Saturday, November 15, 2014

Airbus Worried About A400M Costs as Profit Drops: Plane Maker’s Third-Quarter Net Profit Fell 41%

The Wall Street Journal
By Robert Wall

Updated Nov. 14, 2014 5:08 a.m. ET

LONDON— Airbus Group NV’s third-quarter net profit fell 41% from a year earlier but operating profit topped analysts’ expectations and the plane maker stuck to its full-year profit guidance.

A big improvement in the plane maker’s cash generation cheered investors and shares rose 1.6% on Friday in London.

The Toulouse, France, plane maker said net profit fell to €264 million ($329 million) from €445 million on flat revenue of €13.3 billion. Operating profit was €821 million, up from €706 million a year earlier.

The plane maker delivered more unprofitable A380 super jumbos in the period and fewer earnings-boosted single-aisle and widebody jets. Free cash flow improved to €180 million from an outflow of €686 million in the third quarter last year.

“We still face a number of challenges,” Airbus Chief Executive Tom Enders said. Programs such as the A400M military airlifter and the A350 “require strong management focus,” Mr. Enders said.

Airbus said “negative cost and risk evolution” are an issue as the armies that have bought the planes are taking time to get used to them and are finding the aircraft difficult to customize.

“The objective remains to avoid any incremental [A400M] charge,” said Chief Financial Officer Harald Wilhelm. Mr. Wilhelm acknowledged that one couldn’t be ruled out.

The group, which has a much smaller range of defense aerospace programs than rival Boeing Co. , has struggled with development of the A400M plane, now in service with the French and Turkish militaries. Problems have ranged from the aircraft’s large turbo-propeller engine to some of its complex systems, causing the program to fall about four years behind plan.

Airbus has booked 174 orders for the A400M, with Malaysia the only customer beyond a group of six European countries and Turkey backing its development. Airbus might benefit from Boeing’ decision to cease building the C-17 military airlifter next year.

Some customers, such as Germany and the U.K., have cut the number of A400Ms they are taking, and more cancellations could come. Customers have the right to terminate contracts since Nov. 1. “However, management judges that it is highly unlikely that this termination right is exercised,” Airbus said.

Airbus has delivered only four A400Ms this year. “Clearly there was a target to deliver more,” Mr. Wilhem said. However, Airbus said it is sticking to a goal of handing over 10 of the aircraft this year to customers. Talks to sell other defense assets, including a holding in the Atlas Elektronik naval-technology joint venture with ThyssenKrupp AG , are progressing, Mr. Wilhelm said. “We’ve received a lot of interest,” he said.

Airbus stuck to its target of delivering the first A350 long-range jet, its newest plane, to Qatar Airways before the end of the year. European regulators approved the jet to enter service at the end of September, with the U.S. giving its green light this week.

The plane maker already has met its target of ensuring new orders for planes exceed planned deliveries this year. In the first 10 months of 2014, it secured 794 net commercial jetliner orders against planned deliveries of around 626 planes.

Orders for Airbus’s flagship A380 superjumbo remain scarce. Airbus canceled a deal with a Japanese airline for six of the planes, even though two were already built. “We are confident we can reallocate them,” Mr. Wilhelm said, characterizing as the plane’s backlog for 2016 and 2017 as healthy.

Airbus is increasingly focused on its commercial jetliner business, that represents the bulk of its sales. Among defense assets up for sale is the group’s 46% stake in French combat jet maker Dassault Aviation SA which Airbus is will sell when market conditions are right, Mr. Wilhelm said. 

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