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Airbus Clears The Decks By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

airbus1While disappointing, the decision by Airbus to take an additional EUR1bn second quarter charge on the A400M military airlifter programme will have come as little surprise to those that have watched the programme development over the past few years. Covering planned engine gearbox repair issues whilst Airbus would not have wished to be in a position of needing to make additional charges on top of the EUR 5 billion plus that it has already made on the programme in the past it makes sense to do this now in order to sort the various issues that need to be resolved with all haste.

The Airbus A400M is undoubtedly an excellent aircraft and while the issues that have beset the development and that have limited operational readiness are regrettable there is no doubt that air forces that have acquired the capability recognise just how good this aircraft will be when the remaining issues have been resolved. That Airbus underestimated the engine issues on the A400M has already been recognised by Airbus CEO Tom Enders and that the company has been let down by insufficient quality of the engine partnership is well recognised too. But for all that the A400M is an excellent capability and one with a great long term future. The sooner the engine issues are resolved and the retrofit work required is complete together with any other remaining issues having been sorted I still believe that this excellent aircraft could go on to enjoy much deserved export success.

Elsewhere Airbus has also chosen to take a EUR385 million charge on delays to its A350 XWB airliner programme caused by regrettable and well publicised shortages of cabin equipment from one particular supplier and that caused delivery delays to various customers of the aircraft. Clearly there will have been a requirement for Airbus to make some penalty payments to cover delay in delivery of A350 XWB aircraft.

Whilst it would always be surprising to me that any new aircraft development moved forward through development into production without a hitch it is perfectly true that in this case the Airbus A350-XWB has, apart from the supply of seats, galleys and lavatory fittings from the French company Zodiac, progressed all the way through with very few if any major problems.

Back in January 2016 Airbus actually chose to name and shame Zodiac as being the company responsible for its primary supply chain problems and that its failure to deliver sufficient numbers of aircraft seats, galley and lavatory fittings had been very damaging to the programme. Such a move by Airbus was, as far as I am aware, unprecedented and yet was hardly surprising given the huge additional costs that have needed to be borne by the aircraft manufacturer in relation to contractual arrangements made at the time of the aircraft having been ordered by the airline customer.

While it is true that a number of technical issues had delayed delivery of the first A380 aircraft to customers a few years ago Airbus has a very formidable record of success over the years in not only supplying its airline customers on time but also in mitigating problem within the supply chain that can and clearly are causing delivery delays. The knowledge of that long history of past success makes the specific Zodiac issue all the worse and the rare public warning made by Airbus CEO Fabrice Bregier six months ago when he accused the supplier management of being ‘in denial’ was clearly justified.

The need to make the EUR 385 million charge in the second quarter results published by Airbus today to cover delays on the A350 XWB programme is no small amount and the hope is that Zodiac will now raise its game in terms of deliveries to all the various Airbus programmes that it is involved including the A320neo.

I suspect that 2016 will be a year that in terms of financial performance Airbus will be glad to see the back of and despite the various issues that are at the forefront of today’s announcement the company remains in excellent health and, with these problems hopefully behind it by the end of this year, ready to better perform.

Leaving the various A400M and A350 XWB charges aside Airbus in its restructured form produced core operating earnings down 4% to EUR 1.183 billion in the second quarter on revenues down 1% to EUR 16.572 billion.

But for all that there was a large amount of good news in the statement too and for the first six months of the year Airbus confirmed order intake of EUR 39.1 billion and an order book at the end of June worth EUR 978 billion. Whilst both these figures are well down on those given for the equivalent period in 2015 I read little into the decline and prefer to take the view that what we are seeing within the commercial aircraft industry this year is an unsurprising timing and rebalancing of requirements by airlines. Indeed, I would add that no-one should be in any doubt that the most recent Airbus Global Market Forecasts suggesting that airline passenger traffic will grow at an average 4.5% per year over the next twenty years and that this will drive the need for over 33,000 new aircraft above 100 seats (32,425 passenger and 645 freighters greater than 10 tonnes) worth US$5.2 trillion at list prices. History tells us that aircraft manufacturers do not get such forecasts wrong. Over the next 20 years Airbus anticipate that the world aircraft fleet will have doubled from today’s 19,500 aircraft to 40,000. This in my view is a perfectly correct assessment of where the commercial aerospace industry is heading.

It is also worth noting that while Airbus only recorded net orders of 183 aircraft during the first half of the year it has subsequently announced no fewer than 279 aircraft orders and commitments at Farnborough International held during in July. Orders are often held back for the alternating Paris Air Show and Farnborough International airshow events and it is worth noting that in this respect the Paris Airshow is held during the first half of the year whilst Farnborough International is always held during the second half of the year.

For the six months Airbus Group revenues were stable at EUR 28.8 billion on a slightly lower number of commercial aircraft deliveries – 298 v 304 in the previous year. Helicopter revenues were down reflecting an unfavourable mix if deliveries and Airbus Defence and Space revenue was broadly stable. Importantly earnings before interest, taxation and one-off charges for the six month period was EUR 1.270 billion (2015 H1 EUR1.883 billion). Group self-financed research and development also fell to EUR 1.309 billion. In terms of charges, apart from those mentioned above there was a negative impact of EUR 509 million related to the dollar pre delivery payment mismatch and balance sheet revaluation, a net capital gain of EUR 868 million related to the sale of shares in Dassault Aviation and a mark to market of the remaining shares plus a net capital gain of EUR 1.139 billion linked to the creation of the Airbus Safran Launchers Joint Venture. Net income rose to EUR 1.761 billion and free cash flow before mergers and acquisitions was a negative EUR 3.236 billion outflow. The net cash position at period end stood at EUR 7.2 billion while the gross cash position was little changed at EUR 19.5 billion.

Forward Guidance:

As the basis for its 2016 guidance, Airbus Group expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. 2016 earnings and free cash flow guidance based on a constant perimeter:

  • Airbus expects to deliver more than 650 aircraft and the commercial order book is expected to grow.
  • Before M&A, Airbus Group expects stable EBIT* before one-off and EPS* before one-off compared to 2015.
  • Before M&A, Airbus Group expects to deliver stable free cash flow compared to 2015, although the A400M industrial situation and delivery re-scheduling makes the achievement of the 2016 free cash flow guidance more difficult. Export Credit Agency financing is targeted to resume in the fourth quarter of 2016.

The perimeter change in Airbus Defence and Space implemented at H1 2016 is expected to reduce EBIT* before one-off and free cash flow before M&A by around € 200 million and EPS* before one-off by around 20 cents.

* Airbus Group uses EBIT pre-goodwill impairment and exceptional charges as a key indicator of its economic performance. The term “exceptional” refers to such items as depreciation expenses of fair value adjustments relating to the former EADS merger and Airbus Combination, as well as impairment charges thereon.

CHW (London – 27th July 2016)

Howard Wheeldon FRAeS

Airbus Group Reports Half-Year (H1) 2016 Results


  • Robust and diversified commercial backlog supporting ramp-up
  • H1 financials driven by back-loaded aircraft delivery schedule
  • Revenues € 29bn; EBIT* before one-off € 1.7bn; Earnings per share € 2.27
  • Significant progress on strategy to focus on core activities with material capital gains
  • A400M and A350 XWB programme charges recognised in Q2 2016
  • 2016 guidance confirmed**

Amsterdam, 27 July 2016 – Airbus Group SE (stock exchange symbol: AIR) reported half-year

2016 results and confirmed its guidance for the full year**.

“The first-half underlying financial performance reflects our well-flagged back-loaded aircraft delivery schedule this year,” said Tom Enders, Airbus Group Chief Executive Officer.

“We continue to see good demand for our products as shown by the brisk order intake at the Farnborough Airshow, with the production ramp-up supported by our robust and diversified commercial backlog. Our operational focus remains squarely on the A320 and A350 ramp-ups and transition to the new engine version of the A320. Unfortunately, we have to cope with new charges on the A400M and A350 programmes. Significant capital gains from the portfolio reshaping mitigated these programme losses but that does not make them more acceptable! Industrial efficiency and the stepwise introduction of the A400M’s military functionalities are still lagging behind schedule and remain challenging. But we are making good progress and the A400M, servicing already five air forces with its impressive performance, proves more and more to be an exceptional aircraft. In the second quarter, we successfully finalised the Airbus Safran Launchers Joint Venture and exited from Dassault Aviation. In summary, despite our near term challenges, we remain committed to delivering our earnings and cash growth story.”

Group order intake(1) in the first six months of 2016 was € 39.1bn (H1 2015: € 53.9bn), with the order book(1) value totalling € 978bn as of 30 June 2016 (year-end 2015: € 1,006bn).

The order book of Airbus Defence and Space decreased by € 4.6bn due to perimeter changes. Airbus received 183 net commercial aircraft orders (H1 2015: 348 net orders) with gross orders of 227 aircraft including 27 A350 XWBs. The second half of the year started positively with 279 orders and commitments announced at Farnborough, including firm contracts for eight A350-1000s from Virgin Atlantic Airways and for 100 A321neos from AirAsia. Airbus Helicopters received 127 net orders (H1 2015: 135 net orders) and was selected as the aircraft service provider for the UK’s

Military Flying Training System contract. It also signed an agreement with a Chinese consortium for 100 H135 helicopters. Order intake was stable at Defence and Space with good momentum seen in Space Systems driven by Earth observation and telecommunication satellites.  Group revenues were stable at €28.8bn (H1 2015: € 28.9 bn). Despite lower deliveries of 298 aircraft (H1 2015: 304 aircraft), revenues were stable at Airbus Commercial supported by the strengthening US dollar hedge rate. Helicopters’ revenues declined nine percent, reflecting an unfavourable mix despite higher deliveries of 163 units (H1 2015: 152 units).

Airbus Defence and Space’s revenues were broadly stable.

Group EBIT* before one-off(3) – an indicator capturing the underlying business margin by excluding material non-recurring charges or profits caused by movements in provisions related to programmes and restructurings or foreign exchange impacts – totalled € 1,684m (H1 2015: € 1,883m). Airbus Commercial’s EBIT* before one-off was € 1,270m (H1 2015: € 1,533m), driven mainly by the back-loaded delivery profile, lower A330 production and transition pricing on the A320 and A330. Helicopters’ EBIT* before one-off totalled € 144 m (H1 2015: € 162 m), mainly reflecting a less favourable mix. Defence and Space’s EBIT* before one-off rose 22 percent to € 325m (H1 2015: € 267m), driven by good programme execution, its portfolio re-focus and efficiency measures.

Group self-financed R&D expenses decreased to € 1,309 m (H1 2015: € 1,506m).

On the A380, delivery planning is being adjusted to 12 deliveries a year from 2018 with traffic growth supporting the programme’s long-term perspective. On the A320 programme, preparation for the ramp-up continues with temporary issues, mainly linked to the supply chain, expected to be recovered by year-end. In the half-year, eight A320neos were handed over to three customers while in July the first aircraft fitted with CFM engines was delivered. Twelve A350s were delivered in the first half of 2016 with the production ramp-up progressing. The A350 Loss Making Contract provision has been stable since the Full Year 2013 results throughout the aircraft’s certification, entry-into-service and ramp-up phase. As the ramp-up accelerates challenges are being faced on supply chain capability and performance, with the cabin still the critical pacing item and outstanding work causing some slower progress on recurring cost convergence than planned. Due to this, a charge of € 385m was taken in the second quarter as an addition to the LMC provision. This also includes lower escalation and delivery phasing. The target for a monthly production rate of ten A350s by the end of 2018 remains unchanged.

On the A400M programme, five aircraft were delivered in the first half of 2016. The European Aviation Safety Agency certified an interim fix to the engine propeller gearbox (PGB) which, once available, will give air forces at least 650 flight hours before initial inspections of the affected parts of the PGB. The first major development milestone of the mission capability roadmap defined with customers earlier this year was successfully completed in June with certification and delivery of ‘MSN 33’, the 9th aircraft for the French customer. Industrial efficiency and military capability remain a challenge for the A400M programme. Furthermore, the EASA’s Airworthiness Directive, linked to the PGB on the engine, and various PGB quality issues have strongly impacted the customer delivery programme. Management has subsequently reviewed the programme evolution and estimated contract result incorporating the implications at this time of the revised engine programme and its associated recovery plan, technical issues related to the aluminium alloy used for some parts within the aircraft, recurring cost convergence issues and finally some delays, escalation and cost overruns in the development programme. As a result of the review, including an updated assumption of export orders during the launch contract phase, Defence and Space recorded an additional net charge of € 1,026m. Commercial negotiations with OCCAR and the Nations are yet to take place with regard to the revised delivery schedule and its implications. As of today, the outcome of these negotiations cannot be reliably estimated. The potential impacts on the financial statements could be significant.

At Helicopters, the investigation into April’s H225 accident in Norway is ongoing while the financial impact cannot be reliably estimated at this stage.Reported EBIT*(3) of € 1,856m (H1 2015: € 2,229m) included net one-offs totalling € 172 m which comprised:

  • The net charge of € 1,026 m related to the A400M programme;
  • The € 385m net charge on the A350 programme;
  • A negative impact of € 509 m related to the dollar pre-delivery payment mismatch and balance sheet revaluation;
  • A net capital gain of € 1,139m linked to the creation of the Airbus Safran Launchers

Joint Venture;

A net capital gain of € 868 m related to the sale of shares in Dassault Aviation and a mark-to-market of the remaining shares; A total net capital gain of € 85 m related to portfolio adjustments at Airbus Commercial and Defence and Space. Net income(4) rose to € 1,761m (H1 2015: € 1,524 m) with earnings per share of € 2.27 (H1 2015: € 1.94) further supported by an accretion of around two percent related to the share buyback. The finance result was € -148m (H1 2015: € -344m).

Free cash flow before mergers and acquisitions amounted to € -3,236m (H1 2015: € -1,025m), reflecting the focus on the production ramp-up and transition. Free cash flow was € -1,119m (H1 2015: € 549m) and included € 1.2bn from the sale of Dassault Aviation shares, € 750m from the implementation of the second phase of the Airbus Safran Launchers JV and € 310m from the sale of the Business Communications activities. The net cash position on 30 June 2016 was € 7.2bn (year-end 2015: € 10.0bn) with a gross cash position of € 19.5bn (year-end 2015: € 19.1bn).


As the basis for its 2016 guidance, Airbus Group expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. Airbus Group confirms its 2016 earnings and free cash flow guidance based on a constant perimeter:

  • Airbus expects to deliver more than 650 aircraft and the commercial order book is expected to grow.
  • Before M&A, Airbus Group expects stable EBIT* before one-off and EPS* before one-off compared to 2015.
  • Before M&A, Airbus Group expects to deliver stable free cash flow compared to 2015,

although the A400M industrial situation and delivery re-scheduling makes the achievement of the 2016 free cash flow guidance more difficult. Export Credit Agency financing is targeted to resume in the fourth quarter of 2016. Q2 2016 revenues decreased by one percent compared to Q2 2015, mainly reflecting an unfavourable mix at helicopters despite higher deliveries. Q2 2016 EBIT* before one-off decreased slightly, driven mainly by Airbus Commercial, and partially compensated by good momentum at Airbus Defence and Space. Airbus Commercial EBIT* before one-off mainly reflects the back-loaded delivery profile, lower A330 production and transition pricing, partially compensated by a small R&D tailwind.


Q2 2016 reported EBIT* increased by 51 percent to € 1,491 m. It reflects net “one-offs” of approximately € 300m. Net programme charges were booked in Q2 on A400M (€ -1,026m) and A350 (€ -385m) and a negative one-off from foreign exchange from the dollar pre-delivery payment mismatch and balance sheet revaluation (€ -0.5bn).

In Q2, positive one-offs were recorded from the creation of the Airbus Safran Launchers JV (€ 1,139m), the sale of shares in Dassault Aviation (€ 868m) and other smaller portfolio adjustments mainly related to Defence and Space. In Q2 2015, a net charge was booked related to A400M programme (€ -290m).

Q2 2016 net income was positively influenced by a low Q2 effective tax rate which reflected net programme charges and the gains from the creation of the Airbus Safran Launchers JV, Dassault Aviation and other divestments in Defence and Space.


Contributions from commercial aircraft activities to Order Intake and Order Book based on list prices.

Earnings before interest, taxes, depreciation, amortisation and exceptionals.

Earnings before interest and taxes, pre goodwill impairment and exceptionals.

Airbus Group continues to use the term Net Income. It is identical to Profit for the period attributable to equity owners of the parent as defined by IFRS Rules.


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