Airbus announced on Day 1 of its two-day Investors Days that it will shift the A350 program to contract accounting for the first few airplanes, reports UBS Ltd. in its research note wrapping up Day 1.
“Airbus has changed the accounting treatment for the early A350 deliveries from unit to IAS 11 contract accounting, using average costs over the contract for each aircraft delivery. This boosts group profits by 50bps in 2015 and 2016 (about €300m benefit) and reduces profits by the same in the later years of the early contracts (est 2017-18),” write UBS.
This is similar to Boeing’s program accounting method, but Boeing uses this for an entire program rather than the first few airplanes.
UBS also wrote, “We have increased our 2015forecasts by €70m or 2% to €4,042m, brought 2016down by 5% to €4,069m and reduced 2017 by 15% to €4.3bn and 2018 by 10% to€6.1bn. The five main drivers were (1) €300m benefit to 2015 and 2016 and €300mdrag to 2017 and 2018 from an accounting change tothe A350, (2) Pricing at Airbus,mainly on the A330; (3) weaker civil helicopter markets; (4) €200m reduction in EBIT from the expected Dassault disposal; (5) A330 production rates could fall further than the 9 per month rate in Q4 2015 (we had already factored in this final point,forecasting 6.4 per month in 2016 and 5 per month in 2017).”
Bernstein Research wrote the following:
The 10% fall in the Airbus stock price appeared to us as primarily a dampening of overly optimistic market expectations. The A350 delivery delay to Qatar appears to be a non-issue. The margin and cash guidance, as well as A330 outlook, now appear closer to our forecasts. A particular concern was the change in methodology for treating loss-making contracts. 2015 margin guidance was maintained at 6.3-7.3%, but the change in methodology effectively weakens this guidance by 50 bps. We have not expected a return to positive cash flow until 2017, which is still later than the company’s new guidance (has positive free cash flow in 2016).
Qatar ́s delay of the handover ceremony for the first A350 expected this weekend crossed the news wires just prior to the start of the event. It appears that the source of the problem came from relatively minor issues related to the finish of the airplane.
As the A330ceo nears the decision point for 2016 production rates, management suggested that further cuts below 9/month may be necessary.
Management announced that they expect 2016 deliveries of A330s to be lower than 2015. Rate is expected to declines from the current 10/month to 9/month next year, and the next decision on rate will be taken in early 2015 for 2016. We have forecaste a rate of 6/month, which appears to be lower than consensus estimates and is one driver of our below consensus earnings forecasts. We see the decline in Airbus stock as in part due to lower A330 delivery expectations. These expectations, however, are in line with our outlook. The A330neo is expected to bring production rates back up near current A330 levels. But, we believe, A330neo margins are likely to be weaker.
Canaccord took a broader view of Day 1, focusing on the impact to the supply chain of comments made by Airbus during the day, noting that several suppliers traded down on Airbus news. Canaccord wrote:
In spite of these cautious comments, Airbus remains generally bullish on the commercial cycle and in the health of its backlog. We tend to agree, and we view the reaction today, specifically to Hexcel and Spirit, as an overreaction. While it is true that even if many of these issues are unique to Airbus, they can easily result in increased aircraft pricing pressure, which would be negative for Boeing, or stepped up pressure on the supply chain, and it is valid on a certain level to apply this read through to the broader sector. Even with the caution around the A330, we remain generally confident in the wide-body backlogs, and we see little risk today for either the 787 or the A350 backlogs from either an execution or market standpoint. However, we view a prolonged drop in fuel prices as perhaps the greatest risk to the cycle, as it would imply greater risk to the replacement assumptions, even with a net positive impact on airline profitability. However, we are not yet hearing about airline plans to adjust fleet outlooks as a result of the drop in energy prices.