Tuesday, July 22, 2014

Airbus Slashes Delivery Target as It Struggles With Production Woes: European company remains poised to overtake Boeing as the world’s biggest plane maker

Airbus SE cut its key delivery goal for the year as it struggles to build all the planes it has promised to airline customers, though it remains poised to overtake Boeing Co. as the world’s biggest plane maker in 2019.

Toulouse, France-based Airbus expects to deliver 860 commercial aircraft this year, a company record, though that is down from a previous estimate of 880 to 890. It cut its free cash flow guidance to €3 billion ($3.3 billion) for 2019 from as much as €4 billion earlier. Deliveries affect cash flow because plane makers don’t typically get paid until they hand over their jets.

Despite the deliveries short fall, Airbus shares rose 2.4% in Paris as it held its full-year profit guidance, aided by better production costs on its A350 wide-body and A320 families of aircraft.

Airbus and Boeing have for years been ramping up production as they seek to meet surging demand for more fuel-efficient, narrow-body jets. Boeing has been hit hard by the grounding of its best-selling narrow-body, the 737 MAX, since March, after two fatal crashes.

With the grounding, Boeing’s total orders and deliveries have fallen sharply, putting Airbus on track to beat the U.S. manufacturer on handovers for the first time since 2011. Airbus delivered 571 planes to customers in the first nine months of the year, compared with Boeing’s 301.

Airbus has also been struggling—in a different way—with getting a narrow-body, the A320neo family of jets, to customers.

Chief Executive Guillaume Faury said Airbus was still recovering from major delays last year from its engine manufacturers, in particular from Pratt & Whitney, a unit of United Technologies Corp., and to a lesser extent from CFM International, a joint venture between General Electric Co. and Safran SA. These challenges were exacerbated by the difficulty of building a bigger, more customizable narrow-body, the A321, which is designed for longer flights.

“It’s very difficult to recover once we are late,’’ Mr. Faury said. “We want to be prudently ramping up.”

The company remains confident it can meet a production target of 63 A320neo deliveries a month from 2021, up from close to 60 a month now. The company has long insisted that demand for the A320neo is sufficient to justify producing at least 70 a month.

The production woes are a setback for the new Airbus chief executive, who took over the role this year and is under pressure to capitalize on the MAX grounding. Airbus so far has been unable to peel off Boeing customers, some of whom have explored switching to the A320neo.

Airbus’s backlog at the end of September stood at 7,133 aircraft including close to 5,800 orders for the Neo, which Airbus says leaves it little room to accommodate new orders from interested MAX operators at least in the next few years. The delays are making it harder for Airbus to carve out any availability.

They were also a factor in the owner of British Airways, International Consolidated Airlines Group SA, signing a letter of intent for 200 Boeing 737 MAX jets in June. IAG Chief Executive Willie Walsh has been vocal about his frustration with Airbus persistently missing its delivery schedule. The airline group has been forced to push back some operations, particularly at its Irish unit Aer Lingus, which flies across the Atlantic, because of A320neo delays.

Mr. Faury said he is aiming to be more careful in meeting delivery plans and communicating with customers.

Airbus’s third-quarter net income rose 3% to €989 million, while sales fell 1% to €15.3 billion.

The company is dealing with the start of U.S. tariffs, part of a long-running dispute between the world’s two biggest plane makers over government subsidies. The U.S. Trade Representative has slapped a 10% duty on all Airbus aircraft delivered to American carriers, with the exception of jets that are built at its plant in Mobile, Ala.

Mr. Faury was adamant that the duties will be borne by airlines and not by Airbus. He said that he was working with customers with aircraft already in production at European plants to ease the situation and called for a de-escalation of the “useless tariff war.’’

The new tariffs may lead Airbus’s U.S. customers to defer deliveries of aircraft not already in production, from mid-2020, Chief Financial Officer Dominik Asam told analysts. Airbus should be able to reallocate those production slots to airlines outside the U.S., he said.

Airbus says the European Union will be able to respond to the levies next year when its counter claim against Boeing is resolved, allowing the bloc to slap similar duties on the U.S. manufacturer.


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