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Good and bad news to be delivered in H2

  • 28 Apr 16

Headline figures: Airbus posted flat Q1 revenues at €12.18bn, up 1%, while EBIT before one-offs fell 23% to €501m from €651m. Reported EBIT was €136m lower, impacted by PDP mismatches/balance revaluations at Airbus commercial. FCF generation was a negative €3bn mainly due to the heavily H2 aircraft delivery profile at Airbus commercial but also almost certainly from the lack of deliveries of A400 (just two in Q1 despite the original target of 20 for 2016). Divisional standpoint: Airbus commercial saw a slow start to the year in terms of orders with 10 net orders (32 gross, 22 cancellations including 14 conversions from A320 Ceo to Neo), however the order intake is hardly ever linear. The underlying market remains robust with a very low level of deferrals; in fact customers are looking for earlier delivery slots if possible. Looking at revenues, Airbus commercial benefited from the stronger dollar, up 1.2% to €8.7bn despite lower deliveries over Q1 versus Q1 15. EBIT came in at €407m down 28.5% from Q1 15 despite a significant €168m decrease in R&D. The fall in margin to 4.7% from 6.6% is explained by the fall in volume of deliveries of A320s and A330s during Q1. A pricing impact on A330s during the transition phase to A330neos as well as the lack of pricing benefit from the undelivered A320neos. The dilution impact from the increase in A350 support costs is also a factor (200bp dilution impact on EBIT margin in 2016). The reduced R&D and the small FX tailwind have failed to compensate these factors in H1. Looking at the individual programmes: The A320ceo deliveries are unharmed but the pricing is certainly not as favourable as that of the A320neo. In 2016, Airbus expects the mix of A320 deliveries to be roughly 20/80 in favour of the ceo meaning that the pricing uptick will certainly have more of an effect in 2017. The backlog of A320neos sitting on the tarmac is expected to fall starting this summer as they are awaiting their new engines from Pratt & Whitney which has guaranteed that the fixes (hardware and software) will lead to deliveries in the summer. The CFM-engined test aircraft are going through certification but with a less innovative design, teething issues are not expected to be important. The A330 programme has ramped down to the 6/month rate announced and the pricing on these aircraft is certainly not as favourable as in the past, however Airbus will see some volume uptick in 2017 as the rate will increase again to 7/month before the transition to the A330neo in 2018. The A350 ramp-up is going well despite supply chain issues remaining challenging. The cabin interior issues (Zodiac among others) have apparently stabilised, allowing Airbus to maintain its 50+ delivery target for 2016. Airbus indicated that the focus is very much on reducing rework-associated costs and recurring costs but that support costs are increasing through the ramp-up as expected. The target for a rate of 10/month in 2018 is confirmed. The A380 programme is certainly a smooth one on an industrial basis with Airbus confirming that it would maintain the breakeven level on the programme in 2016 and that it was currently targeting 20-25 deliveries in 2017 while working to reduce the breakeven level to closer to 20 aircraft. Airbus Helicopters has seen a significant change in its mix/volume of deliveries with the weakened civil market being partially compensated by the growing defence deliveries but at a structurally lower margin. Revenues fell 10% to €1.15bn and EBIT by 36% to €33m (€52m in 2015, 2.8% EBIT margin vs. 4% in 2015) despite restructuring efforts. Airbus Defence & Space is seeing its portfolio adjustments payoff with the disposal to KKR of its defence electronmics signed and the JV with Safran on the launcher business set to be finalised in the coming months. Airbus should see a cash inflow from Safran of c. €800m once the JV is finalised. Revenues fell by 2.7% during the quarter to €2.53bn, however EBIT grew 21% to €109m (EBIT margin of 4.3%) as the greater focus of the portfolio in addition to the restructuring are paying off. The order from Kuwait for Eurofighter was certainly a highlight over the quarter. The big disappointment comes from the A400M programme which again made the headlines for gearbox issues. The gearbox is produced by AVIO (owned by GE) and, as a result of waiting for a fix, Airbus has only been able to deliver two aircraft while 20 deliveries were originally planned for 2016. The comments on the conference call highlight the uncertainty concerning the fix and the financial impacts. These are yet to be determined, however Airbus’s CFO suggested that the “impact on financial statements could be significant” but later admitting that the burden could be spread between the stakeholders of the programme. In addition, production would be stopped in order to avoid inventory build-up if a fix cannot be rapidly implemented. Management suggests that “cancellation risks from customers are remote”.