The A220 JV, value? In its entirety I wonder what the A220 program is actually worth to Airbus....
It cost 6 billion to develop, but there were large cost overruns, so let's say it would be five billion to get another similar aircarft up and running in today's dollars. But of course, that number can't be taken at face value. There is no gurantee that AB even would want to sink that kind of cash into this type of plane.... perhaps, but it's pretty clear from the list of old A319s, and MDs out there that there is a huge market. So yes, there is a business case for sinking billions into a plane like the A220.
Right so we have a baseline value of 5 billion as that is what it would take to make a similar plane. Now let's look at the other factors:
- Design age. If the deisgn were 10 years old you would have to start hacking away at the base line value. But the design is brand new.
- Market reception: even the best planes built by the largest producers can flop. This one didn't. We have a going concern with a 500 plane backlog, which is highly likely to increase. Airline and passenger reviews are strong. So let's add 20 per cent to the baseline value.
- Comepetitor status: As we all know, the Max imploded, and it's likely beginning to dawn on people's minds that a plane with a backbone from the 60s may be at the end of its rope. Even the A320 is far from new, though it has decades to go yet before it gets as many grey hairs as the 737. In this environment the A220 can demand higher price points, so let's add 15 per cent to the baseline.
- Regulatory tighetening: I know in Canada we think a mild carbon tax will call in the four horsemen, but in Europe things are tighteneing and tighetening fast. Fuel costs and fuel efficency will soon be a major factor in Europe. So let's add 5 per cent.
- Design risk: The plane works... and its bugs are pretty much all dead. That;'s good. But let's say it's a wash given the overruns in teh initial development.
- Capacity improvements: This is a young design with room for imperovement, but that will costs money, incur rsisks, etc.. so I'll give this a value of 0.
- Reduced risk for AB: After the Max, no one is safe. Your plane is only an acciedent away from being grounded. having overlap in the prortfolio between A320's and A220's no longer looks like cannibilazation. It looks like security.
- Cannnibilization of sales: If the A220 did overlap with AB's current product line this would reduce the value of the A220 for AB. The overlap is minimal and AB is probably thankful all of its eggs are not in the A320 basket.
With all of the above and hindsight, AB's involvement in the A220 went from a good deal fro AB to sheer genius. If we add up the above we get a JV value of...
6.25 billion... BBD's share of this is a tidy sum! It is also a value that grow rapidly as sales increase. Currently this value is washed out on BBD's balance sheet by debt, but if any of the above is remotely true, then BBD's current share price is way too low given the progress elsewhere in Biz jets and BT.