIAL PERFORMANCE OF


AIRBUS OVER A THREE YEAR
PERIOD (2014-2016)

WORD COUNT: 7492


MENTOR:
REGISTRATION NO:
Table of Contents

PART 1: RESEARCH OBJECTIVES AND OVERALL RESEARCH APPROCH ........... 1

Topic Selection ............................................................................................................. 2

Company Selection ...................................................................................................... 2

Overview of Airbus ....................................................................................................... 2

About Industry .............................................................................................................. 3

Global And Defense Sector Trends .............................................................................. 4

Market share…………………………………………………………………………………...5
RAP Objectives………………………………………………………………………………..6
RAP Framework……………………………………………………………………………….6

PART 2: INFORMATION GATHERING & ACCOUNTING & BUSINESS


TECHNIQUE…………………………………………………………………………………….7

Sources of Information………………………………………………………………………..8

Limitations of Sources of Information……………………………………………………….9

Accounting Techniques………………………………………………………………………9

Business Techniques………………………………………………………………………..12

Ethical Consideration………………………………………………………………………..15

PART 3: ANALYSIS, CONCLUSION & RECOMMENDATIONS………………………..16

Ratio Analysis………………………………………………………………………………..17
Profitability Ratios……………………………………………………………………..17
Liquidity Ratios………………………………………………………………………...22
Activity Ratios………………………………………………………………………….25
Investor Ratios………………………………………………………………………...29
Gearing Ratios………………………………………………………………………...33
Business Analysis…………………………………………………………………………...36
SWOT Analysis………………………………………………………………………..36
PEST Analysis…………………………………………………………………………38
Conclusion…………………………………………………………………………………...39
Recommendation……………………………………………………………………………40
PART - I
RESEARCH OBJECTIVES AND
OVERALL RESEARCH APPROACH

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REASON FOR CHOOSING THE TOPIC:-

I have opted to do my research on Topic 8, ‘Financial and Business Analysis of a


company over a three year period’. The reason for selecting this topic is to apply the
financial knowledge I have obtained through my ACCA Studies and have now got the
opportunity through Oxford Brookes University to apply my knowledge in practical
scenarios i.e. application of financial knowledge in real world organizations.

Analysis of the financial statement will help me in my professional career in external


audit by enhancing my skills in performing analytical procedures.

REASON FOR CHOOSING THE AIRBUS GROUP:-

When it comes to the mass production of different type of aircrafts, Airbus Group is the
largest supplier of aircrafts in Europe and currently ranks second in the world with
respect to the production of commercial aircrafts.

Airbus Group is consistently making innovative commercial aircraft thereby reducing the
CO2 emissions by 25% and capturing half of the commercial aircraft orders in 2016.
Airbus Group has a worldwide workforce of approximately 133,782 employees and
sales of 66.6 billion euros which is a 4% increase from 2014. (Airbus, 2017a)

INDUSTRY ANALYSIS

Overview of Airbus:-

In a meeting in July, 1967 the ministers of France, Germany and the British had agreed
in the progress and development in the aviation industry throughout the Europe and to
take appropriate measures for the joint development in Airbus. In 18th December 1980
Airbus Industry GIE was officially incorporated. The A300 was the worlds’ first wide
body jet with commercial entry in 1974. Followed by the Airbus A310 in the early 1980’s

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and after ten years, the company’s first single aisle A320 which had developed to be
one the successful families in history with A318, A319, A320 & A321 (Airbus, 2017b) .

Airbus is now a European Multinational Company listed in European stock market as


well as in American Stock Market (NASDAQ). Airbus currently comes second in the
world when it comes to large production of commercial aircrafts (Euronext, 2017).
Airbus has a wide range of aircraft divisions which includes passenger aircraft (A320,
A330, A350 XWB, A380 etc.), civil and military helicopters, space and military aircrafts
(A400M, Eurofighter etc)

About The Industry:-

Aerospace industry is one of the key sectors in the global market and ranks amongst
the world’s largest manufacturing industry. Aerospace Industry in United States has
remain competitive during the year 2016 contributing up to $147 billion to the U.S
economy resulting in a positive trade surplus of $90.5 billion during the year. (Select
USA, 2017)

In 2016, the European countries contributed US $ 207.7 billion to the global aerospace
and defense sector revenues whereas the aerospace companies in US contributed US
$ 407.6 billion. The revenues of European countries showed a strong growth of 3.7%
whereas the revenues of US countries showed a slow growth of 2.4% (Deloitte, 2017, p.
34).

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GLOBAL AEROSPACE & DEFENSE SECTOR TRENDS

680
674.4

670

660 658.7

650
$ Billions

640
634.6

630

620

610
2014 2015 2016
YEARS

(Deloitte, 2017, p. 9)

The graph illustrated above shows the revenue earned by the global aerospace and
defense sector over a three year period. During the year 2014-2015 the revenue
showed a strong growth of 3.8% whereas the sales growth rate decreased from 3.8% to
2.4% in the year 2015-2016.

Aerospace sector is being regulated different authorities and agencies across the globe
which includes the Federal Aviation Administration (FAA) regulating aerospace and
defense sector in the United States (FAA, 2017) and the European Aviation Safety

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Agency (EASA) overseeing the aerospace sector operation in the European countries
(EASA, 2017).

The pie chart mentioned below shows the market share of top 10 aerospace companies
in 2016. Airbus Group has secured 19% market share coming in second place while
Boeing having the highest market share of 24% coming the in the first place and
becoming a market leader.

Market Share 2016

Safran
Raytheon 5%
6%
Boeing
BAE Systems 24%
6%

Northrop Grumman
6%

GE Aviation
7%

United Technologies Airbus Group


7% 19%

General Dynamics
8%
Lockheed Martin
12%

Boeing Airbus Group Lockheed Martin General Dynamics United Technologies


GE Aviation Northrop Grumman BAE Systems Raytheon Safran

(Deloitte, 2017, p. 16)

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RAP OBJECTIVES

The objectives of Research Analysis Project are mentioned below:

 Using ratio analysis to assess the financial performance of the Airbus over the
three year period i.e. 2014-2016.
 Comparison of Airbus Group with its competitor i.e. Boeing over the three year
period i.e. 2014-2016.
 Using SWOT AND PEST model to conduct business analysis of Airbus Group.
 To evaluate the corporate and social policy made by the Airbus Group.

RAP FRAMEWORK:

The report consists of three parts. First part contains reasons for choosing the topic,
discussion on the overview of the industry and company as well as RAP objectives.

The second part contains discussion on sources of information and its limitations,
accounting and business techniques used to analyze the financial and non-financial
data.

The third part contains financial and business analysis of Airbus and its competitor
Boeing over the three year period (2014-2016), followed by conclusions and
recommendations.

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PART-II
INFORMATION GATHERING & ACCOUNTING

& BUSINESS TECHNIQUES

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INFORMATION

It is the data obtained by studying, investigating and researching which is accurate,


reliable and organized and it can be used in decision making process effectively. (
Business Dictionary, 2017)

SOURCE OF INFORMATION

Following are the sources of information:

Annual Report

The most recent annual report of both Airbus Group and Boeing will be used i.e.
financial year end 2016, 2015 and 2014. The annual report is yearly issued by the
company which is of the utmost important as it contains both financial and non-financial
information. The reliability and authenticity of annual report is further enhanced when it
is audited by external auditors.

Company Website

In order to obtain the data about the company’s history, annual report, its share price,
products and services I have used (http://www.airbus.com/) and (www.boeing.com)

Other Websites

I have used other websites such as Investopedia, business dictionary, google etc. to
prepare my report

News & Media

Websites such as the telegraph, business insider, reuters etc. were used to prepare the
report.

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LIMITATION OF SOURCES OF INFORMATION

The Information obtained from the above sources has certain limitations:

 An inherent limitation of annual report is that it contains mostly historic data and
since it is an internal document of the company, the information contained in the
annual report may be manipulated by the management of the company to publish
better results.
 The information on company website can also be biased and can contradict with
the company’s other sources.
 In order to acquire public attention, the news and media usually manipulates
information to create hype in the market. Thus the data obtained from this source
is limited.

BUSINESS & ACCOUNTING TECHNIQUES

BUSINESS ANALYSIS

SWOT

SWOT analysis is a framework that is used to assess the strategic position of a


company by evaluating its internal factors i.e. Strength & Weakness as well as its
external factors i.e. Opportunities & Threats

SWOT FRAMEWORK

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STRENGTH OPPORTUNITIES

SWOT

WEAKNESS THREATS

STRENGTH: It describes the core competencies and uniqueness in an organization


that separates it from the competitor and achieving its objectives for e.g quick inventory
turnover, strong brand name etc.

WEAKNESS: These are the areas that an organization needs to improve in order to
remain competitive for e.g. higher turnover than industry, shortage of funds etc.

OPPORTUNITIES: These are those external factors which the organization can avail in
order to gain competitive edge in the market. For e.g. using energy efficient
technologies to gain tax rebates and credits from the governments etc.

THREATS: These are those elements in the external environments that can adversely
affect the operations of an organization for e.g. rising prices of raw material, increased
competition etc. (Investopedia, 2017f)

LIMITATIONS OF SWOT

 Its only helps to identify the problems and offers no solution.

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 It can produce a lot of information some of which may be useless (Business
Queensland, 2017)Classification of items within the SWOT matrix is very
subjective.
 It does not tell the organization how to identify the factors. (Management Study
Guide, 2017)

PEST ANALYSIS

PEST analysis identifies the major external factors that impacts the organization
positively or adversely and its operations in order to remain competitive in the market.

PEST stands for Political, Environmental, Social and Technological

POLITICAL: This area focuses on the changes in the government laws, rules and
regulations and its impact on the overall market and industry.

ECONOMICAL: This area solely focuses on the economic factors such as demand and
supply, inflation, spending of income etc.

SOCIAL: This area focuses on the factors such as age, cultural norms, lifestyle, and
workplace where the industry is currently operating in.

TECHNOLOGICAL: This area focuses on the technological factors such as the change
and the usage of technology by the companies in order to gain a competitive edge in
the industry. (Investopedia, 2017g)

LIMITATIONS OF PEST ANALYSIS

 The data obtained from PEST analysis can be subjective and may become
outdated quickly given the fact that the external environment changes very
rapidly.
 PEST analysis only accounts for external factors and completely ignores the
internal factors which are equally important for the company in order to remain
competitive in the market.

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 Conducting a PEST analysis requires both time and resources. Also there is an
inherent limitation in PEST analysis that the collection of all the necessary data is
not possible, therefore a decision based on incomplete data may be very risky.
(PEST Analysis, 2017)

FINANCIAL ANALYSIS

Financial analysis is the process analyzing and assessing the financial performance of
the company. The objective of this analysis is to ensure whether a company profitable,
liquid and solvent. For the purpose of financial analysis, ratio and horizontal analysis
have been used. (Investopedia, 2017a)

HORIZONTAL / TREND ANALYSIS

Horizontal or trend analysis is the process of assessing the financial performance of the
company by comparing its ratios and line items in an entity’s financial statement over a
certain period of time. (Investopedia, 2017b)

LIMITATIONS OF HORIZONTAL / TREND ANALYSIS

 Horizontal analysis is based on historic data.


 If a company changes its account in which the data of financial statement is
stored during the year, this may cause changes in account balances, as a result
from which comparison of period to period may vary. (Accounting Tools, 2017a)

RATIO ANALYSIS

Ratio analysis is used to evaluate the information contained in financial statements. It is


a quantitative analysis of operating and financial performance of the company.
(Investopedia, 2017c)

TYPES OF RATIOS

PROFITABILITY RATIOS

It is the ability of a company to earn a profit as compared to its expenses and other
relevant cost over a certain period of time. (Investopedia, 2017d)

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LIQUIDITY RATIOS

These ratios are used to measure the company’s ability to pay its short-term debt
obligations when they fall due. (Ready Ratios, 2017a)

ACTIVITY RATIOS

These ratios are used to measure the company’s ability to convert its assets in cash or
sales. It measures how effectively a company is managing its assets like current assets
for e.g. receivables and inventory. (Small Business, 2017)

INVESTOR RATIOS

Investor ratios are those tools that are used to measure the return on investment an
owner will be getting from its company. (Double Entry Bookeeping, 2017)

BOOK-TO-BILL RATIO

It measures the number of order being received with the abililty of the company to
complete its orders (Investing Answers, 2017).

GEARING RATIOS

These ratios are used to measure the proportions of debt and equity an entity has to
support its operations. A highly geared company has a higher debt to equity ratio.
(Investopedia, 2017e)

LIMITATION OF RATIOS

Ratio analyses are the major tools that are used to measure and evaluate the current
operating and financial performance of the company. However there are certain
limitations of ratio analysis that should be kept in mind:

 Ratio analysis cannot be used to compare two entities having different strategies
for e.g. a company following a price penetration strategy and a company
following a price skimming strategy will have completely different profit margins
and thus they cannot be compared using ratios.

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 Ratios analyses are based on the data given in the financial statement. The facts
and figures in the financial statement can be manipulated by the company
through “window dressing” thus providing incorrect information.
 The amounts contained in the financial statement can be altered due to inflation
each year which may render ratio analysis completely useless as it does not
consider the inflationary impact on the financial statements. (Accounting Tools,
2017b)

ETHICAL CONSIDERATION

All ethical considerations have been considered in the preparation RAP analysis. It has
been ensured that the information obtained from the other sources are relevant,
accurate, reliable and authentic to the best of my knowledge. Facts and figures have not
in any way been altered or manipulated by me. Harvard Referencing has been used to
refer the source of information. The data and information contained in this report is for
academic purpose only.

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PART-III
ANALYSIS, CONCLUSION &
RECOMMENDATION

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BUSINESS ANALYSIS

SWOT

STRENGTH

 Producer of a large range of modern and efficient airliners

From the medium-haul A310 to the best-selling single-aisle A320 product line, long-
range A330-340 Family, new-generation A350 XWB and double-deck A380, Airbus
makes a large range of modern and fuel efficient aircrafts. (Airbus, 2017c)

 Market share
Airbus has the second largest market share throughout the globe in commercial
aircrafts. Based on the number of units sold, Airbus delivered 668 aircrafts as compared
to its rival Boeing delivering 731 aircrafts, acquiring a market share of 48% in
commercial segment in 2016. (Bhaskara, 2017)

 Strong Ratios

Airbus cash management cycle days are much lower than Boeing. Furthermore the
gearing of Airbus is much less i.e. 258% than Boeing’s 1134.8% which means Airbus is
less risky than its competitor. The fixed asset turnover have also improved from 3.7 to
3.9 during the three year period. (Annexure, BS)

WEAKNESS

 Cost of Production

The cost control management of Airbus is very poor leading to higher production costs
which includes net charge amounting to €2.2 bn from the A400m programme driving
down the NPM by 63% in 2016 to €995m. (CHARLTON, 2017)

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 Weak Ratios

Airbus earnings per share have significant reduced to 1.29 due higher net charges from
the A400m due to which investors are getting a declined return from their investments.
Further the current ratio have remained below 1:1 indicates that Airbus would struggle
to meet its short-term debt obligations. (Annexure, Ratios)

 Decline in Demand of A380 Super Jumbo Jet

At the time, Airbus launched the A380s, it expected its super jumbo jet was going to be
a successful aircraft. But it could not become as successful as Airbus had expected in
the long run. Several airlines cancelled their orders for the A380s. (Aboulafia, 2016).
Due to this Airbus have decided to reduce the production of A380s to just 12 a year by
2018 (Tovey, 2017b).

OPPORTUNITIES

 Increased travel demand in China

Airbus has won orders to supply 140 jets which includes 100 A320s and 40 wide body
A350s worth $22bn. Airbus is also planning to establish plant of its A330 and A330neo
jets as well as to sell its super jumbo A380s to take advantage of the travel demand in
China which is expected to grow by 6.1% in the next twenty years (China Daily, 2017)

 A large backlog of orders

Airbus has accumulated a very large backlog of orders of 6874 aircrafts which amounts
to €1 trillion (Zhang, 2017). Its backlog is larger than that of its competitor Boeing which
also indicates higher demand.

THREATS

 Competition

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Both Airbus and Boeing will now face intense competition in commercial aircraft market
in the upcoming years as there are companies around the world launching commercial
aircrafts and are aiming to break the duopoly of both Airbus and Boeing. These includes
Bombardier C-series, Embraer E-Jet C2, Mitsubishi MRJ, COMAC ARJ21, COMAC
C919 and Irkut MC-21 (Zhang, 2016).

 Regulatory pressures

Regulatory challenges for aircraft manufacturers have increased. From passenger


safety to other issues such as legal and environmental law, there are several laws and
regulations that create immense pressure for Airbus due to its globalization. (Airbus
Annual Report, 2016, p.p. 63-65)

 Ongoing Case with the World Trade Organization

Both Airbus and Boeing has filed an appeal with WTO against each other alleging for
receiving illegal subsidies from their respective governments. Further WTO has ruled
that both Boeing and Airbus had received illegal subsidy from their governments. Both
Aircrafts manufacturers have asked the permission from WTO to impose sanctions on
competitor industries amounting to $10 billion from the Boeing side and $12 billion from
the Airbus side. (Miles & Hepher, 2016)

PEST

POLITICAL

Due to Brexit issues, Airbus has stated “non-negotiable” demands which includes
exemption from tariffs and free movement of its employees in Britain and has indicated
to move its wing production facility for new jets in Broughton, Britain to other country if
its demands are not met (Hughes, 2017).

Airbus and its consortium Eurofighter are facing a lawsuit by the Austrian Government
for deceiving and hiding the true cost of the order of Eurofighter jets worth €1.96bn back
in 2003 and has claimed damages of up to €1.1bn (Tran, 2017a).

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ECONOMICAL

As Airbus is located in the Eurozone, the GDP of the Europe increasing at an annual
rate of 2% in 2017 which is faster than annual rate of America i.e. 0.7% (The
Economist, 2017). Further, in France where the headquarters of Airbus is based has
reduced the tax rate from 34.4% to 28.9% resulting in lower tax expense for Airbus.
(Airbus AR, 2016, p.114)

SOCIAL

The Airbus foundation collaborated with the Action Against Hunger in providing the
services of Airbus A330 to help with the transportation of food and medical supplies to
the people of Haiti struck by the Hurricane Matthew which had led to catastrophic
damages (Wallis, 2016).

Since 2008, airbus has provided the NGOs community its services amounting to more
than €4bn (Airbus, 2016). Further, Airbus CEO Tom Enders had provided a cheque of
€121,926 to the International Federation of Red Cross in support of the victims in Nepal
who were hit by a devastating earthquake in May 2015. (Airbus press release, 2015b)

TECHNOLOGICAL

Airbus division of space and defense have also created an anti-drone defense system
for the government authorities which is designed to take control and pinpoint the
location of the person flying the drone near or inside the restricted airspace for e.g.
airports in order to avoid any collision with the aircrafts carrying hundreds of passengers
(Vanian, 2016).

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FINANCIAL ANALYSIS

HORIZONTAL ANALYSIS

Horizontal analysis cannot be performed due to the currency difference in Airbus and
Boeing.

RATIO ANALYSIS

Profitability Ratios

Gross Profit Margin (GPM)

It measures the productivity, efficiency and the ability of a company to control its cost in
order to remain profitable. (Ready Ratios, 2017b)

GPM

14.7 15.5
14.6 14.6
16.0 13.7
14.0
12.0
PERCENTAGE

10.0 7.9
8.0
6.0
4.0
2.0
-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratio)
The revenue of Airbus had grown by 6.2% in 2014 and 2015 to €64,450 and €66,581 m
respectively but have shown a slow growth of 3.3% to €66581 m in 2016. In 2014, the

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major revenue came from Airbus commercial segment by selling 629 aircrafts
(Hofmann, 2015). Airbus helicopter division have also contributed positively by booking
402 net orders and selling 471 rotorcraft helicopters (HeliPress, 2014) . The Airbus
defense and space division has faced several issues such as technical problems and
delayed production of its military plane the A400M which had led to the recognition of
€551 m in Q4 in 2014 which have led to the reduction in revenue and earnings in Airbus
D&S division (Pocock, 2015) to €12,728 m. (Airbus AR, 2014 p.38).

In 2015, the contributing factor in the growth revenue was mainly due to an increase in
the revenue of Airbus commercial jets segment delivering 688 aircrafts throughout the
year (Airbus AR, 2015, p.210). But still the GPM fell from 14.7% to 13.7% in 2015. The
reason for this decline was the increase in cost of goods sold by 7.5% which was higher
than the increase in revenue of 6.2% (Annexure, IS). The major driver for the increase
in cost of goods sold was the cost incurred in supporting the A350 XWB process as well
as the net charges of A400M programme of €290 m (Hepher & Altmeyer, 2015)

In 2016, the GPM fell from 13.7% to 7.9%. The decline in the profits of Airbus was due
to higher net charge of A400m military transport and an increase in the production cost
of A350 XWB aircrafts. (Tovey, 2017a). Due to this the cost of sales have increased by
10.3% (Annexure, IS) and the major driver in this concern was the net charge of A400M
amounting to € 2,210m which have significantly contributed in the fall of net profit
amounting to €1000 m (Business Insider, 2017).

On the contrary, the GPM of Boeing in 2014-2015 have dropped from 15.5% to 14.6%
due losses recorded on the 747 program and higher costed recorded for KC-46 tanker
(Boeing AR, 2015, p.125). In 2015-2016, both revenue and cost & expense fell by 2%
(Annexure, IS) due to the higher cost recognized for KC-46A tanker and losses
recognized for the 747 programme due its declining demand in the market and lower
revenues. (Kim, 2016)

Net Profit Margin (NPM)

NPM was the percentage of revenue left after all the expenses have been deducted
from sales. (Investing Answers, 2017)

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NPM

6.0
7.0 5.4
6.0 5.2
4.2
PERCENTAGE %

5.0 3.9
4.0
3.0
1.5
2.0
1.0
-
2014 2015 2016

AIRBUS BOEING

(Annexure, Ratios)

Despite the decrease in gross profit from the previous year 2014 as discussed above,
the NPM has increased from 3.9% to 4.2% in 2015. The rise in the NPM was due to the
increase in the other income and share of profit from investments by 43.6% and 20.9%
respectively which was partly offset by increase in other expense by 24% (Annexures,
Income Statement). The increase in the other income was due the net gain relating with
the disposal of Cimpa SAS to Sophia Steria Group (Finanzen, 2017) amounting to €72
m, partial disposal of Dassult Aviation shares (Stothard & Hollinger, 2015) amounting
€51 m and the completion of the first phase of Airbus Safran launchers (Selding, 2015).

In 2015-2016, the NPM have fallen from 4.2% to 1.5%. The profit for the period have
fallen by 62.9% to €1000 m, the reasons for this sharp decline was due to an increase
in cost of sales by 10.3% which was much higher than the growth of revenue i.e. 3.3%
(Annexures, IS). During the year 2016 the net profit has taken a hit by a one-off charges
of € 2.2 billion which includes the net charges of the A400M programme (CHARLTON,
2017) which is then offset by one-off gains of € 2.4 billion which includes the sale of
Dassult Aviation shares (Reuters, 2016a).

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In 2014-2015, the NPM of Boeing slightly decreased from 6% to 5.4%. This was due to
the carry forward losses discussed above as well as an increase in the research and
development expense by 9.3% which was partly offset by a reduction in interest and
debt expense by 17.4% (Annexure, IS) In 2015-2016, the NPM of Boeing decreased
from 5.4% to 5.2%. This was due to a decline in gross earnings by 1.7% as well as a
rise in R&D expense by 38.9% from the previous year 2015 (Annexure, Income
Statement), the sharp increase in R&D expenditure was due to the cost related with
“787 programme inventory”. (Scott, 2016a)

Return on Capital Employed (ROCE):

ROCE measures how efficiently the entity is using its capital employed to earn profits.
(Ready Ratios , 2017c)

ROCE

16.7 16.9
20.0
14.6
PERCENTAGE %

15.0
8.3 7.7
10.0
4.1
5.0

-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratio)

Between the year 2014 and 2015, the ROCE declined by from 8.3% to 7.7%. As the
capital employed had risen by 10% to € 52673 m which is much higher than a marginal
increment in PBIT by 1.8% to €4062 m. The major reason behind the increase in capital
employed was due to a rise in non-current other financial liabilities by 41.5% which
includes European Government refundable advances that are provided to Airbus to
finance in R&D activities (Airbus AR, 2015, p.42), the total equity had fallen by 15.6% to

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€5973 m due to an increase Accumulated OCL by 258 % (Annexures, BS) as well as
significant buyback of its shares of up to 10% of its capital to allow Airbus to distribute
the proceeds from divestments. (Hepher, 2015)

In 2015-2016, the ROCE fell from 7.7% to 4.1%. The capital employed rose by 3.4%
mainly due to an increase in long-term debt financing by 38.7% which was utilized to
support the operations and the dividend streams (Moody's, 2016), but the major factor
in the reduction of ROCE was PBIT which had sharply declined by 44% in 2016
(Annexures, IS).

On the contrary the ROCE of Boeing in 2014-2015, had marginally increase from 16.7%
to 16.9%, this was due to decline of capital employed by 2% as the company had
brought back common shares at $6.75 billion and agreed to raise the limit of share
buyback from $12 billion to $14 billion (Imaduddin, 2015). In 2016 the ROCE declined to
14.6% due to rise in non-current liabilities to 3.7% (Annexure IS) as Boeing issued new
debts of $1.2bn (Whyte, 2016) to finance the R&D for new aircrafts (Schmidt, 2017a)
the total equity have significantly fallen to $817m as Boeing repurchased shares of
$7bn. (Boeing press release , 2016)

LIQUIDITY RATIOS

CURRENT RATIO

The current ratio measures the ability of a company to pay its short-term debt liabilities
when they fall due. (Ready Ratios, 2017d)

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CURRENT RATIO
1.40 1.35
1.25
1.50
0.99 0.99 0.99
PERCENTAGE %

1.00

0.50

-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratios)

Overall the current ratio of the Airbus Group had remained constant throughout the year
2014, 2015 and 2016. In 2014 the current ratio stood at 0.99 due to the current liabilities
being higher than the current assets (Annexure, BS).

In 2014-2015, the current assets had risen by 12% which includes an increase of
inventories by 14.6% which is in line with increase in sales revenue due the higher sales
of A320neo (Topham, 2016) and receivables by 15.9% due to delays in the production
and deliveries of A400m (REHMAN, 2015). Whereas current liabilities have also risen
by 12% which includes an increase of short-term financing liabilities by 160% amounting
to €2790 m. (Annexure, BS)

In 2015-2016, both the current assets and current liabilities had risen by 5% which
includes increase in cash and cash equivalent by 53.9% which includes proceed of sale
of shares and exchangeable bonds in Dassult Aviation raising €2.38 billion (Wall, 2016)
as well as issuance on two new bonds amounting €1.5 billion (Airbus AR, 2016, p.300)
which is offset by an increase in current provisions by 17.9% and trade liabilities by
15.4%. (Annexures, BS)

The ideal ratio should be 2:1 but this can vary from industry to industry. In 2014 the
current ratio of Boeing stood at 1.40 which the highest in the three year period. In 2015
the current ratio fell to 1.35 due decrease in short-term investments by 44.8%

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amounting to $750 m (Annexure, BS) as well as decline in cash and cash equivalents
due to debt repayments of $885 m (Bryant, 2016) . In 2016, the current ratio dropped to
1.25 ratio due to decrease in cash and cash equivalents by 22% due to repayment of its
debts (Schmidt, 2017b) .

QUICK RATIO

Quick ratio measures the ability of the company to pay off its short term liability by
liquidating its short term asset quickly for e.g. cash and cash equivalents. (Ready
Ratios, 2017e)

QUICK RATIO
0.46 0.44 0.45 0.47
0.42
0.50 0.38
PERCENTAGE %

0.40
0.30
0.20
0.10
-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratios)
In 2014, the quick ratio stood at 0.46 as the inventory accounts for 88% of the current
asset (Annexure, BS) as due to the rise in net orders higher than Boeing i.e.1456
aircrafts (Flottau, 2015).

In 2015, the quick ratio has dropped from 0.46 to 0.45 as the inventory had risen by
14.6% which is in line with increase in sales revenue by 6.5% (Annexure, BS & IS) as
Airbus was able to deliver 635 aircrafts surpassing 629 aircrafts in 2014 (Jansen, 2016).

In 2016, the quick ratio had marginally improved due to an increase in cash and cash
equivalents by 53.9% which include proceeds of €2.38 billion from disposal of Dassault
Aviation (Reuters, 2016a) whereas the stocks have also increased by 2.2% due in

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increase in the production of Airbus new product A350XWB and had delivered 49
aircrafts up from 14 aircrafts from 2015 (CAMPBELL, 2017).

However, the quick ratio of Boeing is much weaker than the Airbus. In 2014-15 the
quick ratio declined from 0.44 to 0.42 as inventory increased by 1.1% due to increase in
the production of Boeing Dreamliner 787 and had delivered 135 as compared to 114 in
2014 (Wright, 2016). In 2015-2016 the quick ratio fell to 0.38, inventory fell by 8.6% as
Boeing has decided to cut the production of 747 to one per month due falling orders and
sales (Reuters, 2016b) as well as to cut the production of 777 to five per month from 8.3
which reflects the reduction in sales (Scott, 2016b).

ACTIVITY RATIOS

DEBTOR TURNOVER DAYS

This ratio indicates the efficiency of a company in collecting outstanding cash from their
credit customers. (Ready Ratios, 2017f)

DEBTOR TURNOVER DAYS

34
2016 44
YEARS

33
2015 44

31
2014 41

0 5 10 15 20 25 30 35 40 45

DAYS
BOEING AIRBUS

(Annexures, Ratios)
In 2014 the debtor days stood at 41 days as Airbus sold 629 aircrafts and received net
orders of 1456 aircrafts surpassing Boeing’s total of 1432. (Hepher & Altmeyer, 2015)

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In 2015 the debtor days have risen by from 41 to 44 days which is line with surge in net
sales by 6.1% due to increase in aircrafts sold i.e. 635 jets with A330 manging to outsell
combine Boeing 777 & 787 due to large orders from China (Bhaskara, 2016a)s.

In 2016, the debtor days remained stable while the sales revenue had shown a slow
growth 3.3% due to delayed deliveries of A320neo, A350 and A400M due to engine
problems (Briganti, 2016).

On the contrary, the debtor turnover days of Boeing had also increase in the three years
period. In 2014-2015 the debtor days increased from 41 to 44 days in line with the
increase in sales revenue by 6% as Boeing delivered 762 aircrafts as compared to
Airbus 635 (Chicago Tribune, 2016). In 2015-2016, debtor days rose to 34 as the sales
had dropped by 1.6% due to decline in deliveries by 2% (Annexure, Other Information)
due to Boeing’s new product 737 Max which takes longer to build than its older model
737. (Scott, 2017)

BOOK-TO-BILL RATIO FOR AIRCRAFTS

It measures the number of orders being received with the abililty of the company to
complete its orders (Investing Answers, 2017).

BOOK-TO-BILL RATIO

0.9
2016 1.1
YEARS

1
2015 1.6
2
2014 2.3

0 0.5 1 1.5 2 2.5

DAYS

BOEING AIRBUS

(Annexures, Ratios)

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In 2014, the book-to-bill ratio of Airbus stood over 2 as it delivered 629 aircrafts and
received net orders of 1456 aircrafts which is higher than the net orders received by
Boeing (Flottau, 2015). The book-to-bill ratio of more than one indicates the increasing
backlog of orders which is preferred by investors as it signifies constant revenue over
the upcoming years (Basu, 2014).

In 2015, the ratio declined to 1.7 as it received net orders of 1036, down by 29% from
2014 due to slow global economic growth and low oil prices but still delivered 635 jet
which is higher from 2014 (Skynews, 2016) due to ramp in output of A320ceo family
(Reuters, 2015c)

In 2016, the ratio declined to 1.1 as deliveries increased by 8% due to rise in deliveries
of Airbus cash cow single aisle jet A320ceo (Hepher, 2017a). The net orders reduced to
29.4% (Annexure, Other Information) due to huge buying of jets by airlines in prior years
as well as drop in fuel prices as airline can use older aircrafts longer (Levine-Weinberg,
2016).

The ratio of Boeing in 2014-2015 decrased from 2 to 1 as deliveries increased by 5 %


due to faster production of 737 & 787 Dreamliner (Wright, 2016). In 2015-2016 the ratio
dropped below 1 as Boeing’s net orders received, declined by 13% (Annexure Other
Info) due to airlines purchasing less aircrafts as compared to previous years (Ostrower,
2017) further the deliveries has also dropped by 2% as company is transiting to new
737 Max jet which requires test flight and longer to build than it predecessor 737 (Scott,
2017).

CREDITOR TURNOVER DAYS

This ratio calculates the number of days which a company takes to pay its suppliers.

(Accounting Tools, 2017c)

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CREDITOR TURNOVER DAYS

51
2016 75

48
YEARS

2015 77

51
2014 72

0 10 20 30 40 50 60 70 80

DAYS

BOEING AIRBUS

(Annexures, Ratios)
In 2014, the creditor days stood at 72 as the NP increased by 59% which would have
been better had it not been for the provision of €551m for delays in the production of
A400m miltary transport (Clark, 2015).

In 2015, the turnover days have increased by 3 days whereas the sale revenue have
increased by 6.1% due increased in demand of A330s and A320s as China has signed
a deal of €15.5bn to buy 30 A330s and 100 narrow body A320s (BBC, 2015) .

In 2016, the turnover days had declined by 2 days as cost of sales had increased by
10.3% due to a net charge of €2.2bn by A400m (Business Recorder, 2017).

In 2014-2015, the turnover days had fallen from 51 to 48, altough the sales had
improved by 6% to $96.1bn as Boeing delivered 762 commercial jets, 186 military jets
and 4 satelites (Boeing AR, 2015, p.5). In 2016, the days got back up to 51 days due to
decline in cost and expense by 1.6% as the production of Boeing 747 jumbo jet declined
to one per month due to falling orders (REUTERS & GRAY, 2016) and as well as
decline in production of 777 to five a month which indicates the reduction in sales
revenue. (Scott, 2016b)

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FIXED ASSET TURNOVER

It is used to measure the operating efficiency of a company in using its fixed asset to
generate sales. (Accounting Tools, 2017f)

FIXED ASSET TURNOVER

7.4
2016 3.9
YEARS

8
2015 3.8

8.2
2014 3.7

0 1 2 3 4 5 6 7 8 9

TIMES

BOEING AIRBUS

(Annexure, Ratios)

In 2014, the turnover ratio of Airbus is lower than Boeing as it had delivered 629 jets
which is much lower than Boeing’s jet deliveries of 723. (Wilson, 2015)

The asset turnover rose from 3.7 to 3.8 in 2015 by an increase in revenue by 6.2%
mainly as Airbus delivered 635 jetliners and exceeded from the number of deliveries in
2014 i.e. 629 jetliners (Rothman, 2016).

In 2016, the fixed asset turnover rose from 3.8 to 3.9 by an increase in sales revenue by
3.3% which includes increase in number of aircrafts sold by 8% to 688 aircrafts
(Hepher, 2017b) as well as increase in deliveries of Airbus military helicopters to 418
units. (Tran, 2017b)

On the contrary, Boeing’s fixed asset turnover from 2014-15, fell from 8.2 to 8 due to an
increase in fixed assets by 9.7% due to ramp up production of Boeing 737 to 42 per
month (Leiro, 2016) as well increase in production of 787 Dreamliner to ten per month

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(Polek, 2015). In 2015-2016, the ratio fell from 8 to 7.4 by an increase in fixed assets by
6.1% due to the ramp up in the output of Boeing new product 777X which will be
entered into service in 2020 (Bhaskara, 2016b)

INVESTOR RATIOS

EARNINGS PER SHARE (EPS)

It measures the profitability generated on every single share of the company. (The
Economic Times, 2017)

EPS
8.00 7.32
6.92
7.00
6.17
6.00

5.00

4.00 3.43
2.99
3.00

2.00 1.29
1.00

-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratios)
In 2014, the EPS of Airbus stood at 2.99 which further improved to 3.43 in 2015 as the
net profit increased by 14.8% (Annexure, IS) as it had delivered 635 jets and 471
helicopter units (Rappler, 2016) The weighted average no. of shares had increased by
0.33% to 785,621,099 due to allotment of shares under “Employee Share Ownership
Plans” (Airbus AR, 2015, p.242)

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Between 2015 and 2016, the EPS had dropped down by 62.4% to 1.29 as the net
profits took a €2.2bn hit due to the net charges of A400m due to technical delays and
engine problem (Berrada, 2017) The weighted average shares declined by 1.5% to
772,912,869 as Airbus repurchase shares under the €1bn shares buyback scheme
(Airbus AR, 2016, p.257)

In 2014-2015 the EPS of Boeing increased from 6.17 to 6.92 as Boeing delivered 762
jets which is increased by 5.4% from 623 aircraft delivered in 2014 (Nensel, 2016) the
weighted average shares reduced by 5.6% as Boeing repurchased $6.75 bn shares as
part of $14bn shares repurchase program (Boeing press release, 2015) . In 2015-2016
the net profits Boeing dropped by 5% due decrease in jets delivery from 768 to 668 due
production cuts in 777 and falling order for 747 jets (Levine-Weinberg, 2017) but still the
EPS rose from 6.92 to 7.32 due to decrease in weighted average shares by 7.5% from
shares buyback of $7 bn (Boeing press release , 2016)

PRICE TO EARNINGS RATIO

PE ratio is used to value the current investor demand in a company by comparing its
current share price to its EPS. (Ready Ratios, 2017g)

PRICE TO EARNINGS RATIO


60
48
50
40
30
19 20
17
20
13 17
10
-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratios)

In 2014-2015, the P/E ratio of Airbus rose from 13 to 17 times, the EPS had risen by
14.7% whereas the market share price had greatly increased by 52.8% (Annexure,

33 | P a g e
Other Info), as Airbus net profits increased by 15% to €2.7 bn (Fasse, 2016) and
authorization of €1 bn shares buyback. (Nickerson, 2015)

In 2015-2016, the P/E ratio had increased to 48 times, the MPS increased by 3.3% as
Airbus DPS increased to 1.35. However, Airbus EPS dropped down to 1.29 (Annexure,
Other Information) as the net profits fell by 63% mainly due to net charges of A400m
military transport of €2.2 bn (BBC, 2017).

The P/E ratio of Boeing in 2014-2015 had increased from 17 to 19 times. Although the
net earning had reduced by 5% (Annexure, IS) the EPS has increased to 6.92
(Annexure, Other Info) as Boeing had repurchased $6.75bn shares (Reuters, 2015a). In
2015-2016 the ratio increased to 20 times, the market share rose by 7.7% due in
increase in quarterly dividends by 30% to $1.42 (Reuters, 2016c) as well increase in
EPS by 5.8% as Boeing repurchased $ 7 bn shares (Boeing press release , 2016).

DIVIDEND YIELD

It calculates the amount paid to shareholders for their investments in the company
annually. (Ready Ratios, 2017h)

DIVIDEND YIELD
3.50 3.10 3.00
3.00 2.60
2.40
PERCENTAGE %

2.50 2.20 2.20


2.00
1.50
1.00
0.50
-
2014 2015 2016

AIRBUS BOEING

(Annexures, Ratios)
In 2014 Airbus shares increased by 7 % in Europe, due to achieving net profit of €2.3 bn
& paying high dividend of €1.20/share (Smith, 2015).

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However the yield had dropped down to 2.2% in 2015 due to increase in market share
by 52.8% (Annexure, Other Information) as Airbus posted net profit of €2.7 bn up from
15% in 2014 while paying dividend of €1.30/share up 8% from the previous year (Yahoo
Finance, 2016) .

In 2016, the yield remained dividends increased by 4% to €1.35 (Annexure, Other


Information) despite the decline in earnings to €1.29 (RTT News, 2017). Further the
market share price also grew by 4% (Annexure, Other Information) due to growth in
European markets as GDP grew by 1.6% (Amaro, 2017)

On the contrary, the dividend yield of Boeing in 2014-2015 have increased from 2.4% to
2.6% as the market price and DPS grew by 11.2% and 23.2% respectively as Boeing
had distributed a total of $2.5bn dividends and $6.7bn through shares buyback to the
shareholders (Seeking Alpha, 2017). In 2015-2016 the yield increased to 3% as the
market price and DPS grew by 7.7% and 22.8% respectively as Boeing paid $2.8bn
dividends and $7bn by shares buyback to the shareholders (Boeing AR, 2016, p.3)

INVESTOR RATIOS

FINANCIAL GEARING

These ratios are used to measure the proportions of debt and equity an entity has to
support its operations. (Accounting Tools, 2017d)

FINANCIAL GEARING
1,134.80
1,200.00
1,000.00
PERCENTAGE %

800.00
600.00 286.90
400.00 152.80 155.80
103.80 103.20
200.00
-
2014 2015 2016

AIRBUS BOEING

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(Annexure, Ratios)

The gearing of Airbus is already above 100% in 2014 which means the company is
highly geared. In the year 2014-2015, the D/E ratio have significantly increase from
103.8% to 152.8% due to rise in total debts (long plus short term financing liabilities)
amounting to €9125 m by 24.1% of which €500 m convertible bond will used to diversify
its funding portfolio (Reuters, 2015b) and a decline in equity by 18.5% which includes a
258% increase in other comprehensive losses due sharp increase in loss in the fair
value of cash flow hedge by €3554 m (Airbus AR, 2015, p.193) as well as buyback of its
shares of upto 10% of its share capital.(Hepher, 2015)

In 2015-2016, the gearing further increased to 286.9% as the total debt had increased
by 14.8% which includes issuance of €1 billion convertible notes in Dassault Aviation
which would be ultilized to maintain the dividend streams as well as to support ongoing
operations (Moody's, 2016) but the major factor is the steep decline in equity by 63.5%
which includes decrease in share premium by 21.2% due to cancellation of treasury
shares and reduction in retained earnings by 21%. (Annexure, BS)

The financial gearing of Boeing in 2014-2015 has risen to 155.8% as Boeing issued
new debts but still Boeing has sufficient cash to pay off its debts (Schmidt, 2016).
Further in 2016 the gearing increased by 10 times to 1134.8%, as Boeing raised new
debts for investment in R&D and to meet its targets (Schmidt, 2017a) and a decline in
equity by 87.1% as Boeing repurchased $7bn shares and announced a further $14bn
share buyback (Boeing AR, 2016, p.3).

INTEREST COVER

It measures the number of times a company can pay finance cost from its profits.
(Accounting Tools , 2017e)

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INTEREST COVER

27.10
30.00
22.40
25.00 19.10
20.00
15.00
8.60 7.40
10.00 4.30
5.00
-
2014 2015 2016

AIRBUS BOEING

(Annexure, Ratios)
In 2014, the interest cover of Airbus stood at 8.6 times which shows the strong position
of the company to repay the finance cost. Whereas in 2015, the interest cover fell to 7.4
times due to increase in interest expense by 19.3% as Airbus issued convertible loan
notes of €500m to diversify its funding portfolio (Reuters, 2015b).

In 2016, the interest cover declined to 4.30 mainly as PBIT declined by 44.4%
(Annexure IS) due to weak performance and net charges of €2.2 bn A400m military
transport (Berrada, 2017)).

The interest cover of Boeing has been fluctuating over the three year period. In 2015
the interest cover had risen from 22.4 to 27.1 as the interest expense fell by 17.4% due
to high interest capitalized on construction in progress (Boeing AR, 2015, p.39). In 2016
the interest cover fell to 19.1 due to increase in interest expense by 11.3% (Annexure,
IS) as Boeing issued unsecured debts amounting to $1.2bn (Whyte, 2016).

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CONCLUSION.

The profitability ratios have shown a declining trend so far with GPM reducing from
13.7% to 7.96%, NPM reduced to 1.5% whereas the return of capital employed also
remained low to 4.1% which is the lowest in the years under consideration. The decline
was mainly due to higher net charges in 2016, ultimately driving the down the
profitability ratios.

The liquidity ratios remained weak throughout the three year period as the current ratio
remained below 1, indicating that Airbus would struggle to pay its short-term debt
obligations. Whereas it competitor Boeing’s current ratio was above 1 but its quick ratio
remained below Airbus showing that much of its increased current ratio was due to
higher levels of inventory amounting to €43,199 m.

Activity ratios of Airbus showed improvement than its competitor as the creditor days
was much higher than Boeing but the receivable days were also higher which would be
a result of ineffective credit control policy.

Book-to-bill ratio also remained above 1 and higher than Boeing’s 0.9 indicating
increased demand for Airbus jets.

Due decreased profits for the period, Airbus paid earning per share €1.29 which is the
lowest in the three year period but still the P/E ratio have peaked at 48 times which
show the market confidence in Airbus. Further, Airbus have also increased dividend
payment of €1.35 which is a 4 % increase from 2015 sending a positive signal to the
stock market.

The capital structure of Airbus includes significant amount of debt as the company’s
debt to equity ratio reached to about 286.9% in 2016 which could lead to high cost of
debt, loss of trust of the bank in Airbus to repay the loans but still the gearing of Airbus
is much better than Boeing.

By improving its cost control management, Airbus would be able to remain competitive
as well achieve higher profits.

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Airbus has the second largest market share in commercial aircrafts and a global brand
recognition. Making fuel efficient aircrafts would benefit Airbus due to volatility in jet fuel
prices.

Airbus must focus on delivering more aircraft to reduce its backlog and achieve higher
revenues.

Airbus will face serious competitions in coming years, in order to retain its market share
Airbus should remain competitive.

RECOMMENDATIONS

 Airbus could continuously innovate itself to produce the best fuel-efficient


aircrafts in the market.
 Airbus could implement effective cost control strategy in order to achieve higher
profits.
 Airbus has a large backlog of orders, it could work on strategies to increase the
number of aircraft deliveries to earn more revenue.
 Airbus can implement effective credit control policy to improve its cash operation
cycle.

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