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Airbus – Brexit Clock Ticking By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

Working hard to improve performance would ordinarily have been the title that I would have chosen for this piece on Airbus today. It is of course rare that I write on quarterly results these days and I make an exception on Airbus today only because of coincidence. Choosing to leave deeper analysis of the Q3 figures to others, whilst I provide initial comment and detail on Airbus Q3 results my primary view today is reserved in relation to Airbus and Brexit and of just how badly let down, particularly by the UK government, that the company feels. This can be found in the second half of this commentary piece.

While Europe’s largest commercial planemaker may have struck a cautious tone in relation to full year aircraft delivery and cash flow expectations in its statement to shareholders this morning, taking into consideration negative impacts from foreign exchange revaluation of financial instruments that were partly offset by positive revaluation of some equity investment, results covering the first nine months to September 2018 are now showing improvements albeit perhaps not on the scale that management would like.

We still have “a lot to do” said Tom Enders, Airbus CEO who will hand over the role to Guillaume Faury following the shareholder meeting in April 2019. That is certainly true and while there have been noticeable improvements in respect of A320 neo engine deliveries following well publicised problems at Pratt & Whitney other issues, some outside of its control remain.

In respect of detail Airbus reported consolidated earnings before interest and taxation (EBIT) of EUR 2.69 billion, up from EUR 1.67 billion last year. Consolidated revenues increased to EUR 40.4 billion from EUR 38.0 billion last year, this mainly driven by Airbus and including the perimeter changes. A total of 503 commercial aircraft were delivered in the period, comprising 8 x A220’s, 395 x A320 Family, 31 x A330s, 61 x A350 XWB’s and 8 x A380s. The company delivered about 454 commercial aircraft in 2017.

Airbus says that on a reported basis, Helicopter revenues reflected the perimeter change from the sale of Vector Aerospace late in 2017. Revenue at Airbus Defence and Space reflected a stable core business and the perimeter change mainly related to the divestment of Defence Electronics in February 2017 and Airbus DS Communications, Inc. in March 2018. Adjusted EBIT for the division was EUR 409 million.

Adjusted EBIT for Airbus Helicopter increased to EUR 202 million, this reflecting solid underlying programme execution which compensated for the lower deliveries.

With regard to full-year deliveries Airbus says that the A320neo ramp-up is ongoing but that the level of disruption resulting from the late availability of engines during the first half of 2018 together with some other internal industrial suggest that the current full year target for deliveries will be challenging.

The A330neo delivery schedule has also been adjusted to reflect the engine partner’s (this relates to the anticipated shortfall on deliveries of the Rolls-Royce Trent 7000) latest 2018 outlook. Furthermore, Airbus said that it is actively working to resolve certain commercial challenges on the A330ceo and A380 programmes that are targeted for completion by the year-end.

As the basis for its 2018 guidance, the company expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. To that end Airbus is targeting to deliver around 800 commercial aircraft in 2018, this now including an estimated 18 x A220 aircraft (formally the Bombardier C Series) and the updated commercial aircraft delivery schedule.

The company is maintaining an EBIT Adjusted forecast of approximately EUR 5 billion for 2018. This includes a lower expected reduction in EBIT Adjusted from the A220 programme than had been estimated in the first-half of 2018. Free Cash Flow before mergers and acquisition activity and Customer Financing is expected to be lower than the 2017 level of EUR 2.95 billion, this reflecting amongst other factors an anticipated reduction of about EUR -0.3 billion from the A220.

On the A400M programme, Airbus says that it is progressing on the military capabilities and with the delivery and retrofit plan and delivering against the objectives set in February 2018 as part of the Declaration of Intent framework, this was agreed with OCCAR and the Nation partners in the programme, but also that progress to convert the Declaration of Intent framework into a contract amendment has been somewhat slower than planned. The company has also stated that risks remain, in particular on the development of technical capabilities, on securing sufficient exports on time and on aircraft operational reliability in particular with regard to engines and finally, on cost reductions as per the revised baseline.

BREXIT

Perhaps not surprisingly, this being results statement to Airbus shareholders, there was no mention of Brexit. However, for those of us who know the company well and who follow its fortunes, it is well known to us that CEO Tom Enders and many other members of the senior management team at Airbus feel badly let down not only at the prospect of the UK leaving the EU but also by the UK Government, its seeming failure to comprehend the importance of Airbus to the UK economy and of how the UK Government has so far failed to properly respond to the many issues and problems that would be caused by failure to agree a negotiated Brexit deal.

Airbus warned the UK Government back in July that it must urgently provide a much clearer vision of the country’s post-Brexit relationship with the EU or risk a decline in investment in the UK aviation industry. The need for clarity was urgent and the clock was ticking.

Airbus CEO, Tom Enders, someone I have known well and respected over his many years at the company, is understandably no fan of Brexit and he certainly isn’t alone!

Having worked hard to explain complexities, difficulties and reasons why Britain leaving the EU could have serious impact on future Airbus plans in the UK, Enders said back in July that the “lack of clarity on the Brexit situation is damaging and hard to bear”.

“A transition arrangement for the UK’s departure will be a positive step, once it is signed. But this is a temporary solution – it does not solve all the issues that need to be addressed” he said and “We must have more clarity on the UK’s long-term relationships, not just for the next 20 months.”

Rightly Airbus has banged the table in relation to the need for the UK to remain within the EU aviation safety certification agency (EASA) in order to ensure new planes gain the necessary rights to fly. “My business, aviation, is by its very nature global and Aerospace manufacturers, whose products must meet rigorous safety and certification standards, cannot let political whims drive the crucial issue facing our industry: no certification, no fly.”

Importantly Tom Enders and other at Airbus have warned that a hard Brexit would force delays to supply chains “causing our business to grind to a halt” and yet it seems, few in the UK Government are prepared to realise the seriousness and the potential consequences of failure to achieve a negotiated Brexit solution.

No-one is suggesting that the EU has made the situation any easier and you might well say that as it was the UK that decided to leave the EU why should they? But deep down I get the feeling that what hurts Airbus most is that the UK government doesn’t appear to care that this is a company that spends £5bn with UK suppliers every years and that the company supports no fewer than 117,000 jobs in the UK across an estimated number of 672 different supply chains sites across the UK.

I know and understand just how Airbus management feel on the Brexit issue – badly let down and struggling to understand why the UK government doesn’t appear to believe the issues and problems that the company has raised are now or should be, considered to be THE absolute priority.

There are those out there that take the view that nothing will change and that Airbus will learn to cope with the extra costs involved of having large scale manufacturing in the UK. Let me kid them not when I say that Airbus will do what is right in order to compete in global markets and if that means ultimately investing in wing manufacturing outside of the UK then, unless the situation is clarified and Brexit agreement that takes account of all its concerns, that is exactly what over the next couple of decades Airbus will do.

Whatever your view on Brexit happens to be and from wherever you sit, please mark my words – this is no illusion or false imagination – it could well soon become fact.

CHW (London 31st October 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd      

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

 

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