By Bjorn Fehrm
Aug 3, 2015, © Leeham Co. Airbus successfully filled its production gap for the A330ceo for the transition to the A330neo, officials said Friday during the 1H2015 earnings call.
Production rate for the A330ceo can be maintained at the previously announced reduced rate of 6/mo, said CFO Harald Wilhelm.
Airbus Group reported solid progress in all areas where we previously described it had outstanding challenges. Cleaned from one time effects (among them a Dassualt share sale income of € 748m), sales and profit where 6% higher than 1H2014 at € 28.9bn and € 1.88bn respectively. Free Cash flow consumption was now € 1bn instead of € 2.3bn last year. Airbus expects to be Cash Flow neutral on a full year basis.
Rather than going through all figures of the results, we will now go through each major program in Airbus Group and try to understand whether it is a contributor to profits or a consumer of company cash.
Commercial aircraft is the motor in Airbus Group. It contributes 73% of Airbus Group’s turnover and 82% of its profits. Sales during first half was better than for first half 2014, with 348 aircraft ordered vs 290. Deliveries were essentially equal at 304 aircraft instead of 303. Revenue increased from € 19,429m 1H2014 to € 21,081m with profits growing from € 1,287m to € 1,533m. The better results were due to higher margins in delivered aircraft. Of the Airbus programs, the A320 and A330 are the cash generators.
A320 will continue to generate considerable margins and therefore cash for Airbus during its transition to A320neo. Airbus Group CEO Tom Enders commented that Airbus will not be really affected from a bottom line point of view by the delays in flight testing of the new engines for A320neo. First deliveries have slipped to Qatar Airways from October 2015 to the end of the year.
Should deliveries slip further, Airbus will schedule A320ceo slots instead of A320neo slots and these generate adequate margin and cash to keep the Group’s forecast as before, with slightly better results throughout than 2014.
Airbus has already to increased production rate from the present 44 aircraft per month to 50 which will take effect during 2017. One is also studying rates as high as 60 per month and expects a decision before the end of the year.
Airbus has been forced to reduce production rates from 10/mo to 6/mo during 2016 and 2017. This will remain until the A330neo kicks in during the second half of 2017. Airbus CFO Wilhelm said the recent A330ceo orders by Saudi Arabian and China for 57 A330ceos now secures rate 6 and it will not have to be lowered further. The bridge to A330neo is “secured,” he said. Enders filled in that these orders were not sold at cost, but had a sales price that generated profit margin to Airbus.
Airbus is confident it can deliver 15 aircraft this year. In-service experience for the first aircraft with Qatar and Vietnam airlines has been good, with dispatch reliability around 98%, according to Enders. Next year the production ramp will be “to more than double that,” according to Enders, and this will consume cash as each initial aircraft cost hundreds of millions Euros more to produce than its sales price. This means that each unit of A350 produced during 2016 consumes cash that was generated by the A320 and 330 programs.
With an average rate of four aircraft per month and a production year of 11 months, around 40 to 50 A350 will be built during 2016. This will consume cash from Airbus bottom line. This is normal, and the trick is to keep this cash consumption to plan and to converge it to break even as fast and as reliably as possible. Airbus expects profits to stay at this year’s level for 2016.
Enders said Airbus is on plan to achieve the learning curve as planned. Boeing’s 787 program is forecast to turn cash positive (using program accounting) at around 400 produced units. Airbus should achieve cash break even for A350 earlier. The program has gone as planned during the last three years and should continue to do so. Airbus has given no information around learning curve rate (how fast the cost per unit comes down) or when the break even for A350 would be achieved, only that things are running “to plan.”
The A380 is on the way to pass from cash drain to being produced at the cost of its net sales price at end of 2015 as planned. Previously Airbus has said it needs a production rate of 30 units per year to reach this cost level. Wilhelm now said Airbus can achieve a cost break even on a lower rate than 30 per year. Wilhelm was therefore confident that A380 will not affect Airbus result negatively during 2016 and 2017. He said that Airbus will be able to reroute the white tail A380 they have been left with after Skymark’s insolvency to other customers.
Airbus Helicopters is experiencing a down market but has been successfully executed a transformation program to control the effects of the weak market. Through costs cuts and focus on services Helicopters have been able to mitigate a lower production rate and increased revenue with 5% to € 2,950m and profits with 8% to € 162m.
Airbus Space and Defense
The defense unit contains Airbus’ problem program at present, the A400M. After the crash of an A400M during a test flight due to faulty installed engine software, the program has been delayed even more than it previously was. Airbus is confident it can deliver 13-17 aircraft this year and is now in discussions with the customers how to change the program to minimize the consequences of the accident. A charge of € 290m has been taken in Q2 to cater for the extra costs due to the accident and its consequences. The program is the real cash drain on Airbus Group at present.
Other activities run better. Airbus is successfully selling and delivering A330 MRTT tanker versions of A330 and the satellite business is going well. Airbus has also created a joint venture with Safran around the Ariane launchers. They expect this to increase the launcher business as well.
Profit for the division is up 20% at € 267m at flat revenue of € 5531m, despite the A400M problems.
Airbus is on track to achieve the guidance that was given December 2014 in its investor conference of a slightly better 2015 than 2014. It sees the same progress for 2016 and then clear upside for 2017 when the A320neo will have achieved 50 units per month and the A350 program has reached rate eight or higher.
2017 is also the transition year from A330ceo to neo. The years beyond 2017 have the potential to be even better than 2016 and 2017 (our remark). The commercial aircraft side has a good prognosis going forward and the risks in the A350-1000 and A330neo programs should be low.
Airbus is working hard to also get the Helicopter and Defense and Space division to be reliable profit generators. As said in our February article, this is not the Airbus as we know it. The management is working to make it a reliable and profitable company with solid shareholder value. The first half 2015 results shows they are making progress to achieve this goal.