Airbus Profit Hit by Charge on Troubled Military Plane Program -- 3rd Update
February 22 2017 - 10:52AM
Dow Jones News
By Robert Wall
Airbus SE is again seeking to renegotiate the contract with
governments buying its A400M military transport plane after the
troubled program led to a 63% fall in profit last year.
Chairman Denis Ranque and Chief Executive Tom Enders jointly
sent a letter to the governments buying the A400M, including
Germany, France and the U.K., asking them for changes in how the
contract to develop and build the multibillion-dollar plane program
is structured and managed.
Mr. Enders called the program a "huge liability" for the company
and told reporters Airbus wanted to address "lopsided
risk-sharing."
Airbus and chief rival Boeing Co. have enjoyed huge orders in
their commercial airliner business, but suffered repeated earnings
setbacks on some of their highest profile military programs. Airbus
has taken about EUR7 billion in earnings charges on the A400M
program over the past decade. Boeing earnings have been hit
repeatedly on setbacks on developing a new military refueling
plane.
Airbus said it made EUR995 million ($1.05 billion) in net profit
last year compared with EUR2.70 billion the year before. Earnings
were hit in the fourth quarter by a EUR1.2 billion charge on the
beleaguered A400M military transport plane that had already
incurred EUR1 billion in unanticipated costs earlier in the
year.
When Airbus won the A400M deal, it agreed to absorb most of the
development risk, a structure more akin to commercial plane
development than an advanced military aircraft. Mr. Enders called
the setup along with an insufficient budget and over ambitious
schedule at the outset the program's "original sin."
The plane project quickly ran behind schedule and the cost
increased. Airbus struggled to develop some complex systems and the
European engine consortium, that included Rolls-Royce Holdings PLC
and Safran SA, also suffered repeated setbacks.
Airbus won an agreement from A400M customers in 2010 to ease
some contractual terms after the company threatened to walk away
from developing the plane. Mr. Enders, on Wednesday, wouldn't renew
that threat. But he said governments should cooperate better to get
the plane in the field and remove heavy financial penalties the
company is suffering amid delays.
The German government, the biggest buyer of A400M planes,
acknowledged receipt of the Airbus letter and said it welcomed
Airbus's commitment to the project. Long-running talks about how to
fix the A400M would continue, a spokesman said, without committing
to any potential contract changes. The French government, the first
operator of the plane, declined to comment.
The first A400M entered service with the French air force in
2013, years late, though problems persisted. Mr. Enders last year
promised to deliver at least 20 A400Ms in the year. Airbus shipped
17.
Deliveries last year slowed when the program was hit with an
engine component failure. Airbus also has struggled to introduce
new military functions. Airbus has won orders to build 174 A400M
planes and said it needs to secure additional export deals if it is
ever to make money on the project. Mr. Enders called out
"immaturity" of the engine as a particular headache. The engine
suppliers didn't immediately respond to requests for comment.
Strong deliveries at Airbus' commercial airplane business, the
biggest profit driver, helped lift company sales 3% to EUR66.58
billion last year. Airbus delivered a record 688 commercial
planes.
A surge in plane deliveries in the last three months of 2016
allowed Airbus to close last year with free cash-flow before
mergers and acquisitions of EUR1.41 billion. The plane maker
generated about EUR6 billion in free cash in the last three months
of last year during which it handed over 226 airliners.
Cash generation was hampered by the lack of support from
European export credit agencies. The government institutions
suspended assistance on new deals to Airbus after the company
reported problems in some loan applications. The issue also is
being investigated by Britain's Serious Fraud Office.
Airbus said it was working with export credit agencies to resume
their financial backing and Mr. Enders said it was fully
investigating what occurred.
Airbus faces renewed pressure in 2017.
The A400M military transport plane could incur more costs. Its
commercial plane-building business also is bracing for another
race-to-the-finish at year-end with only 25 planes delivered in
January against a full-year target of 700 planes. Handover of the
new A320neo planes will be backloaded to the second half of the
year, the company said. Pratt & Whitney, a supplier of engines
to Airbus A320neo single-aisle planes, is still playing catch-up on
delivery plans which could affect handovers this year. Supplier
issues that slowed delivery of A350 long-range planes last year
have improved, Airbus said, though "bottlenecks remain."
Mr. Enders has been restructuring the company to lower costs and
more effectively manage the business, including the integration of
headquarters with its commercial airplane unit. Airbus said it was
taking a EUR182 million charge against 2016 earnings to pay for the
restructuring.
Airbus said it would deliver mid-single-digit earnings growth.
Free cash flow before mergers and acquisitions excluding customer
financing should be roughly equal to last year.
Airbus said it would pay EUR1.35 dividend a share for 2016.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
February 22, 2017 10:37 ET (15:37 GMT)
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