Problems with the Pratt & Whitney GTF and slower-than-expected ramp-up of the CFM LEAP affected A320neo deliveries in the quarter. Continuing problems with interiors supply depressed A350 deliveries.
We have earnings previews from two investment banks that cover Airbus.
We expected 2017 to be challenging for Airbus, before cash upside begins in 2018-19. But, Q1 appears to be a particularly weak quarter within 2017, with low A320neo and A350 deliveries and pricing pressure on mature models. We revise our model with lower Q1 deliveries, slightly lower pricing assumptions, and changes to non-commercial segments, which lower our earnings expectations for Q1, but with only small changes to our annual outlook. A320neo and A350 deliveries should fall heavily into H2.
The three areas we see as most critical are the A320neo (GTF issues), A350 (interiors issues), and A400M. Only 12 GTF-powered A320s were delivered in Q1, increasing the challenge to reach the target of 200 A320neos (split between GTF and LEAP) for the year (we estimate 190). GTF issues are not yet fully resolved. On A350, management expresses confidence it can get to a 10/month production rate by year end. Orders were very low for Q1 at only six net orders, but we do not see this as a major issue given the backlog size. Less critical issues are the future of the A380, weakness in A330 backlog and ongoing helicopter challenges.
We expect 2017 FCF to be slightly better than 2016. FCF should rise significantly in 2018 as losses decline on the A350 and production rates rise. We expect major issues on the A320neo to be resolved by then and in 2020, we expect cash retention on the A400M to reverse.
Our Outperform rating (TP €88) reflects retirement of significant risk on the A350 despite interior issues impacting near term deliveries. We see earnings and FCF growth from higher A320 production rates for 2017-20 and an end to A400M cash headwinds in 2019.
Airbus’ performance is driven by the Commercial Aircraft segment (74% of revenues in FY 2016),
which whilst it enjoyed 9% y/y higher aircraft deliveries in 1Q 2017 and, we estimate, a $0.03 more favourable hedged rate, saw two fewer A380s y/y (or -40%), which affects fixed cost absorption, 21 more A320neos y/y (or +420%) and nine more A350-900s y/y (or +225%), both of which are likely to have reflected launch customer pricing, higher field support costs for the A320neo and A350 programmes, and “Transition pricing”, or lower prices, on A320ceo and A330ceo aircraft that reflect delivery slots forming a bridge between the outgoing models and incoming neo models.
Hence we anticipate +19% higher segmental revenue and -200bp of margin compression. Airbus Defence and Space tends to be heavily 4Q-loaded in profit terms, and in 1Q 2017, it is impacted by the formation of the Airbus Safran Launchers JV and the disposal of the Defence Communications business; we do not anticipate further charges on the A400M military transport aircraft programme after those booked in 2Q and in 4Q 2016, but that programme remains a watch area.
Key issues: In our view these are: (1) any comment on supplier execution on the A320neo (which saw only 26 deliveries in 1Q 2017 vs 44 in 4Q 2016), due to execution issues with the PW1000 engine or a slower than- expected ramp-up on the LEAP engine, and on the A350XWB (which saw only 13 deliveries in 1Q 2017 vs 23 in 4Q 2016), due to execution issues with the lavatories and potentially other cabin interior products, (2) any comment on the sales campaign environment, given the soft 1Q order intake of 26 gross orders or six net of cancellations, (3) any pick-up in deferral requests or acceleration requests or other backlog changes; (4) an update on pricing trends for recent new order intake, especially for the A320neo, A350 and A330neo; (5) a view on the likely low point for offshore Oil & Gas industry demand at Airbus Helicopters (with Brent oil now at $53/bbl); and (6) any views on customer interest for its newly-revised interior configuration for the A380, which adds circa 80 seats.