Problem planes plague Airbus; its profit is cut in half

By Benjamin Katz, Bloomberg

Airbus said three problem aircraft programs are set to remain a bugbear for the rest of the year after weighing on earnings in the first quarter.

The planemaker is waiting on a fix for glitches afflicting engines on its new A320neo narrow-body jet, while production delays persist on the twin-aisle A350, Airbus said Thursday. And talks with European governments on stemming cost overruns on the A400M military transport are likely to stretch into 2018.

Airbus earnings fell by more than 50 percent in the three months as deliveries of its newest civil models were held up, with the company’s full-year guidance dependent on it achieving significantly higher build rates in the second half. Pratt & Whitney’s proposed solution to the A320 engine issue looks promising but needs to be verified, it said.

“Let’s see whether the fixes coming through are finally confirmed,” Chief Financial Officer Harald Wilhelm said. “We still need to see the proof. Demonstrated performance so far is not satisfactory.”

Airbus shares fell as much as 2 percent after the Toulouse, France-based company said three-month earnings before interest and tax fell to 240 million euros ($262 million) from 498 million euros a year earlier. That fell short of the 326 million euros estimated by analysts.

Deliveries of the A320neo have been slowed by the overheating of Pratt’s new geared-turbofan engines, causing Airbus to prioritize production of an older, lower-margin variant. With the U.S. supplier saying Wednesday that regulators have backed a solution for a faulty carbon seal, Wilhelm said Airbus is taking that in good faith and targeting 200 deliveries in 2017, up from just 26 in the first half. More A320 “classics” could be built if need be, he said.

Progress is being made in resolving supplier issues with the A350, which has suffered a shortage in interior fittings and seats from beleaguered Zodiac Aerospace, Airbus said, though Wilhelm cautioned that Zodiac still needs to improve both production rates and build quality.

Only 13 A350s were delivered in the first quarter and with as many as 40 incomplete planes scattered around Toulouse, Airbus may face a late rush to fit them out in order to meet annual targets, as it did in 2016. The program should reach its goal of 10 deliveries a month by the end of 2018, it said.

The A330, the company’s biggest-selling wide-body, is meanwhile facing pricing pressures as customers hold out for a re-engined version due to enter service this year.

Airbus Chief Executive Officer Tom Enders said he stands by a forecast for a mid-single-digit percentage gain in annual earnings, together with more than 700 commercial aircraft deliveries and free cash flow matching the 1.4 billion euros achieved in 2016 — contingent on the anticipated boost in output.

The value of new orders secured by Airbus in the first quarter slumped almost 50 percent from a year earlier, with the company announcing contracts for just six new planes net of cancellations. Wilhelm said he’s not concerned about the figure and that the company’s order backlog is solid.

The A400M troop transport still faces potentially significant challenges in meeting contractual capabilities, cutting costs and securing sufficient export orders in time, Airbus said. Wilhelm predicted that negotiations over costs with government customers are likely to extend until the end of 2017 at least, especially with elections taking place in Germany, France and the U.K.

The plane cost Airbus 2.2 billion euros last year to cover penalties for late deliveries and fresh issues with meeting promised performance specifications, taking the total hit to 7 billion euros over the past decade.

Airbus shares traded 0.4 percent lower at 73.79 euros as of 9:39 a.m. in Paris, paring their gain this year to 17 percent and valuing the company at 57 billion euros.