Technical and supply chain issues cause delays, cost Airbus $1.5B

AMSTERDAM, 28 July 2016. Officials of Airbus Group SE in France revealed losses of roughly 1.4 billion Euros ($1.55 billion in U.S. dollars) on the A400M military jet and A350 wide-body commercial jet programs due to technical glitches and resulting delays.

“The first-half underlying financial performance reflects our well-flagged, back-loaded aircraft delivery schedule this year,” explains Airbus Group Chief Executive Officer Tom Enders. “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 programs,” Enders adds. “Significant capital gains from the portfolio reshaping mitigated these program 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,” Enders says.

Twelve A350s were delivered in the first half of 2016 with the production ramp-up progressing. 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 € 385 million was taken in the second quarter. 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 program, five aircraft were delivered in the first half of 2016. The European Aviation Safety Agency (EASA) 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 program. Furthermore, the EASA’s Airworthiness Directive, linked to the PGB on the engine, and various PGB quality issues have strongly impacted the customer delivery program.

Management has subsequently reviewed the program evolution and estimated contract result incorporating the implications at this time of the revised engine program 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 program.

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 € 1.026 billion (€ 1,026 million).

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 € 1.856 billion (1,856 million) included net one-offs totaling € 172 million which comprised:

· The net charge of € 1.026 billion (1,026 million) related to the A400M program;

· The € 385 million net charge on the A350 program;

· A negative impact of € 509 million related to the dollar pre-delivery payment mismatch and balance sheet revaluation;

· A net capital gain of € 1.139 billion (1,139 million) linked to the creation of the Airbus Safran Launchers Joint Venture;

· A net capital gain of € 868 million 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 million related to portfolio adjustments at Airbus Commercial and Defence and Space.

The net cash position on 30 June 2016 was € 7.2 billion (year-end 2015: € 10.0 billion) with a gross cash position of € 19.5 billion (year-end 2015: € 19.1 billion).

The second half of the year started positively with 279 orders and commitments announced at Farnborough International Airshow, including firm contracts for eight A350-1000s from 2 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.

Airbus Group expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions.