2022 French Elections with Axel Gyldén, 16 April 2022

Between the two rounds of the French Presidential election (last Sunday and next Sunday), Sami J. Karam speaks to Axel Gyldén, veteran reporter at France’s leading weekly L’Express. Topics include analysis of the first round results, President Emmanuel Macron’s popularity, Marine Le Pen’s probability of winning and what such a victory would mean for France and for Europe.


Update: Working Age Population Around the World 1960-2050

This is an update of a similar post from 2015. The UN projections have changed but only by small numbers. The main observations are the same as six years ago (click table to enlarge in a new tab).

The working age population (WAP, those aged 15 to 64) of sub-Saharan Africa continues to grow rapidly. It has more than doubled since 1990 from 252 million to 609 million, and is expected to more than double again by 2050 to 1.3 billion. If the reality turns out to be anywhere near these projections, it will be a significant challenge for African economies to absorb and to employ productively this enormous amount of new human energy.

India faces a similar challenge with its WAP growing from 928 million now to 1.1 billion in 2050. Though daunting, this represents a slowdown in the rate of growth from the previous thirty-year span 1990-2020.

The WAP of Europe, China and Japan have already peaked and will be declining for the rest of the century, per UN projections. Europe’s decline from near 500 million in 2005 to a projected 407 million by 2050 is mainly due to eastern and southern Europe. The WAP of France and the United Kingdom will flatline to 2050 while those of Germany and Russia decline.

In the United States, the steady growth in the WAP between 1960 and 2005 combined with a falling dependency ratio to fuel strong economic conditions. Growth in the WAP is expected to be more muted in the decades ahead.

Compared to the late 20th century and the first decades of this century, the future growth in the WAP will taper off or even turn negative in several regions and countries. Sub-Saharan Africa stands out as the exception that will maintain strong WAP momentum through at least 2050.

Lebanon in Crisis, with Joe Issa El Khoury

“Historically, Lebanon prospered as a result of inflows of people and funds – people who came to take refuge in Lebanon and also funds. If we look at the post World War 2 period when modern Lebanon became independent and also at previous periods that Lebanon went through – and I mean over the past 100 or 200 years – one thing that was common to all these eras is its liberal economic system that was adopted by all who lived on this land. The constant was the liberal economic system.”____ Joe Issa El Khoury

Sami J. Karam speaks with Joe Issa El Khoury, a Beirut-based financier, about the tragic events that have unfolded in Lebanon since 2019. A sharp fall in the currency, a banking freeze, a political crisis, hyperinflation, and widespread street protests made 2019 a difficult year. But these events were then compounded by the Covid-19 pandemic and the explosion in the port of Beirut in 2020.

Issa El Khoury explains the sequence of events that led to the present, and offers a possible way forward.

Topics include:

  • 0:00 Introduction of Joe Issa El Khoury
  • 2:25 What is it like right now on the ground in Beirut?
  • 8:33 Why did Lebanon have a golden period in 1945-75; why was it later so prone to crisis?
  • 17:40 The Rafik Hariri era and the return of growth 1990-2005
  • 20:00 What explains the weakness of the Lebanese state: geography and demographics
  • 26:30 Lebanon’s diversity as a source of wealth; Example of Lebanese cuisine
  • 30:40 Crossing the line from a laissez-faire economy to a crony economy
  • 35:05 The real estate boom of 2007-11
  • 36:55 The impact of the Syrian civil war
  • 39:10 Crowding out the private sector
  • 44:10 The proximate factors that led to the meltdown
  • 46:15 The current condition of the banking sector; Role of the Central Bank
  • 51:00 Will depositors suffer a haircut? The Lazard and other plans
  • 54:45 Talk of privatization of state assets
  • 59:45 Political patronage in the public sector
  • 1:01:50 “All roads lead to Washington DC and the acronym IMF”
  • 1:05:20 Political reform and the role of the diaspora


A Few Certainties About Covid-19

There is plenty that we do not know about the coronavirus. But let us take stock of the things that we do know for sure, and of some other things that we will soon know.Screen Shot 2020-01-27 at 2.29.15 PM

Real-world Exponentiality

By now, a child understands exponential growth. If you start with one apple on March 1st and double every three days, you will have a thousand apples on March 31st and a million on April 30th.

But in the real world, not the abstract world of math, there are constraints on that growth. Doubling your apples every three days is feasible for a month or so because you can probably find a thousand apples and also find a place to store them. But it would be more difficult to find, transport and store a million apples, unless you are willing to pack a six car garage with apples from floor to ceiling (accurate math). If you did, most of them would rot and your neighbors would call for psychiatric help, two other constraints on unbridled exponentiality. Read more

Soccer for Americans

Three rule changes to turn American soccer into a big money maker.

The experience of watching a soccer game rarely lives up to the anticipation. You go in hoping for a 4-3 cliff-hanger (as with Argentina vs. France recently) but too often you end up with 1-0 or worse, a draw, or much worse, a draw that is resolved through a penalty shootout. This chronic letdown explains why Americans prefer watching other sports.

Photo by Torsten Bolten.

Except for anxiety-ridden upper middle-class moms trying to steer their teenage sons away from (American) football practice, most Americans don’t really care about watching soccer. If this is changing, at about the pace of a glacier inching down an Alaskan ravine, it is mainly because the percentage of immigrants in the US population has been on the rise in recent decades. These immigrants or their parents often come from countries where soccer is the leading spectator sport. It follows then that with the current crackdown on immigration, the future of American soccer is looking as frail as ever. NFL bosses need not lose much sleep.
Read more

The US Census Digs Deeper

Where were your ancestors from?

Over 45 million Americans identify their dominant ancestry as German and 22,000 identify theirs as Marshallese, from the Marshall Islands in the Pacific. But in the US Census proposed new form for 2020, both of these groups get their own box to check for the first time. In the previous 2010 form (shown below), German-Americans would simply check ‘White’ and Marshallese-Americans would check ‘Other Pacific Islander’.


In the 2020 form therefore, the US Census is seeking more disclosure and more granularity in the population data. This desire for more detail is not evenly spread however. The Marshallese, 0.01% of the US population, get as much real estate on the form as do German-Americans, 14% of the population. Germany being a country of many regions and Bundesländer, there would surely be more fragmentation in that 14% if anyone cared enough to know the percentage who claim for example Bavarian vs. Hessian ancestry. Read more

Working Age Population Around the World 1960-2050

>>> This post was updated in May 2021. Visit this page for latest figures.

A fast growing economy usually requires a growing working-age population.  It is informative in this regard to look at the size of the working-age population (wap) for different regions and countries of the world.

Screen Shot 2015-09-25 at 1.05.48 PM

This data, compiled from the UN’s World Population Prospects – the 2015 Revision, tells us the following: Read more

Europe: Aging Population Undermines Longer-Maturity Bonds

ANCHALEE WORRACHATE writes in Bloomberg News and highlights the adverse rise of the dependency ratio undermining European debt reduction efforts:

The euro-region’s ability to grow its way out of the debt crisis faces a roadblock — an aging population.

While Italian Prime Minister Mario Monti and his Spanish and French counterparts push for measures to spur an economic expansion, Italy’s structural dependency ratio exceeds 50 percent. In other words, the number of working-age people is less than half the total population. The government forecasts the ratio will reach 63 percent in 2030 and 83 percent by 2065.

Aging and shrinking labor pools are adding to budget woes in the region where the unemployment rate is already at a record high. The risk is that without an overhaul of benefit programs, governments will be unable to balance their books as tax revenues shrink and unfunded pension and health-care liabilities balloon. Longer-maturity bonds in Spain, Portugal and Greece are underperforming their shorter-dated counterparts amid concern the nations’ finances will keep deteriorating.

“You just can’t create growth out of thin air and the demographic trend in the euro zone isn’t conducive to growth,” said Humayun Shahryar, who helps oversee $100 million as chief executive officer at Auvest Capital Management Ltd. in Nicosia, Cyprus. “For a long time, the economic expansion in the region was fueled by low borrowing costs that came with the monetary union. That’s no longer the case and the shrinking working-age population is a problem.” READ MORE.

Demographic Megatrends of the 21st Century

The world’s changing demographics will have a far-reaching impact on our economy.

Context, as we know, can be very important in economics and in investing.  Some of the most successful investors of our time might have been unknown humble laborers if they had instead been born in a poor country far away or born in this country at a less propitious time. Context is made of several components including, among others, political risk, the rate of innovation, fiscal and monetary policy, and of course demographics.  Some or all of these components can remain unchanged for years or even decades, which may lead a majority of economists and investors to mistakenly view them as permanently fixed. Yet each inevitably comes to an inflection point which destabilizes economic or investment projections built on assumptions derived from the old paradigm.

In the case of demographics, they have acted for decades as sustained tailwinds for the US and global economies. The main drivers of these tailwinds were 1) the rise of the baby boomers and 2) the subsequent decline in the birth rate in North America, Asia and Europe, which resulted in a fall of the dependency ratio (number of dependents per working adult). Because these tailwinds have now largely died down (except in India and other parts of Asia), demographics can no longer be seen as a fixed component of the economic or investment context.  What was true for decades is no longer true because we have recently passed an inflection point in demographics.

Going forward, changes in the populations of North America, Europe, Asia and Sub-Saharan Africa will likely undermine economic projections derived from the habits and assumptions of an obsolete context.  Unlike the past few decades, demographics should now be considered as a moving variable which may be supportive or adverse to one’s economic or investment thesis. (In my view, every investment portfolio should be subjected to a ‘demographic audit’ which incorporates the impending changes).

Some demographic megatrends were quantified in 2010 by a United Nations report, World Population Prospects, and are summarized in the table below.  Forecasting is a difficult endeavor and the UN tries to mitigate the uncertainty by creating four different scenarios, or ‘variants’ of the Total Fertility Rate (TFR), for population projections: constant-fertility, high, medium and low. The constant-fertility variant assumes that the fertility rate (the number of children per woman) in each country and region of the world remains at the same level as it was in 2005-10.  This variant shows a shocking increase in the world population to levels which are probably unmanageable, from 7 billion today to 11 billion in 2050 to 27 billion in 2100.  It is highly unlikely therefore that fertility rates will remain unchanged. They are today exceedingly high in Sub-Saharan Africa and exceedingly low in Russia, Germany and Japan.  The three other variants all result in lower population counts for 2050 and 2100.  I use the medium variant below and all figures are UN estimates, not my own (for more detail on fertility assumptions of the four variants, see pages 27-35 of the UN report).

The key points are as follows:

The population in each of the more advanced economies of North America, Europe and Oceania will either grow slowly, stagnate or fall precipitously.  In the US and Canada, it will grow slowly. In a large majority of European countries, it will stagnate or shrink moderately. And in Russia, Japan and Italy, it will fall or fall precipitously.


Europe faces a significant demographic challenge.  It is in its causes and chronology similar to the challenge we face in the United States but it is more severe because Europe has a lower fertility rate. How do you keep the economy growing when the size of the population and its age distribution are no longer working in the direction of growth? It can be done but it is certainly more difficult. And how do you maintain Europe’s cherished social programs when the number of workers stagnates or declines and the number of retirees increases?

Europe’s population is expected to fall from 738 million in 2010, to 719m in 2050 to 675m in 2100. Because of some growth in Ireland, France and the United Kingdom, the population of Northern Europe would maintain itself or grow modestly. But it will decline in Southern Europe in large part because of Italy, Portugal and Serbia. On medium variant estimates, the number of Italians would shrink from 61m in 2010 to 59m in 2050 to 56m in 2100.  Germans would also be fewer, from 82m to 75m to 70m. Eastern Europe (including Russia) would shrink from 295m to 257m to 222m, with every state except the Czech Republic, Hungary and Slovakia losing 20 to 30% of its population count by 2100.

The UN report projects that, at constant-fertility rates, the population of Russia would fall from 142 million in 2010 to 114m in 2050 to 67m in 2100. The more probable medium variant predicts a Russian population of 126m in 2050 and 111m in 2100, still a decline of 31m by the end of the century. Russia suffers from a low fertility rate and a low life expectancy, two factors which are likely to improve in coming years.


Africa presents the opposite profile with the population of Sub-Saharan Africa continuing to grow rapidly.  In 2010, the fertility rate in Africa was 4.37 children per woman (5.43 in Nigeria) compared to 1.59 in Europe and 2.08 in the United States.  Although fertility rates are expected to fall dramatically, the population of Africa will first grow from 1.02 billion in 2010 to 2.19b in 2050 to 3.57b in 2100 (again, using the UN’s median variant). Of these numbers, Sub-Saharan Africa which has 856 million people today will total 1.96b and 3.36b. Given that the world population is expected to grow from 6.9 billion in 2010 to 9.3b in 2050 to 10.1b in 2100, it is easy to see that a huge part of this growth, 77%, will be coming from Sub-Saharan Africa.

If these numbers are surprising, consider that the world fertility rate stands today at 2.45 children per woman but that it is 4.78 in Sub-Saharan Africa.  And while the Sub-Saharan rate is expected to decline to 2.85 by 2050 and 2.14 by 2100, it will not decline fast enough to avert the incoming boom. Indeed, the numbers above already assume such a decline. A fall in the fertility rate usually follows an improvement in health care and a fall in the mortality rate. There is excellent news on this front. As recently reported by the Economist, “16 of the 20 African countries which have had detailed surveys of living conditions since 2005 reported falls in their child-mortality rates”.  The World Bank calls this “a tremendous success story that has only barely been recognised”.

China, India and Japan

China was the most populous nation in 2010 with 1.35 billion people but it will be overtaken by India around 2020 when both countries will have 1.39 billion. The impact of China’s one-child policy means that its population count will fade to 1.3b by 2050 and 952 million by 2100, while India continues to grow to 1.69b by 2050 before it also fades to 1.55b in 2100. The assumptions built into these numbers are not extreme. Starting at 1.56 in 2010 (well below the world average), China’s fertility rate would rise to 1.81 by 2050 and 2.01 by 2100.  India’s TFR now 2.54 (slightly higher than the world average) would fall to 1.84 by 2050 and tick up to 1.88 by 2100.

Like Europe, Japan’s population will fall by a large percentage.  Japan’s fertility rate of 1.42 was in 2010 one of the lowest in the world, but the UN is expecting it to recover to 2.04 by the end of the century. This will not be soon enough to avert a precipitous decline from 126m Japanese in 2010 to 109m in 2050 to 91m in 2100.

North America

The UN expects the population of North America to grow from 344 million in 2010 to 447m in 2050 to 526m in 2100 with nearly all of this growth taking place in the United States (respectively at 310m, 403m, 478m). My own estimate of the US population, published in America Heading for Zero Population Growth?, is lower.  Without new immigration, I found that the US population would not grow at all in the 2030s and 2040s.  The difference between my estimate and the UN estimate is of the order of 25 to 35 million Americans by 2050, which is significant for the US, but not so significant in the context of global demographics where the numbers are much larger.

On the Demographic Dividend

The demographic dividend is an economic benefit which can occur after mortality and fertility rates decline in a given country.  A decline in the mortality rate is generally followed by a decline in the fertility rate, as more women gain access to better health care and to some form of birth control. Over a period of decades, each adult and each working person will have fewer dependents to support. In the right context and with the right policies, this decline in the dependency ratio will yield a demographic dividend.  The best examples of the demographic dividend are found in East Asia, and in developed countries.  The demographic dividend in the US has largely been reaped and it now threatens to turn into a liability unless we enact the policies needed to deal with its aftermath. I wrote in Our Growing Inactive Population that the dependency ratio is about to reverse unless the retirement age is raised to 70 years.

In theory, Africa could be the next place to benefit from a demographic dividend. This would require not only a big decline in mortality and fertility rates, but also the adoption of government policies which foster political stability and encourage economic development. As to timing, it may be decades before the dividend appears, if at all. Outside of Africa, India could also reap a large demographic dividend.

Other Considerations

Outside of the sheer numbers which are startling enough, there are other considerations which flow from the age distributions and economic conditions in various countries.  The challenges posed by aging populations on developed economies and their government social programs are well known and documented.  It is enough to say that the status quo is untenable since it would lead inevitably to an explosion in government liabilities and to a severe deterioration of the economy. This statement applies easily to North America, Europe and Japan.

Less known are the demographic issues facing developing nations.  Nicholas Eberstadt of the American Enterprise Institute described them in a 2011 working paper:

On China:

“China is confronting the demographic version of “the perfect storm” and these new demographic realities may ultimately force us to revise today‘s received wisdom about “China‘s rise”.”

“China‘s future demographic profile will differ substantially from its current population situation, mainly because of the country‘s low levels of fertility. Although there are some inconsistencies and problems in official Chinese population data, population specialists believe that China became a sub-replacement fertility society about two decades ago—and that birth rates have fallen far below the replacement level since then.”

“In the decades immediately ahead, China will see the emergence of a growing host of essentially unmarriageable young men. This outcome will be the all but inescapable arithmetic consequence of the gender imbalance that has accompanied the country‘s “One Child Policy” – while ordinary human populations regularly and predictably report 103 to 105 baby boys for every 100 baby girls, China‘s officially reported sex ratio at birth (or SRB) was almost 120 boys for every 100 girls in 2005. This imbalance between the numbers of little boys and little girls in China sets the stage for a “marriage squeeze” of monumental proportions in the decades just ahead.”

In India, Eberstadt sees a significant North-South divide correlating the birth rate with education and economic opportunity:

“[India’s] dilemma can be highlighted by contrasting the prospective educational profiles of Kerala (which is now one of India‘s most prosperous states) and Bihar (one of its poorest). In just over a decade and a half, Kerala‘s working-age population will be on the brink of stagnation—but the state‘s working age manpower will be fairly well trained (roughly half of Keralites aged 15-64 would have high school education or better). By contrast, Bihar‘s working-age manpower will still be growing briskly—but as 2030 approaches, these projections suggest that well over half of working-age Biharis will have received no more than some primary schooling, and nearly a third of the state‘s working age manpower will have no formal education at all.”

Globally, Eberstadt sees a slowdown in the growth of the working-age population:

“By the reckoning of the UN Population Division, the world‘s population of “working age” (conventionally, albeit somewhat imperfectly, defined as men and women 15-64 years of age) grew by 1.3 billion, or about 40%, between 1990 and 2010: a pace averaging about 1.7% a year. Given the pronounced global fall-off in fertility over the recent past, however, the world‘s manpower of economically-active ages is set to grow much more slowly between now and the year 2030. By the Census Bureau‘s projections, the absolute increase in the world‘s working age population for 2010-2030 would be around 900 million—400 million fewer than over the past two decades—and the projected average rate of global manpower growth for the coming decades is 0.9% per annum—that is to say, only just over half the tempo for 1990-2010.”

Demographics are not the be all and end all of economics but they are one important factor among many important factors.  They open or close a window of opportunity. There is always a risk in extrapolating the present to predict the future and we should view these figures with some skepticism. However the trends outlined above are undeniable, even if their magnitude turns out to be greater or smaller than the figures suggest.

Portfolio 004 – Boeing vs. Airbus: Orders and Profits

Boeing has a better product lineup and is more profitable but Airbus has more room for improvement.

The rising tide of globalization has boosted growth prospects for the airline industry all over the world, and in particular in emerging markets such as China and India.  As air travel has become more accessible to hundreds of millions of people, airplane orders and deliveries have boomed. We examine the evolution of orders and profits at Boeing and Airbus.

Airbus Market Share Strategy

Given the Boeing – Airbus duopoly and buoyant demand markets, both manufacturers should now be highly profitable but this is only true of Boeing.  Airbus made some strategic decisions in the late 1990s and early 2000s that continue to depress its profitability, namely the development of the super jumbo A380 which is still loss-making, and the sale of planes below cost or at razor-thin margins in the early 2000s in a drive for market share.

If Airbus’s main mission has been to gain market share, one has to recognize that this mission has so far been highly successful.  In the year 2000, Airbus delivered 311 planes to airlines and Boeing delivered 489.  Eleven years later in 2011, Airbus delivered 534 planes and Boeing 477.  As important, the backlog at EADS (European Aeronautic Defence and Space Company, the parent of Airbus), including non-Airbus divisions, grew from €132 billion in 2000, the equivalent of 5 years of revenues, to €541 billion in 2011, the equivalent of 11 years of revenues.  Boeing’s comparable backlog grew from $153 billion in 2000, 3 years of revenues, to $355 billion in 2011, 5 years of revenues.  Because the Euro has appreciated against the dollar in that decade, these figures actually underestimate the scale of the shift in favor of EADS/Airbus.  In dollar terms, EADS’s backlog has grown from $124 billion in 2000 to $700 billion in 2011, a near six-fold increase.

But Boeing has been more profitable.  In 2011, its EBIT margin in commercial planes was 9.7% vs. 1.7% at Airbus. This dichotomy between one party’s push for market share gains and the other’s focus on profitable orders has defined the relationship between the two competitors for over a decade.

In a decade of astounding revenue and order growth, Airbus has not improved its profitability.  In fact, its operating income (EBIT) was negative in three of the last six years (2006-2011) despite healthy revenues and deliveries.  Boeing has remained profitable but its commercial airplane sales and operating income have been range-bound for a decade.  From 2000 to 2011, Boeing sales grew at a small 1.4% annualized rate and EBIT at only 2.3%.  At Airbus, sales have grown at a 7.6% annual rate (11% in dollar terms) but EBIT has nosedived into the red for the past six years.  Boeing’s commercial plane division accounted for 66% of its group sales in 1999 and now accounts for 52%.  Airbus sales have remained consistently above 60% of EADS group sales and reached a new high of 67% in 2011.  Airbus’s drive for market share at the expense of profits has had a very measurable impact: its revenues are up, its profits are down, and Boeing’s airplane sales and earnings have flatlined.

EADS went public in July 2000 at €19 per share and ended 2011 near €24, a subdued performance for an 11-year period in which sales more than doubled. In January 2012, Airbus promised better returns for its shareholders for the years ahead and the share responded by rising to €31 in March (it recently traded at €28.8). EADS’s reasons for optimism are a decline of the Euro vs. the US dollar and a long-awaited improvement in operating margins for its superjumbo A380.


Long-term headline prospects look nominally encouraging. Airbus and Boeing estimate that 25,000 to 33,500 new planes (including both passenger and cargo) will be delivered to airlines in the next twenty years.  However, according to Boeing, single-aisle aircraft (the A320 for Airbus, the 737 for Boeing, and their successors) will account for two thirds of units sold and for half of the value.  And as many as one third of new planes will be sold in the Asia-Pacific region.

As a market segment, ‘single-aisle in Asia-Pacific’ is not the ideal sweet spot for profit growth because smaller planes have lower margins and because Airbus and Boeing face new entrants in the single-aisle category, notably from China’s COMAC C919 and from Russia’s Sukhoi Superjet 100. The COMAC C919 seats 165 to 190 passengers and is therefore directly positioned against the larger versions of the A320 and the 737. It already has 175 orders, nearly all from Chinese airlines, and it plans to start deliveries in 2016.  Note in passing that Airbus is now assembling some of its own A320s in Tianjin, China, with a target production rate of four per month in 2012. It says on its web page Airbus in China that it “has several major technology transfer programmes underway” some of which have ostensibly already been filtered to COMAC.

The Superjet 100 is smaller than the C919 at 75 to 95 passengers and is positioned against the smallest versions of the A320 and 737 and against Brazil’s Embraer and Canada’s Bombardier. Although it has 240 orders, there are only eight in service now, seven of them with the Russian carrier Aeroflot. Last week’s tragic crash in Indonesia raises fresh safety concerns about Russian aviation just as it tries to rebound from its accident-prone Soviet legacy.

Turning to recent orders, we see that as of the end of April, Boeing had received 415 new plane orders in 2012 and Airbus 95. This huge lead in favor of the American is a temporary anomaly because most of it comes from orders for the new Boeing 737MAX which came on line about 12 months after the competing Airbus 320NEO.  If 2012 is the year of the MAX, 2011 was the year of the NEO with Airbus logging a commanding 1419 total orders (of which 1226 for the NEO) against 805 at Boeing (of which 150 for the MAX).


Looking at wide-body categories, the Airbus lineup includes the A330, the A340, the perennially loss-making superjumbo A380, and the A350 still under development.  Boeing’s competing lineup includes the aging but ever-updated 747, the 767, the new 787 ‘Dreamliner’, and most importantly today, the hugely successful 777. Stripping out single-aisle aircraft from 2011 orders, we see that Boeing secured 254 orders for wide-bodies and Airbus 193.

The 777 in particular now enjoys a quasi-monopoly in some segments, vindicating Boeing’s decision to develop this plane while Airbus exhausted itself on the prestige-minded A380 double-decker. Boeing delivered its 1,000th 777 to Emirates in March.  Airbus has positioned different versions of the upcoming A350 against both the 777 and the 787 Dreamliner. The A350 is years away from service but it now has a total of 548 orders. Recent cancellations by Abu Dhabi-based Etihad Airways have slowed down the momentum for the largest version A350-1000 which competes with the 777-300ER.

Airbus still loses an estimated €30+ million on each A380 that it builds but it expects the program to break even in 2014-15 on an EBIT pre R&D level, which is break-even on an operating level, ignoring much of the upfront investment.  That would place the EBIT break-even point somewhere between 200 and 250 unit deliveries (so far 72 A380s have been delivered).  In 2005, Airbus estimated the program would break even on an IRR basis at 270 units.  But in 2006, it revised the break-even point to at least 420 units.  The A380 now has 253 orders, two thirds of which have come from airlines based in emerging markets. And one airline, Dubai-based Emirates, accounts for 90 orders.

Airbus sees a total market of over 1,200 units for the A380 (all versions) in the next 20 years, but Boeing believes the potential market is only 325 units. Depending on where one stands on either end of this range, the A380 will either be handsomely profitable in a few years or one of the most visible financial failures in modern industry. For context, consider that in the 42 years since the introduction of the Boeing 747 in 1970, Boeing has sold nearly 1,500 versions of the plane.  With its A380 projections, Airbus is hoping to sell 80% as many units in as few as 20 to 25 years. It is true that the overall market is much bigger today but it is also true that airlines seem more interested in smaller planes. Rising world demographics do not necessarily create a correspondingly large demand for jumbo planes, as much as they do for a larger number of destinations and higher frequency of flights serviced by smaller aircraft.

It would be beneficial for both manufacturers if the A380 turned a profit (at least at EBIT level).  The plane has a list price of $375 million but list prices are generally above contracted prices.  Boeing’s revamped 747, the 747-8 Intercontinental, has a list price of $318 million. If the A380 stays in the red, the question becomes how long will Airbus continue to build it at a loss? Thousands of European jobs depend on the plane and Airbus will probably keep the program for as long as possible. Selling the A380 at a loss for an indefinite period would be detrimental to the Boeing 747-8’s own profitability if Airbus has to offer greater and greater discounts in order to keep the program alive.

It is still early in 2012 but both manufacturers have had difficulty selling wide-body aircraft this year.  Of Boeing’s 415 net orders, only 2 were for wide-bodies (there were 8 new orders and 6 cancellations). Of Airbus’ 95 net orders, only 6 were for wide-bodies (there were 22 new orders and 16 cancellations). The A350 has lost a net 7 orders in 2012. Boeing’s newest plane, the 787 Dreamliner lost a net 6 orders. However, both manufacturers have large backlogs, equivalent to 5 years of 2011 revenues at Boeing and to 11 years at Airbus, which should keep their factories humming in any downturn, barring large cancellations.


Airbus is trying to improve its poor profitability.  Its EBIT margin in 2011 was a dismal 1.7% vs. 9.7% at Boeing’s Commercial Airplanes division. Airbus management is targeting an EBIT margin of 10% for 2015, a level last reached in 2005. The margin is expected to start expanding in 2012 as A380 losses subside and low-margin orders from the early 2000s are finally phased out.

By contrast, there may not be a lot of room for margin improvement at Boeing. Its group EBIT margin was 8.5% in 2011 and its margin in commercial planes was 9.7%.

Long-term expectations remain high and both manufacturers are likely to add more capacity in coming years. Because these expectations are predicated on continued growth in emerging markets, a cyclical downturn in these markets will depress utilization rates and put pressure on pricing at the same time that new competitors enter the lower end of the market. On the other hand, continued expansion of emerging market airlines and operational improvements at Airbus could result in better pricing power unless COMAC manages to gain significant market share.

In conclusion, both companies stand to benefit or suffer from emerging market developments. Operationally, Airbus has more room to improve. If it can narrow the margin gap with Boeing, EADS’s EV/Sales and stock should rise correspondingly. But its manufacturing location in Europe may make it difficult to reach its stated margin targets.