Q1 financial results: Covid-19 hits commercial aerospace business, but defence remains stable
Boeing and Airbus reported massive commercial losses in Q1 2020 due to Covid-19, while their defence business remained relatively steady – as did Northrop Grumman’s finances. Harry Lye reviews the defence majors’ Q1 financial results with comment from GlobalData’s defence analysts.
// Aerospace majors are reporting massive losses, but steady defence business could soften the blow of the Covid-19 impact. Image: Boeing
Northrop Grumman’s Q1 finances have remained steady despite the impact of the Covid-19 pandemic, with the company reporting sales increases across the board and net earnings of $868m. Meanwhile, defence contractors Airbus and Boeing reported sweeping losses, largely due to their stagnant commercial operations.
Across the defence sector, operations have remained relatively steady. Boeing president and CEO Dave Calhoun said the company’s Defence, Space and Security division would ‘‘limit the overall depth of the cut” caused by the continued effects of Covid-19.
Defence contractors have sought to free up cash to maintain their operations during the crisis. Some companies have had to temporarily pause operations on some systems, whilst the US Government has tried to free up funding to keep defence contractors afloat during the pandemic.
Some contractors, however, are feeling the pinch as the damage to their commercial operations outweighs the continuation of their defence work.
Northrop stays steady, but are there signs of cracks?
Bucking the trend seen in other companies’ reports, Northrop Grumman saw growth across all its business divisions in Q1 2020, reporting total sales of $8.6bn, a 5% increase on the same period in 2019.
Northrop Grumman’s space division saw the biggest growth in sales of 8% compared with last year, increasing to $1.9bn.
Commenting on the results, Northrop Grumman chair, CEO and president Kathy Warden said: “Our results this quarter reflect the strength of our business, our portfolio’s alignment to the highest-priority global security threats, and the dedication of our team to deliver for our customers and our shareholders in a challenging environment.”
During the quarter, Northrop Grumman increased its cash flow by $80m, which the company said was largely in line with the previous year’s cash use, not a result of Covid-19.
Despite staying relatively steady, Northrop Grumman updated its 2020 guidance to accommodate for the effects of the pandemic on the market. The update reduced projected sales from $35.3bn-$35.8bn to $35bn-$35.4bn.
GlobalData associate aerospace and defence analyst Madeline Wild said: “The military-orientated sales portfolio of Northrop has buffered the company against the effects of Covid-19 compared to more commercially led companies such as Boeing and Airbus. During the pandemic, Northrop has continued to push forward with product development, testing, for instance, the OmegA rocket on schedule despite the Covid-19 crisis.
“Subsequently, sales have grown for Northrop along lines of relatively secure investment. The US awarded Northrop Grumman a $165m contract on 24 April for the production of Lot 9 full-rate production of the AGM-88E advanced anti-radiation guided missile.”
“If Northrop manages to support smaller companies within its supply chain and to maintain production schedule, the company should withstand the lasting effects of the pandemic.”
Despite the positive signs, the company’s operating income for its aeronautics systems and defence systems divisions fell by 16% and 3% respectively in Q1 2020. The aeronautics systems wing posted an operating income of $259m, down from $308m in the same period of last year. Similarly, income from defence systems fell from $202m to $196m.
“These figures suggest that there has been some level of supply chain disruption due to Covid-19,” says Wild. “Not only physical disruption due to reduced workforce, but also cost increases in aeronautics related to the collapse of air travel and the struggle of commercial aviation.
“Northrop mentioned, for instance, EAC adjustments for autonomous systems that have lowered operating income figures. Nevertheless, if Northrop manages to support smaller companies within its supply chain and to maintain production schedule, the company should withstand the lasting effects of the pandemic.”
Airbus feels the pinch
Airbus’ revenue fell by 15% in Q1 2020, from $13.6bn to $11.5bn. The company’s defence business took a big hit, with its EBIT-adjusted results falling 85% from $101m to $16.3m.
Airbus CEO Guillaume Faury said of the company’s Q1 results: “We saw a solid start to the year both commercially and industrially, but we are quickly seeing the impact of the Covid-19 pandemic coming through in the numbers.”
Airbus’ business fell dramatically across the board, contributing to around $526m (€481m) in losses. Faury said the company was “in the midst of the gravest crisis the aerospace industry has ever known”.
Airbus said in a statement: “EBIT adjusted [results] at Airbus Defence and Space decreased to €15m (Q1 2019: €101m), reflecting the lower business performance, including in space systems. Due to the severity of the coronavirus pandemic, the incremental impact on the business is being assessed and the restructuring plan at Defence and Space will be adjusted accordingly.”
“With major primes like Airbus straddling defence and commercial aerospace, the collapse of the commercial passenger market is a hammer blow to company finances.”
GlobalData aerospace and defence analyst Anthony Endresen told us: “With major primes like Airbus straddling defence and commercial aerospace, the collapse of the commercial passenger market is a hammer blow to company finances in the short, medium and long terms. These issues do not represent an existential threat to Airbus, given its significance to several key European states, in addition to its role in vital defence programmes.
“Important Airbus measures such as planned output reduction to maintain production whilst preserving cash in the commercial sector will be of importance great use to the company. I would like to see Airbus address a number of issues now, from logistics in terms of delivery of finished aircraft – mentioned as a looming issue – to proposing some measures to allow defence work to take up the slack where commercial work has stalled. The latter would entail initiatives such as those pointed to by the assistant secretary of the US Navy for research, development and acquisition James Geurts this week.”
Defence buoys Boeing’s losses
Boeing posted a loss of $641m in its Q1 results and burned through $4.3bn in cash while trying to stay afloat and find a way through the ongoing crisis.
The company has tightened its belt, reducing operating costs, cutting spending, further suspending stock buybacks and dividend payments, and deferring research and development spending to later quarters.
Boeing president and CEO Dave Calhoun said in a statement: “The ongoing stability of our defence, space and related services businesses will help us limit the overall depth of the cut. And in the end, because there are so many unpredictable drivers for this crisis, we’ll have to monitor continuously what’s happening in our markets, and we will make adjustments whenever needed to ensure we’re matching the size of our business to the changing demand in the market.”
The majority of the damage to Boeing’s finances came from its commercial aircraft division, which was already recovering from the ongoing damage from the 737 MAX. Revenue for this division dropped by 48% and Boeing posted an operating loss of $2bn.
In comparison, Boeing Defence, Space and Security saw a smaller drop in revenue of only 8%. Across the division Boeing posted operating losses of $191m, compared with earnings of $852m for the same period last year.
Boeing’s Global Services division was the only part of the company not losing money during the quarter, reporting earnings of $708bn. This is largely due to military support contracts. In its results, Boeing said: “During the quarter, Global Services was awarded a P-8A integrated logistics services and site activation support contract modification from the US Navy and the government of Australia and secured a logistics, components and services contract for the US Army AH-64 Apache fleet.”
“Defence represented 34% of revenue, against 42% for commercial aeroplanes in 2019, but could very well become Boeing’s most important revenue stream in 2020.”
GlobalData aerospace and defence analyst Nicolas Jouan said the future of Boeing could lie in a shift to focusing more on defence, at least in the short term.
“The German press reported that the federal government was ordering 30 additional F/A-18 Super Hornet and 15 EA-18G Growler to Boeing in order to replace ageing Tornado and Typhoon,” Jouan said. “The two F-18 variants can conveniently fill Germany’s capability gaps without engaging in a new program such as Lockheed Martin’s F-35 as the country is also involved in its own next-generation fighter programme in partnership with France: the FCAS. Boeing benefits from this, and will likely see the defence and space share of its business growing in 2020.
“Defence represented 34% of revenues, against 42% for commercial aeroplanes in 2019, but could very well become Boeing’s most important revenue stream in 2020. More cancellations of the 737 should be expected in the months to come, which will tip the balance in favour of the company’s defence portfolio.”