Airbus Group 1H2016 results: Trouble in key programs

Updated with analyst reports.

By Bjorn Fehrm

27 July 2016, ©. Leeham Co: Airbus Group presented its first half year results today, posting strong results in the face of delivery troubles with the A320neo and A350; and more charges on the ailing A400M. It has been a troubled start to 2016 with deliveries in key programs (A320, A350, A400M, Super Puma H225) being far behind targets. In total only the space segment is going well in Airbus Group at the moment.

The key commercial aircraft segment is still enjoying a vast backlog (6,700 aircraft) and sales which point to a book to bill of one for the year. But deliveries are not going well. Twenty A320neo “gliders” are just now getting their first engines and the A350 delivery problems are dragging on.

On top of that, the A400M program has hit new problems in the engine area where the propeller gearbox needs a redesign. An interim fix is needed to keep customers flying.

Airbus helicopter side has also hit trouble. The large Super Puma H225 helicopter suffered a fatal off-shore area crash in April and is still grounded as the investigation to what broke in the helicopter is taking time.

The financial results for the Airbus Group for the first half of 2016 (1H 2015) were revenue €28.8b (€28.9b) with net profit €1.8b (€1.5b). These figures includes €1.9b in write offs (A400m €1b, A350 €0.4, Currency €0.5b) and €2.1b in capital gain one offs (Launchers JV valuation €1.1b, Dassault shares €0.9b, Divestitures €0.1b). This means that one time effects kept the result up for 1H 2016 but these will not be there the next quarters should the troubles continue. Airbus Group maintains 2016 guidance for Revenue, EBIT and Free Cash Flow.

Here the details of the Airbus Group divisions results for first half 2016:

Commercial Aircraft
The Airbus commercial aircraft division delivered 298 (304) aircraft with revenues of €21,061m (€211,081m) and EBIT €421m (€1,424m).

Order intake for the first half was at a low level with 183 (348) net orders. Orders have picked up for Q3, with over 270 orders and commitments booked at the July Farnborough Air Show. Target is a book to bill of one for the year, which seems plausible based on a still strong A320 market.

The order book is at a record 6,716 aircraft and deferrals and cancellations are still at a low level. The order situation for the larger aircraft is weakening with the first major deferrals being made for the A350 program (American Airlines pushing their deliveries out two years).

Here the performance of the different aircraft programs:

  • Only eight A320neo aircraft have been delivered out of a planned 30+. Pratt & Whiteny (PW) delivered the first improved engines to the FAL. The first CFM LEAP engined aircraft has been delivered to Pegasus Air. Airbus expects to recover A320neo deliveries during the autumn.
  • 2016 is a bridge year for A330 to the A330neo. Consequently, pricing for delivered aircraft is lower. This is part of the lower EBIT before one offs for the division.
  • The A350 is still plagued with delays due to cabin items but now also other parts are mentioned. “Amount of traveled work is high” and “the assumptions around the A350 learning curve” have not been confirmed. Therefore the program’s “Loss Making Provision” (learning curve initial loss) from 2013 has been increased by €385m. Airbus maintains that 50 deliveries for 2016 is doable. LNC is now getting skeptical if this is the case.
  • Airbus announced a cut in A380 production rate to one per month in 2018. Break-even rate is now approaching 20 per year and Airbus expects this to improve. “There will be no noticeable losses from producing one A380 per month in 2018. The A320 production is sucking up any capacity and localities that gets freed from A380 production.”

Helicopter division
Airbus Helicopters delivered 163 (152) helicopters with revenues €2,687m (€2,950m) and EBIT €144m (€152m).

The market for helicopters is continually depressed although Airbus helicopters is gaining market share in a down market. What is worrying right now is that the largest helicopter program, H225 Super Puma, is in a major crisis. A H225 crashed fatally in the Norwegian off-shore area end of April and the world-wide fleet has been grounded since. Fatigue issues in the rotor gearbox seems to be the cause but there are no definite fixes defined nor when the fleet starts flying again.

The divisions results of only a slight decline in revenue and profits is a good performance under the circumstances.

Defence and Space division
Airbus Defence and Space had revenues of €5,440m (€5,531m) and EBIT before one offs of €325m (€267m).

The A400M program continues to generate trouble. There are serious problems with the GE Avio produced Propeller Gear Boxes. A temporary fix enables the fleet to fly with 650 hours inspection periods, a final fix is not yet defined. Together with slower production ramp and slower than planned progress in the final military capabilities deliveries, a program charge of €1,060m was defined and taken for the quarter.

Airbus pointed out that this does not include any customer related charges that will come out of settling the aggregated A400M delays in aircraft deliveries and when these get the agreed military functionality. How large these charges can be “cannot be reliably estimated,” according to Airbus. Enders pointed out that the customers really need the capabilities the aircraft have once delivered, so outright cancellations are not a likely outcome.

The rest of the division is performing well, causing revenue to stay almost flat. The EBIT improvement before one offs reflect the good performance in general and in space activities in particular.

Some analyst take:

Bernstein Research (Outperform)

Airbus reported EPS before one-off of €0.90, on revenues of €16.6 bn. The result was in line with consensus and our estimates on revenue and 15% ahead on EPS. EBIT before one-off for the period was €1.2bn, slightly ahead of consensus and our estimates of €1.1bn. The Airbus Commercial division EBIT before one-off margin was 7.0%, which was 40bps ahead of consensus and 30bps above our estimates. Free cash flow for Q2 was -€250m, which was better than consensus (-€796m) estimates. A350 took a charge of took a charge of €385m for increased LMC provisions. Cabin fit issues remain and have driven delivery delays and out-of-sequence work. A320neo deliveries are expected to ramp through H2, as upgraded GTF engines are delivered. The first customer CFMI LEAP engine A320neo was also delivered in July. A400M booked a charge of €1.0bn, from additional costs and schedule overruns relating to engine and other issues. The company noted negotiations with customer nations around other capability delays in the programme are ongoing, and potential financial impacts “could be significant”.

Investec

  • EBIT pre one-offs c.12% ahead of consensus due to Helicopters and D&S – a large number of one-offs – FCF outflow better than expected – Guidance reiterated.
  • No change to consensus which is likely to come down to reflect disposals and limited impact on cautious sentiment.
  • Results:  Group revenues of €16.57bn in line with consensus. EBIT pre one-offs: €1,183m, c.12% above consensus due to better than expected results at Helicopters and Defence and Space.
  • One-off charges/benefits: As expected Q2 results include more positive and negative one offs than usual including: a c€1bn charge for the A400M and €385m charge for the A350 offset by one-off gains of €1.14bn from the ASL JV creation and €868m capital gains from the Dassault disposal. The net of all the one-offs is a positive €172m. The A400M charge is probably smaller than consensus (whisper numbers were €1bn-€1.5bn) but statement suggests that there are likely to be additional charges in the future.
  • The FCF outflow of c€300m was much better than expected given the weighting of aircraft deliveries to H2. Net Cash of €7.2bn also better than expected.
  • Programmes: A320 – Airbus expects to resolve the supplier issues by the end of the year. A350 – Airbus facing “challenges” from the supply chain and is moving slower up the learning curve than expected and has therefore taken an additional  €385m one-off charge for the programme. Airbus still expects to reach rate 10 by 2018. A400M : Airbus still negotiating revised schedule with customers and cannot estimate the outcome but the potential financial impacts could be “significant”.
  • Guidance:  Airbus reiterating guidance for aircraft deliveries (>650) and EBIT and EPS pre one-offs at a constant perimeter (post ASL and disposals) . Airbus expects to deliver stable FCF compared to 2015 but has added the caveat that A400M and delivery re-scheduling makes achieving this guidance “more difficult”.
  • Our view: Results are better than consensus expectations which have been set conservatively.  Investors are concerned about the outlook for the commercial aerospace cycle and Airbus’ ability to execute and deliver a material improvement in profit and cash. We do not expect these results to boost confidence in Airbus longer term outlook.

Valuation: Shares trade on a FY16E PE of 17.4x (FY17E: 13.9x) and adjusted EV/EBITA 16E of 11.1x (FY17E: 9.4x).

Raymond James (Strong Buy)

Airbus’ 2Q figures were materially better-than expected, with a margin-driven beat, relatively good cash flow and charges that were broadly in-line with consensus. Guidance was unchanged excluding M&A (with M&A implying a ~6% cut for FY 2016), although consensus appears to have reflected this already, so we expect it to be largely unmoved today. In all, we view the underlying performance as supportive of the thesis behind our Strong Buy rating. Airbus Group shares were up +5% at 11:00am UK time (vs. the CAC 40 index up +1.42%).

We found that the tone of the call and management’s confidence level had both incrementally improved since 1Q. Mr. Tom Enders, the CEO, noted that Airbus has >400 orders as of now, and that it sees a book-to-bill of at least 1x for 2016 as being “[A]bsolutely do-able”. The transition to the A320neo is seen as making good progress now, with Pratt & Whitney having delivered the first, “Golden Engine” that has normal start-up times, and the first LEAP-engined A320neo being delivered last week, such that >20 A320neos that await engines should be delivered. On the A350, whilst bottlenecks still exist with suppliers of cabin interiors and progress in lowering recurring costs has been slower than expected, once cabin products are delivered, the assembly and delivery process is “[E]xtremely smooth and rapid”, and Airbus re-iterated its prior projections for at least 50 deliveries in 2016 (it delivered 12 in 1H 2016 and 3 so far in July) and for a breakeven by the end of the decade. On cancellations and deferral activity, Mr. Enders noted that there was “[N]othing abnormal here”. On the A380 production rate cut to a delivery total of 12 in 2018, he saw any losses as being marginal, and he commented that Airbus would be working hard to get the rate back up again “[I]n a couple of years”. On the customer financing side, Airbus expects that the suspension of Export Credit Agency (“ECA”) financing should be lifted in 4Q 2016, but so far in 2016, it has only financed 1% of its deliveries, compared to the 6% that the ECAs financed in 2015, thus showing the liquidity and attractive rates available in the commercial financing market.

 

 

30 Comments on “Airbus Group 1H2016 results: Trouble in key programs

  1. Hello Bjorn

    Loss in the A350 is also due to catch up work. More overtime work hour predictable in H2 2016. Less streamlining on the FAL and so on.

    No loss in A320. Parking engineless A320NEO is less costly ?

    Charges on the A350 and on the A400 (huge !) are offset by one off revenue.
    Boeing can’t play with that for its H1 2016 results…

    • As long as management believes there is a way to avoid additional provisions they’ll work towards it.

      What’s your point?
      You’ll make it sound as if Airbus planned these “one-offs” to offset operational charges and that these “one-offs” could serve Boeing as an excuse for it’s bad results.
      Completely unrelated topics IMO.

  2. Hello 2A
    These charges are not invented for sure.
    I guess there’s still good moment and bad moment to announce them
    Depending on the other results and/or One-off on the trimester …

  3. It seems that many of the problems plaguing the A400M program relate to the European governments insisting on developing a “European” engine on this aircraft, rather than using a pre-existing, proven product from PW as Airbus had originally envisioned.

    • “developing a “European” engine on this aircraft, ”

      developing such engines was never an issue. founding Purpose bound commercial entities is established MoO here.

      Then P&W did not have a proven product in that class either. next best is the PW150 @ 3800kW, 40% of required.
      ( Kuznetsov NK-12 could have been a fit 🙂

      What I do see is some rather strange linkage between select A400M problems and US oriented interests.
      Here: GE buys AVIO and the A400M comes down with gearbox problems. ( that were not visible on the prototypes.)

      • Uwe: Ahh the conspiracy theory

        So, how did GE take down eh A350? Shoot, they don’t even have engines on it (maybe the gearbox again?) It has to be true, no problem with the initial aircraft and now suddenly and mysteriously they have production issues!

        So by your logic, GE should be sabotaging P&W as AVIO makes the gear box for them as well.

        Or getting back to reality, maybe you can put it in context with what happened to GE on their GENx. Suddenly it was shedding turbines (fortunately on the ground)

        Reason: They had industrialized the process (known as serial production ) from hand build and make a serious mistake in a coating process that failed miserably.

        Its not easy.

        A400 program was created on the premis it would be a standard Airbus commercial type product , not a military one (and it was not under EADS, it was under Airbus originally).

        Said program was going to use standard commercial not mkliayr procurement and get the best equipemtn out there.

        P&W was the only program with a large base of a lot of different types of Turboprops and was selected. If P&W does one thing really well, its turbo props and a new engine would have done just fine thank you.

        Then the usual European parochialism kicked in (which of course does not apply to them selling us A330T) and they threw together 3 or 4 disparate entities to make an engine.

        Russian was of course an option, they are such a wonderful entity (well other than invading other countries,) .

        What could go wrong? You name it.

        • The A400M is not just a standard Airbus plane with complex engines, it also has highly complex mission systems that are causing Airbus quite some headache. And that can’t be blamed on politics.

          What was standard commercial was the contract Airbus signed with its customer, with such a level of technological maturity it should have rather been a military type of contract (development).

        • The A400M project originally sat with what was formerly CASA. The Spanish project lead at the time was able to hide issues ( especially overweight ) for quite some time. Changes came with the Airbus core strongly going for more supervision and influence.

          “.. European parochialism ..”
          As I wrote before: creating bespoke commercial entities is established and successful Euro MoO.

          If you think “invasion” should influence product decisions anything from the US would cause an ultra large NO.

      • Uwe,

        Yeah, I’m not buying that conspiracy theory sense Avio was on board a long time before GE entered the picture, so this gearbox issue is a pre-existing design flaw in the design that GE inherited, and now has to fix using their superior US know-how and technical ability ;-).

        /since you tried to link the problems with the A400M to somehow be caused by “US interests”

      • You never stop making excuses for Airbus, do you?

        Now you’re advancing conspiracy theories. LOL!

        • “You never stop making excuses for Airbus, do you?
          Now you’re advancing conspiracy theories. LOL!”

          Balance, man. Balance!

          • I would call it a case of un-balance in more ways that one.

    • “rather than using a pre-existing, proven product from PW as Airbus had originally envisioned.”

      Pratt had absolutely no 11k shp engine and having quality problems with PW4000 and various geared fansat that time.

  4. What we are seeing is it just is not easy. So maybe a bit less egg on Boeing face?

    A320 is fine, one engine issue, resolved.

    A350: As I predicted, the first 17 were hand build and then a change and going into full industrialization mode. It will take time to recover, it will be ok, but it tells you how hard this is when they saw Boeing problem and still have issues.

    A400: What can you say, the gift that keeps on giving. Out of the same era as the A380. Keep in mind, the C17 had serious teething issues and came close to cancelation. Program biggest problem is the mfg scatter and trying to make a boutique version for each country. Europe has a problem with its wasted and severely inefficient defense systems. 3 Maint Battle Tanks, small production runs, high costs.

    C17 and Herc set the standard, this is what we make, this is what you get, take it or leave it.

    • The Herc is a fine machine but its bay has become too small for current vehicles. The C-17 is 4 times bigger, not tactical and out of production for a reason.

      • Keesje:

        A Herc was never made to carry serious armor, it could not carry a Sherman tank let alone an M48/60.

        You also do not drop one tank onto the battlefield. It takes a massive support system.

        And the C17 is strategic, it was intended to be and replace the C141. I suspect in an emergency it has capability not published.

        the US listed a need for 220 and has those, they also sold a number to better off countries as well as ones with foresight like UK and Australia unlike most of Europe with its not invented here.

        And the A400 cost how much a copy?

        And it can carry what, one Puma without its armor?

        Did you know the US has pre-positioned armored brigades (the current smallest self sustained combat force) all over the world ?(many on ships) with all the stuff they need to go into a sustained fight and all the US does is fly personal to the link up site?

        There is a lot more to the whole thing than you realize.

    • ” 3 Main Battle Tanks, small production runs, high costs. ”

      The MBT field is afaics dominated by large Cold War production runs still on the books. ( more in storage than in use ). Unsurprisingly the field is dominated by upgrade packages. Now, MBTs don’t have well fitting application in today’s conflicts anyway. Precision Howitzers ( PzH2000 forex) on the other hand…

      Best example for “fractal subtypism” is the NH90 family.

      IMU the newer very heavy up armored infantry vehicle types are in all essence a win for the assymetric adversary
      via isolating your forces from the conflict field. “Like medieval armor “Scalding with Savety” you can drive around in your armored sardine can but cannot interact on an individual level.

      • You miss the point, deliberately I believe and much makes no sense.

        Europe does not provide remotely adequately for its own defense (Trump is a bombastic clown in the mold of Mussolini but that does not mean he has not hit some things on the head)

        So the MBT is a large fully familiar piece of equipment, and 3 countries who face the same geography, adversary and working environment all make their own type and Britain has its own gun (France as well at one time).

        Same goes for APC, artillery firearms and aircraft.

        • “Europe does not provide remotely adequately for its own defense”.

          Here you err. The US obviously spends much more on the military. But definitely not for “defense”.
          All that money makes some industrialists rich and is solely spend towards global arson.

  5. PUMA: That is truly scary, one area you need your act together and this is a multiple repeat. Something badly wrong with the management of that program as well as lethal to the users now.

    Older versions seem to be doing fine, what changed and why.?

  6. It seems to me that they could (should?) have built the 400m in the same architecture as the KC-390 but scaled up. There were/are plenty of proven turbofans from which they could have chosen. Or they could have built a scaled down C-17 with four cfm-56 or vr2500 motors.

    How much (if anything) do they gain from using the purpose built (and used on nothing else) europrop engines?

    • The argument for new engine has always been, from government side, to develop capabilities (and skilled jobs) that could also be used in the future for other projects.
      I mean, this has been done in many other countries before, the issue here seems to be splitting WP around based on political power instead of existing capabilities.

    • Also Embraer’s strategy is clearly geared to low cost products. They can do so because of their low(er) cost base (I guess mainly manpower paid in R$).
      Airbus cannot compete the same way, hence I’d expect them to be in the market with a top of the line product.

      See KC390 vs A400M, both great planes, but different customers.

  7. These tactical air lifter’s seem to invariably generate endless problems in the early years of production: I recollect that the C-17 was almost cancelled by the US and the C-130J almost so by the RAF, its lead customer. I suppose because such planes have infinitely more functions (meaning more than one) that do commercial jets.

    • How many issues did the Noratlas or Transall have in their time? ( Both French/German Coops, The A300M is more of an upsized Transall with more engines and range. 🙂

  8. And now the EU is investigating fraud and bribes in connection with sales of Airbus airplanes.

    • “BREXIT” is investigating. I’d assume that this is political.
      ( independent of there existing real corruption or not.)

      • BREXIT has nothing to do with this. The investigation is lead by the Serious Fraud Office and European Export Credit Agencies.

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