1. AIRBUS & BOEING A FINANCIAL ANALYSIS Airline Industry May 31, 2014 Taposh Dutta Roy & Team

2. Boeing Overview Founded 1916 in Washington State; HQ in Chicago Leader in commercial and defense aircraft; defense, satellite and space systems Acquired several aerospace pioneers (e.g. McDonnell Douglas, Rockwell International) Ambitious 787 Dreamliner – composite materials, fuel efficient - $32B program cost 2013 – 648 aircraft delivered, $86.6 billion revenues

3. Boeing Corporate Governance James McNerney: Elected to serve as CEO and chairman of the board July 1, 2005 Salary for 2013 $1.9 million Awarded $3.7 million in stock option grants 20 analysts cover Boeing CEO is the only insider on the Board None of the individual Board members hold a disproportionate amount of stock Most of the top owners are equity firms

4. Boeing Corporate Governance “The Board’s compensation should be a mix of cash and equity- based compensation with a significant portion of such compensation in the form of the company’s stock or stock- equivalent units. Non-employees directors receive a substantial portion of their compensation in deferred stock units, which must be held until retirement or other termination of Board service.” -Boeing filing SEC None of the individual board members or the companies for which they work own a disproportionate share of stock. Many of the top firms are equity firms.

5. Airbus Overview HQ in Blagnac, France 1967 – consortium of European aerospace firms to compete with US firms 1970 – Airbus Industrie formed: French, German, Spanish, British government backed entities 2001 – consortium is merged as European Aeronautic Defense and Space Company (EADS) 2013 – 626 aircraft delivered, € 59.3 billion revenues 2014 – Rebranded Airbus Group: Airbus, Airbus Defense and Space and Airbus Helicopters

6. Airbus Governance Prior to December 2012, the governments of Germany France and Spain had effective veto power over management decisions Dec 2012 – ownership overhaul – more “normal” shareholder democracy – state entities own 28% Board makeup and insider holdings do not reflect management balance of power 28 analysts covering; information broadly available CSR – adopting industry goals, not leading Ranked 73 of top 100 in Reputation Institute survey

7. 72.6% held by institutional investors Four executives are in the top five direct holders Institutional ownership is down 12 million shares Stockholder Analysis — Boeing

8. Stockholder Analysis — Airbus Merger with BAE systems stopped by company insiders Sogepa & GZBV (2012) Gov’t influence relinquished allowing Airbus to make major business decisions.

9. Risk & Return: Boeing Debt$43,427,702,772 Equity$103,136,011,176 Tax27% β(L)1.28 β(U)0.89 R(f)2.73% MRP5.00% R(e)9.11% R(d)3.73% WACC7.22% Used weekly data from 2009 through 2013 from Boeing and S&P 500 to calculate regression: y = 0.00036 + 1.28x The weekly return averaged 0.32% which results in estimating that Boeing performed 0.12% better than expected. R(f) (1 – β ) = -0.096% Intercept – R(f) (1 – β ) = 0.1161% Annualized return yields 5.97%

10. Risk & Return: Airbus Debt$4,260,048,961 Equity$43,549,799,506 Tax27% Beta(L)0.96 Beta(U)0.89 R(f)2.43% MRP5.60% R(e)7.44% R(d)3.43% WACC7.00% Used weekly data from 2009 through 2013 from Airbus and CAC 40 to calculate regression: y = 0.0041 + 0.958x The weekly return averaged 0.46% which results in estimating that Airgus performed 0.36% better than expected. R(f) (1 – β ) = 0.085% Intercept – R(f) (1 – β ) = 0.36% Annualized return yields 19.7%

11. Dividend Policy & Analysis — Boeing Payout ratio consistent over 5 years 2009 was different – program problems = lower earnings Maintained dividend but paused stock repurchase for 3 years

12. Dividend Policy & Analysis — Airbus Payout ratio growth over 5 years 2009 saw challenges with programs and orders Company posted a loss for the year Paused both dividends and stock repurchase Shareholder mix maybe have made this easier option

13. Dividend Policy & Analysis Last 5 years paid lower dividend than max Possible Manage a stable dividend growth Last 5 years paid higher dividend than max possible FCFE Manage a stable dividend growth

14. Dividend Policy & Analysis Boeing pays lower dividend as compared to the free cash flow to equity. There is more room for Boeing to pay higher dividend to its shareholders. Airbus has maintained a consistent dividend policy and has paid more than their free cash flow. We would recommend Boeing to pay more dividends and Airbus to maintain their current dividend to shareholders

15. Measuring Investment Returns 2013 Equity Return Spread 44.21 ROE - 9.11 Re = 35.10% Equity growth significantly outpaced net income in 2012 and 2013 trending ROE downward 2013 Capital Return Spread 23.68 ROC -7.22 WACC = 16.46% Debt decreased from $12B to $8B over previous 5 yrs. Creating surplus value over past 5 years

16. Measuring Investment Returns 2013 Equity Return Spread 13.64 ROE – 7.44 R e = 6.20% Net income growth trending ROE upward 2013 Capital Return Spread 8.20 ROC -7.00 WACC = 1.20% Positive Firm EVA in 2012 & 2103 after 3 prior years of negative value

17. Capital Structure Choices Boeing Airbus Long Term Debt - $8.07B D/E Ratio – 30% Long Term Debt - $3.51B D/E Ratio – 11%

18. Capital Structure Choices Benefits /Costs Tax Benefits Management Discipline Bankruptcy Costs Agency Costs Flexibility Boeing Low Medium Airbus Low Medium Low Risk associated with A380 & 777 Production

19. Valuation Stable growth model used Mature companies and markets Intense competition Significant growth expected in China & India Large back log of orders Valued using FCFF model Changing debt ratios

20. Valuation Higher valuation due to higher growth rate based on 5 year CAGR of revenue Airbus lower valuation: Higher costs (97% of sales vs. Boeing 93%) Twice the WC as Boeing, main cause is inventory Firm Value $(MM) Value per Share Market Value per Share as of 12/13/2013 Boeing$202,744$213$136 Airbus$64,590$77$56