EADS Forecasts Cash Outflow in 2013 on A350 Development

European Aeronautic, Defence & Space Co. cut its free cash outlook for the full year as it spends more on aircraft programs including the A350 and said it may need to review output of its A380 superjumbo amid slack demand.

The parent of Airbus SAS predicted a 1.5 billion euro ($2 billion) cash outflow instead of breakeven, as it reported third-quarter earnings. If Airbus doesn’t find customers by year’s end to fill A380 delivery slots for 2015 it may be forced to trim production below the 30 units needed to pull the program from deficit, Chief Financial Officer Harald Wilhelm said.

Airbus has struggled to turn the biggest commercial airliner into a financial success, with no firm order so far booked this year and Deutsche Lufthansa AG (LHA) canceling some units. While Airbus may pick up deals at the Dubai Air Show starting next week, the double-decker aircraft remains a niche product, as carriers instead turn to more fuel-efficient twin-engine models such as the A350 or Boeing Co. (BA) 777.

“The change in cash-flow guidance was a bit worse than we expected,” said Yan Derocles, an analyst at Oddo Securities in Paris, who has a “buy” rating on the shares.

EADS rose as much as 1.44 euros, or 2.8 percent, to 53.2 euros in Paris, after falling as much as 2 percent in earlier trading. The stock has gained 79 percent this year.

Major Challenges

Earnings before interest and tax, goodwill impairment and exceptionals rose to 663 million euros from 526 million euros a year earlier, as sales grew 11 percent to 13.63 billion euros. Analysts in a Bloomberg survey had predicted 664 million euros in profit. EADS raised its outlook for Airbus plane deliveries this year to 620 from an earlier target of more than 600.

“We have significant challenges ahead of us, particularly with respect to cash generation” and to the A350 program, which has entered the next critical phase, Chief Executive Officer Tom Enders said in an e-mailed statement.

Airbus first flew the A350 wide-body aircraft in June with the second of five test planes joining the flight trials phase last month. EADS said today that the program remains “challenging” as it seeks to deliver the first jet to Qatar Airways Ltd. in the second half of next year. Any changes in the development may hurt earnings, it said.

A350 Costs

Costs on the A350 have risen as test planes fly more and Airbus has spent more to assure greater maturity for prototype jets, Wilhelm said. The costs for early customer aircraft are also creeping up and will be closely monitored, he said.

Airbus expects to break even on the A350 wide-body before 2020, Wilhelm said. The production rate will reach 10 a month by the end of 2018. Two thirds of the 1.5 billion cash outflow is related to higher spending on programs including the A350 and military activities including the A400M transport, he said.

Airbus also is working on “a number of campaigns” to fill open A380 production slots, he said. The backlog from 2018 needs to be built up, with 2016 and 2017 in decent shape, he said. Competition is “tough” both from Airbus’s own A350-1000 long-range jet and the 777X Boeing is marketing, Wilhelm said.

Tough Competition

The Chicago-based planemaker has cut output on the 747-8 jumbo twice this year amid weak demand as Boeing curtails production to 1.5 aircraft each month through 2015. Wilhelm said the A380 is in a different category and will avoid the 747-8’s fate.

Even if production falls short of 30 aircraft a year it “would not translate into a financial disaster,” Wilhelm said, as Airbus plans to deliver 30 A380s next year.

Airbus, which contributes more than two-thirds of EADS revenue and the majority of profit, delivered 504 planes through the end of October and generated 1,215 net orders in the first 10 months, surpassing a goal of 1,200.

EADS also attributed the revision in its cash outlook to the impact of government budget constraints. Only one more A400 military transport will be handed over this year after the French air force took delivery of the first two planes, EADS said. It previously forecast four of the turbo-propeller aircraft going to clients and said the change in plan was being made “in agreement with customers.”

To contact the reporters on this story: Andrea Rothman in Toulouse at aerothman@bloomberg.net; Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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