A400 When?

The Airbus White Elephant

Governments may be reluctant to help out on A400M.
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The Airbus A400M military transporter weighs more than 10 times 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 another 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.

Chief operating officer Fabrice Bregier told reporters he didn’t want Airbus to have to use commercial aircraft revenue to subsidize its defense 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.

Performance Gap

Boeing's profits far exceed those of Airbus. The A400M isn't helping

Source: Bloomberg

nb. Boeing's profits are flattered by its program-accounting method but its cashflows are also superior

CEO Tom Enders stopped short of repeating his 2010 threat to cancel the A400M project. It's doubtful whether he could do that even if he wanted to because it would inflict yet more financial and reputational pain on Airbus. Instead, he's 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 one billion euros of cash in 2016, painful for a company that generated just 1.4 billion euros in free cash flow. 1  Partly because of the A400M, free cash flow is expected to be similar in 2017. All very disappointing.

Even so, Enders’s negotiating position looks quite 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.

Flight Path

Airbus shares have lagged Boeing this year

Source: Bloomberg

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. The company returned 1.7 billion euros to shareholders in dividends and buybacks last year. So Airbus can hardly plead hardship.

One day, it's possible the A400M might prove a big export hit and this lost decade will be forgotten. But for now free-float investors 2  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 column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Excluding M&A and customer financing

  2. Governments still control about a quarter of Airbus

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net

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