Commentary: Airbus acknowledged Wednesday that its cash problems will continue into next year as European governments delay payment for its troubled A400M military transport, weighing down the company’s more successful commercial jet program.
The Airbus A400M military transporter weighs 10 times as much as a large elephant. Otherwise, it’s not that dissimilar — to a white elephant, that is.
On Wednesday, the European aerospace and defense manufacturer had to report an additional 1.2 billion euro ($1.26 billion) charge on the long-delayed, over-budget troop carrier, bringing the project’s total charges to about 7 billion euros. Airbus says risks remain, so the bleeding may not stop here.
Overall, Airbus reported that its profits fell 63 percent in 2016 to 995 million euros ($1.04 billion), from 2.7 billion euros the year before. The company reported 2.2 billion in charges on the A400M in 2016, including a new 1.2 billion-euro hit in the fourth quarter as it reassessed the overall cost of the program.
Airbus CEO Tom Enders acknowledged that “the jury is still out on the long-term success” of the A400M, but insisted “it’s absolutely necessary” to maintain it as long as European militaries depend on it. With governments delaying payments because of A400M delays, Airbus warned that cash problems “will continue to weigh significantly in 2017 and 2018 in particular.”
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Airbus’ commercial-plane forecast was more upbeat, after a year that saw a rise in deliveries but a drop in orders. It foresees a rise in deliveries in 2017 to more than 700 planes, up from 688 last year.
Chief Operating Officer Fabrice Bregier told reporters he didn’t want Airbus to have to use commercial-aircraft revenue to subsidize its operations. But absent a big financial helping hand from governments, which seems unlikely, there’s a danger of this happening for the next couple of years at least.
So, thanks to the A400M, Airbus will be further weakened in its battle to close a cash flow and profitability gap with Boeing. True, Boeing has military problems of its own, such as the KC-46 air refueling tanker. Still, the U.S. company’s defense operations contributed two- fifths of its operating profit in 2016, whereas the Airbus defense unit lost money.
Enders is asking government customers to cut him some slack — Airbus suffers financial penalties when aircraft are delayed or lack promised capabilities.
You can see why he’s frustrated. The A400M leached away somewhere north of 1 billion euros of cash in 2016, painful for a company that generated just 1.4 billion euros in free cash flow. Partly because of the A400M, free cash flow is expected to be similar in 2017. All very disappointing.
Even so, Enders’ negotiating position looks weak. Not only have the delays, technical gremlins and other embarrassments cost Airbus a lot of political goodwill, but its financial position — A400M aside — actually looks pretty decent. The same can’t be said for some government customers.
While the Airbus commercial-jet business has had its own difficulties, including cabin-equipment problems on the A350 and engine troubles on the A320neo, it delivered a remarkable 5.6 billion euros of free cash flow in the fourth quarter, when Airbus stepped on the gas to get planes out the door. That bodes well as production increases.
It has left Airbus sitting on more than 11 billion euros in net cash, emboldening the board to increase the dividend despite an almost two-thirds decline in earnings per share.
One day, the A400M might prove a big export hit. But for now investors should worry about the manufacturer having to shoulder much of the burden. While that’s the case, Airbus will remain a case of two steps forward, one elephant step back.
This story has been updated. In an earlier version, the headline and photo caption referred to the A400M as a jet, which it is not.