Airbus SE ADR (EADSY) Management on Q3 2018 Results - Earnings Call Transcript

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About: Airbus SE ADR (EADSY)
by: SA Transcripts

Airbus SE ADR (OTCPK:EADSY) Q3 2018 Earnings Conference Call October 31, 2018 3:00 AM ET

Executives

Julie Kitcher - IR

Harald Wilhelm - CFO

Analysts

Benjamin Heelan - Bank of America Merrill Lynch

Olivier Brochet - Crédit Suisse

Celine Fornaro - UBS

Tristan Sanson - Exane

Christian Laughlin - Bernstein

Zafar Khan - Societe Generale

Harry Breach - Raymond James

Carter Copeland - Melius Research

Christophe Menard - Kepler Cheuvreux

Julie Kitcher

Good morning, ladies and gentlemen. This is the Airbus nine months 2018 results release conference call. Please accept our apologies for the delay. This was due to the technical publication problem. Harald Wilhelm, our CFO, will be presenting our results and answering your questions.

This call is planned to last around 1 hour. This includes the Q&A, which we'll conduct after the initial presentation. The call is also webcast. It can be accessed via our homepage where we have set a special banner. Playback of this call will be accessible on the website, but there is no dedicated phone replay service. The supporting information package was e-mailed to you a little bit earlier. It includes the slides, which we will now talk you through as well as the financial statements.

Throughout this call, we'll be making forward-looking statements. The package you received contains the Safe Harbor statement, which applies to this call as well. You should read it carefully.

Now over to Harald Wilhelm, our CFO.

Harald Wilhelm

Thanks, Julie, and good morning, everybody. As Julie said, really, our sincere apologies for that technical hiccup, in particular, I would say, to our US colleagues and friends to keep you awake so long for as well tonight. I mean, apologies again. I would suggest maybe that we try to run rather quickly through the presentation material as you didn't have so much time to digest, so that hopefully, we can cover it up in the Q&A section.

So, jumping to the highlights on the nine months, I will focus very much on the 2018 year-to-date and the remain to do for the year. That's I think why -- I mean, in terms of the global message, we can keep it short. The industry fundamentals remain solid. You see it in the traffic numbers that they remain overall good, airline profitability remains healthy. And in terms of financing, there's a high level of liquidity available to support the financing of commercial aircraft. I mean, the backlog is at around 7,400 aircraft. You know it's solid. It's very well geographically diverse and, therefore, ready to capture the growth in that business.

We're very happy from the 1st of July on, we took the control of the A220 and the CSALP joint venture. That's why now we consolidated in our books. The transition is working very well between the teams. There's an excellent cooperation, collaboration. The short-term goals are very well-defined. What are they? Increase the sales, reduce the recurring costs. So it's a great start, it's great opportunity, but there's also lots to do.

On the nine months financials, I really like to highlight the EBIT adjusted of 2.7. Why? Number one, you can see in there the strength of the A350 year-on-year performance from 61 deliveries year-to-date, from recurring cost reduction, from price improvement year-on-year and also the IFRS 15 impact. So a great underlying performance on the A350 driving the nine-months result.

And second, you see the benefit of delivering more aircraft, i.e., 45 single-aisle more despite the pause, the halt we had to do in the Q1, Q2 absent engines at the point in time. So once we deliver, you see there is a very healthy margin coming through. That's what you see in the 2.7 EBIT adjusted.

For sure, it leads us with a lot to do to deliver on our commitments for the remainder of the year. That's why we are very much focused on the A320neo ramp-up. Now, we have the engines. We have the airframes. But the level of disruption resulting from the late availability of the engines in H1 and also some internal industrial challenges make the full year target a greater stretch, next to some issues also or commercial issues on 330, in the 380 and also the 330neo engine availability. I'm sure we'll come back to that later.

On the A400M, we are delivering against the objectives which we set out in February and which were part of the framework agreed with OCCAR and the nations in February. We are working on the contract amendment, i.e., to turn the Declaration of Intent into a firm and binding contract amendment and making progress on that, however, it is a bit slower than planned.

We -- on that basis, we have updated our guidance 2018 to mainly reflect the latest delivery outlook. All in all, we target around 800 commercial aircraft now, including 18 A220, EBIT adjusted, and free cash flow reflect that update. The management succession is in progress. You could all see Guillaume Faury will succeed Tom, following the shareholder meeting in next year. This provides us but, I would say, in particular, you, with a clear direction and continuity.

Over to page 5 on the commercial positioning. I said before, we now take A220 into our reporting. Following the control, we took over it. That means the order book includes the 357 orders for the A220 in the 9 months. In commercial aircraft, we booked 311 gross orders, including 58 A350s. Very good to see in Q3, Qatar upsized five 900s to the A350-1000. That's a great endorsement following a very successful entry into service of the -1000. So year-to-date, 256 net orders after 55 cancellations. A little bit of work to do for our new friend, Christian Scherer, on the commercial side.

On Helicopters, we booked 230 net orders at EUR3.5 billion. The CNP market remains soft. On the other side, prospects in military are really progressing well. You see it in the Q3 bookings. Four out of six Super Puma were for the H225 military for Thailand, and 20 of the 36 H145 were military versions for Hungary. That will also support deliveries on 2019 and beyond.

In Defence and Space, the order book now includes the contract for Heron TP drones with the German Armed Forces. Interesting to note as well, I would say, on the space side, Eutelsat became the first commercial customer to sign a multi-year contract for the Ariane 6. In Defence, mid- to long-term perspectives are positive. We continue to see good prospects on the Eurofighter platform, but expect the timing of contract awards is a bit difficult to predict.

On the full year 2018 backlog value, we will prepare that under IFRS 15, you know that. You should expect a significant reduction in order book value as we adjust mainly for the net prices versus list prices. 2017 backlog will not be restated.

Now on the financial performance, page 6. Revenues are at 40 billion, slightly higher year-on-year, mainly reflecting the higher deliveries and some parameter changes. On the EBIT adjusted, yes, I emphasized it already before, but I'm happy to do it again. The EBIT adjusted is meaningfully up at the EUR2.7 billion.

Also, if we look at the return on sales of the 9 months or if you want to take the third quarter, it gives us an idea of the leverage or the power the A350 progression has, again, from a price recurring cost and the ramp-up and, on the other side, the higher-level deliveries of the A320 family now with 222 A320neo aircraft, i.e. more than the CEOs, and obviously, that means as well that the pricing premium of the A320neo is coming soon.

All in all, we also saw a solid program execution in Helicopter and in Defence and Space. At the same time, we continue to invest into innovation and digital activities, which will further accelerate in the last quarter.

EPS adjusted stands at EUR2.31 per share, using an average of 775 million shares outstanding. Yes, well, on the cash flow side, you see cash flow before M&A and customer finance at minus 4.2. That includes the A220. This reflects the delivery phasing, the ongoing ramp-up, some finished aircraft, but for sure as well, the A400M cash charge, which is still hefty in 2018.

Now looking on the page 7 on the reported profitability. We see EBIT reported basically at the same level than the EBIT adjusted at 2.7. The level of adjustments is minor or, I mean, not very material, minus 55 million and largely unchanged compared to H1. The EPS reported includes a negative impact from the FX revaluation of the financial instruments, partly offset by the positive revaluation of certain equity instruments.

On the tax side, the tax rate on the core business is around 28%. The effective tax rate on net income is 36% due to the reassessment of tax assets and liabilities. For 2018, you should continue to assume a tax rate of around 29% on the core business result. The resulting net income adjusted is at 1.8 billion with an EPS adjusted of EUR 2.31 a share

Moving to the hedging on the page 8. We are well protected by the hedge book throughout 2020. We saw more favorable rates this quarter, and that's why you see some ramp-up in the hedging activities. What is it? In the nine months now, we implemented $13 billion of new hedges, forwards, at an average rate of $1.26. And that, I mean, obviously addresses more the outer years, the 2020 and beyond. At the same time, 18 billion of hedges matured at the same rate of $1.26.

We also adjusted the intra-year phasing of hedges to better reflect the delivery profile with rollovers from Q2 and Q3 to Q4. You see that in the appendix on chart 18. So the hedge rates for the last quarter have changed slightly with some slightly positive impact on the full year rate. The portfolio of the hedge book is now at 84 billion at an average of $1.23.

Looking on the cash evolution on the page 9. The gross cash from operations of 2.5 billion overall reflects the EBIT adjusted. While on the working capital, you see hefty charge, which is linked to the back-loading of the delivery profile, the ramp-up and the delivery phasing caused by the engine deliveries, [indiscernible] 330neos but also on 330neos; and on the other side, the PDP inflow overall remains very healthy.

I said already before, the A400M also weighed heavily on that cash flow of minus 4.2 billion already in the 9 months. CapEx is at 1.4, i.e., 0.3 billion lower than a year ago. The A220 is included into this 9 months number. The Q3 slides, however, is not material.

On the Customer Financing, I mentioned it in the opening, the effort was very limited, thanks to a strong appetite for financing of commercial aircraft. The free cash flow reported was at minus 4 billion. All in all, we have about 400 million from M&A activities from the sale of the Defence and Space Communications Inc. business in the US. You know we completed that in the first quarter. And in the second quarter, we got the final payment from the divestment of Defence Electronics.

Just as a reminder, I mean, on the free cash flow and the A220, the total cash outflow from the joint venture is largely covered by the funding arrangements as per the JV agreement with Bombardier and, therefore, is net cash neutral.

On the pensions, we highlighted that in H1 that we would top up the pension funding. So in Q3, we did the 1 billion contribution to pension funding, and I will consider to do another slice in the fourth quarter. With all of that, the net cash position by the end of September is around 7 billion.

If we look at Airbus performance evolution a bit more in depth on the page 11, I mean, deliveries, revenues, EBIT adjusted are meaningfully higher than last year. 503 aircraft in the nine months, that includes eight A220, 222 A320neos, 61 A350s, very well on track on the A350 compared to the plan we set out at the beginning in the year. We also have in the 61 A350s the first A350 Ultra Long Range, which has been delivered to Singapore Airlines and which had, at the meantime, a very successful maiden flight and I think receives a lot of very positive customer and passenger feedback.

On the A220, we have nearly completed, I mean, the PPA exercise. This has resulted in a lower estimate annual dilution on the P&L side. The Q3 impact is not material. The cash and funding mechanisms are unchanged, as I just reminded before.

On the single-aisle, we delivered 395 aircraft, 222 NEOs, as I said. And that is an increase of 132 year-on-year, again, despite the engines not being available throughout a good part of the H1. So the ramp-up is ongoing. We faced some industrial challenges. As I said, I mean, we have engines, we have the airframes, but you need to bear in mind that the whole industrial planning had to be reshuffled time and again. And that's what we feel right now and which makes it more difficult next to some industrial challenges also on our own operations.

On the 321 long range, we got the EASA and the FAA's certification in October, and we expect the first delivery to happen soon. Over to the 330s, the 330neo, the 900 version received EASA-type certificates. We expect the FAA to follow shortly. The 900 engine to service is clearly targeted before the end of the year. And we also expect the first flight of the 800 to happen before the end of the year.

The 330neo delivery schedule has been adjusted to reflect the engine partner's latest 2018 outlook. And I'm sure you will have some more questions following the communications over the last phase on that, so happy to answer these.

On the 330ceo deliveries, we had an impact from a customer situation, and we have been working actively and continue to work actively to find a solution here before the year-end. And that means we still target to deliver quite a lot of 330ceos in the last quarter.

On the 380, eight deliveries have been achieved in the 9 months, two in the third quarter. We target 12, as set at the beginning of 2018. And also, I mean, 380, we have some commercial discussions yet to be completed before the year-end.

On the 350, I think I emphasized really progressing very well in line with the plan, 61 deliveries, that includes seven -1000s. We confirm the rate 10 at the end of the year. We see the benefit of the improved pricing. We see the benefit of the enhanced recurring cost coming through. And now, I mean, including the -1000 in the nine months, but completely on track, I mean, with our main targets in terms of learning curve and further recurring cost improvement.

I think that clearly emphasizes, I mean, the prospect not only for 2018 but for the breakeven in 2019. And as you know, we don't stop here, but we target benchmark margin for the A350 for 2020 beyond. Fantastic operational reliability sitting at above 99%. I think that's a pretty remarkable achievement.

On the nine months, to wrap it up here for Airbus, we see the A350 performance, we see the benefit of the higher A320neo deliveries. And I think I stressed it, there's a lot to do on the remaining A320 deliveries, but also on 330 CEO and the NEO and a bit also on 380.

On Helicopters, well, the revenues were pretty stable, I mean, on a comparable basis, if you adjust for the divestment of Vector Aerospace a year ago. On the EBIT side, we continue to see a solid underlying program performance and execution, which was successfully compensating the lower deliveries and the softness on the CNP side.

We announced already in the H1 that we took an adjustment for the first H160 orders of 23 million negative impact. I would say, this is purely due to the learning curve or the early aircraft of the H160.

Over to Defence and Space on the Page 13. The revenues and the EBIT adjusted reflect the stable core business and as well a solid program execution. The EBIT reported is supported by net capital gains on the disposal of the US communications business, as I said already before. Last year, we had a higher one, which was from the electronics.

On the A400M, we delivered 12 aircraft over the nine months. The provision update, what we did in H1 has been slightly adjusted to now to 105 million for the price escalation. On the industrial side, we are progressing with the military capabilities. We're progressing with the deliveries, I mean, the 12, as I said, even more as we speak in line with the full year objective. We're also delivering the retrofit.

So clearly, we are on track against the objectives we set ourselves, but we also agreed with the nations. We work hard on this contract amendment. A lot has been achieved already. A bit slower, however, in terms of timing to bring it to fruition and conclusion. But I think we continue to work hard to get that in the box ASAP hopefully before the year-end.

I need to remind, however, that on the A400M, risks remain, in particular, on the development of the technical capabilities, securing sufficient exports on time, aircraft operational reliability, in particular, with regard to engines, and on cost reductions according to the revised baseline.

Well, now over to the guidance on the page 15. As we discussed before, we updated the delivery outlook. Let me just remind you, with regard to the full year deliveries, the A320neo ramp-up is ongoing, but the level of disruption resulting from the late availability of engines in the first half of 2018 as well as some internal industrial challenges, make the full year 2018 target a greater stretch.

A lot remains to be done before the year-end, I mean, to fulfill the customer commitments or the overall commitments. The A330neo delivery schedule has been adjusted to reflect the engine partner's latest outlook for 2018. Furthermore, we are actively working to resolve certain commercial challenges on the 330ceo and the 380 program that are targeted for completion by the year-end.

So on that basis, I read out the guidance statement, which is in front of you. As the basis for the 2018 guidance, Airbus expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. Airbus 2018 earnings and guidance are prepared under IFRS 15. Airbus 2018 earnings and FCF guidance is before M&A. It now includes the A220 integration.

In 2018, Airbus targets to deliver around 800 commercial aircraft, now including around 18 A220 and the updated commercial aircraft delivery schedule, that means before the A220, we expect rather around 780 aircraft. On that basis, before M&A, we maintain EBIT -- expected EBIT adjusted of approximately 5 billion in 2018. The A220 is now expected to reduce EBIT adjusted to a lesser extent than estimated in H1, however, the updated delivery outlook is now also included in this number.

We now expect free cash flow before M&A and Customer Financing to be lower than the 2017 free cash flow of 2.95 billion. This also reflects an expected reduction of approximately minus 0.3 billion from the A220 and the updated delivery outlook, which I explained before.

Just as a reminder, again, on the A220, on an economic level, in 2018, we expect the net cash impact on the A220 integration to be largely covered by the funding arrangement as laid out in the terms of the C Series Aircraft Limited Partnership, meaning limited net cash dilution.

Well, so to wrap it up shortly. The nine-months financial performance on the EBIT side, again, you see the A350 performance, you see the 45 higher A320 family contributing, I mean, decent margins. You see on the free cash flow side, I mean, the phasing of the deliveries and, hence, the inventory impact, which we need to have to deliver our full year objectives.

We are focused on the 2018 deliveries in the last quarter certainly with a lot to do. I think I explained all that. But we're not losing sight, at the same time, to shape the future. What is it? 2019, the ramp-up on the single-aisle to go to the rate 60 by the middle of the year; the A350, rate 10 by the end of '18, so we should harvest the full year benefit 2019, work towards the breakeven.

We will continue to invest into innovation and into digital, which in itself is going to position ourselves well in the future and will pay back and working actively also on the management transition. And I think, all in all, this supports our key objective to continue the journey on EPS and free cash flow growth for 2019 and beyond. The ingredients are there, lots to do, but trust on our fighting spirit.

Now over to the Q&A.

Julie Kitcher

Thank you, Harald. So we'll now start our Q&A time. Ladies and gentlemen, please introduce yourself and your company when asking a question. Please limit yourself to two questions at a time. And as you know, this also includes sub-questions. Also, as usual, please remember to speak clearly and slowly in order to help all participants, particularly ourselves, understand your questions.

Sashu, please go ahead and explain the procedure for the participants.

Question-and-Answer Session

Operator

[Operator Instructions] So the first question is over to the line of Benjamin Heelan at Bank of America Merrill Lynch.

Benjamin Heelan

Just two from me. One, can you -- obviously, the cash flow guidance for the year has been left fairly open-ended. Could you maybe flesh out a little bit more the key moving pieces there and maybe comment a little bit on a range of how we should see that ending this year?

And then secondly, on the 330neo, obviously, Rolls-Royce have lowered their delivery targets. I mean, could we expect penalty payments from Rolls as a result of that -- those late deliveries of those engines?

Harald Wilhelm

Yes, thanks, Ben. Number one, I will not comment on any commercial agreements between engine manufacturers and ourselves here. Clearly, as I said before, we took into account the update of the engine delivery. Frankly, as you say, yes, we are frustrated at our end here that, I mean, we had to take the plan down for the A330neo quite substantially. You saw last Friday, I think the numbers announced in terms of engines to be delivered to us for 2018 deliveries, I think they said the 10.

If my maths are correct, that should translate into a max of five A330neo deliveries. Clearly, that's what we're trying to do. And the ROM, that is included into this latest outlook. So to the first part of your question, yes, we had to take, I mean, the 330neos down compared to some previous planning. The airframe, by the way, is there. Hence, yes, I mean, there's a cash burn as the airframe is there, but we cannot deliver the ones which we built, but sitting there without engines.

Furthermore, I mean, on the 320neo, given the difficulties I described on the engine side but also some internal industrial issues, we had to revise the A320neo schedule slightly down. That is built into that delivery outlook of 780-ish, pre-A220. I think you know pretty well what it means to take about 20 aircraft down as a mix, call it, chiefly of A320neo and the A330s when the airframe is built, but we are lacking the balance upon delivery payment, which is the majority of it. Well, it may be to help you think of that a bit. If I do the math, take the 295, take the 300 dilution, free cash flow, not net cash, free cash flow of the A220 down, you have 2.6.

If you then take this 20 aircraft as a mix of 320, 330 down, well, I'm rather getting closer to around 2 billion, I would say, compared to the number we gave before. So that's how I think. But the important to remind that in that revised number of around 780, we still target to deliver basically all of the A330ceos, on which we're discussing with the customer, and also still some A380s yet to go, which are also being discussed with customer as we speak. So that is built in our objective, our target, not only assumptions. We're very actively working on it. I hope that gives you a bit of an idea how we're coming up with the 780 and the free cash flow guidance update.

Operator

Okay. We are now over the line of Olivier Brochet at Crédit Suisse.

Olivier Brochet

If I could follow up on Ben's question around free cash flow and looking to 2019 without getting into guidance there, what makes you confident that maybe 2019 is not going to be again very back-end loaded? That would be my first question. And the second one is on the A400M. There's a 30 November deadline to close the agreement with the partner nations and OCCAR. What happens if no agreement has been formed on that date?

Harald Wilhelm

Yes, hello Olivier, so I mean -- well, I mean, here we are on the nine-months call, you know that we are working also on the phasing of deliveries. And clearly, we're working also hard on improving the phasing. We know that we have been impacted here in 2018 largely by the engines. So if engine manufacturers stay firm on their commitments for 2019, I think there is a potential to improve, probably not a rapture, I would say, in terms of the phasing, but there is a potential to improve in 2019, provided we get the engines in time.

But other than that, I would suggest we talk about the 2019 cash flow at large, including phasing when it comes to the guidance for '19, in February 2019, actually, on the 14th of February 2019. With regard to the A400M, no, I mean, the world does not come to an end by the end of November. If this interim agreement expires, I don't see any material impact for 2018. As commented before, we are working hard. We are converging. I think if you read the press and the media as of yesterday, it's addressed chiefly around commercial issues. Well, sometimes, yes, at the end, it's about money.

Well, let me remind you that we entered into this DOI at the beginning of the year. I think we were very clear on the envelope. Well, we'll see where this is ending up. But the positive thing I take from that is that, I mean, a lot of stuff on technical side, delivery, capabilities, contractual legal adjustment has been accomplished. And therefore, I think the prospect of taking that to an end, at least in terms of freezing an agreement in 2018, is still achievable and accessible as we outlined at the beginning of the year.

Operator

Okay. We are over to the line of Celine Fornaro at UBS.

Celine Fornaro

Two questions, if I may. The first one would be on the nine-months performance, Harald, on the A400M and also maybe on the full year, have things performed in line from a cash perspective compared to what you expected? Or is it slightly worse?

And my second question would be on the commercial momentum where the order intake so far has been fairly limited or slower than what you would have expected maybe, and we had a lot of MOUs signed on Farnborough Airshow. So where are we on those? And if you could maybe comment around wide-bodies and narrow-bodies on this.

Harald Wilhelm

Yes, thanks, Celine. Well, on the nine months cash performance at A400M, yeah, it’s hefty, contributed to the minus 4.2 billion. Globally, I would say, in line with the plan and the phased plan. Well, we're getting to conclusions on the nego side a bit later. Maybe on the cash inside, we're lagging a bit behind, I would say, and trying to keep control on the cash outside. And -- but I mean, not too far apart, I would say, from the plan we set at the outset of 2018 and trying to recover that basically for the remainder of the year.

In terms of commercial momentum, you all heard that, I mean, in summer when we were collectively on stage, I think they are being worked upon as well, that a quarter doesn't mean too much. Yes, I mean, with the change of guard as well, from Eric to Christian, and Christian is jumping on the fight, I mean, the ones I alluded to before but also, I mean, on the MOUs. So I think -- I mean, I'm hopeful at my end that we're going to see a good -- on a healthy quarter, last quarter, in terms of order intake. I would not give any speculation right now, I think, on the split in terms of what is single-aisle and wide-body here. But the objective clearly for 2018 was to firm up on wide-bodies in support of 2019 and 2020, and that's clearly what Christian picked up.

Operator

Okay. We now go to the line of Tristan Sanson at Exane.

Tristan Sanson

The first one is on the commercial challenges to be addressed on the A330 and A380. We can see if you can help us quantify a bit the risk for free cash flow if you can't settle or deal with the challenges by year-end. Can you give an indication, for instance, of what could be the organic pressure by end of the footfall on the 330 and 320 deliveries compared to initial plan? Can we say that the maximum risk you have on 330 and A380 is equivalent to that number, higher or lower? That would be already of some help.

And the second question is on the A400M as well. I think you indicated in the past that in 2019, you're expecting, let's say, a high 3-digits improvement in the cash contribution of the A400M. If you don't reach an agreement by the beginning of next year, can you give us a hint of how much of this can you achieve organically by working on the efficiency of the program overall? That would be very helpful.

Harald Wilhelm

Well, Tristan, maybe first on the A400M 2019, I think we have come such a long way now on the discussions with the nations we had. I think from our perspective, it's just unconceivable and not in line with the spirit of the discussions not to have an agreement on the way forward with the nations in 2019. We reset the deliveries, we agreed the capabilities, so now we need to fix that framework and, obviously, I mean, also with the money attached to it. So I think we should not speculate on that and rather spend all of the energy and the time, I mean, to get that to fruition.

On commercial issues related to A330 and A380, well, how can I answer that? I mean, clearly, we expect these to be resolved. I want to be very transparent in terms of what remains to be done for the year. I mean, an easy way of looking at that, I mean, take the 9-months deliveries on 330 and compare to what we said we would do in 2018, all in all, while we said around 60, I mean, this, you need to take down now by quite a bit due to the NEO. So I mean, we're definitely below 60 with the latest A330neo outlook.

So that still leaves you, say, with a good 20 A330s all in all, NEOs and CEOs to be delivered. And I mean, a share of that is subject to discussion. Then now, I think you can do the math, but we're really working on that and I think a solution can be found. So it's really, I think, to give you transparency. And if you do the same thing on the 380, 8 got delivered, we target 12. Well, you know that, I mean, one of them is pretty hefty in terms of payment at the delivery. Even more, we are incentivized to get it fixed. So again, it's to give you transparency. And you know that, I mean, volatility on the cash in terms of cash forecasting is slightly higher than on the EBIT side, given the importance of the payment at delivery.

Operator

Okay. We are now over to the line of Christian Laughlin at Bernstein.

Christian Laughlin

Just a couple -- well, actually, one question really on the industrial challenges you're looking at with the A320neos in particular. I was wondering, Harald, if you can elaborate a little bit on the nature of the challenges outside of the knock-on effects from delays in engine deliveries earlier this year, and then what you expect the time line to be for rectifying them?

Harald Wilhelm

Yes, thanks, Christian. Well, on the industrial issues, we're somehow facing ourselves. I mean, I would basically mention two. I mean, number one -- or I mean, we need to come back to the engine, so let's say 3, yes? Number one, we put into place some investments into higher level of automation. You saw in the third quarter, we inaugurated, I mean, the fourth FAL in Hamburg, but also some other important, we call that, step-change projects. And they proved to be more demanding and more challenging in terms of ramping up -- ramping them up than what we have estimated so far. So that is point number one.

Point number two, the A321 Cabin-Flex, the kind of A320 long-range or mini-long-range version is a complex aircraft, given the higher level of customization. And that also poses, I mean, some challenges to have them being built, manufactured and processed next to, call it, standard A320 aircraft. And therefore, I mean, we had to take some measures to somehow separate them in the two to avoid disturbance on the flow, which somehow happened. And then, I mean, that's why I come back to the engines, you put them in the engine thing on top of it or at the outset in whatever sequence you want to do, which means that due to the unavailability of the engines, there were several replannings we had to do.

And that, I think, explains to you that what is normally a pretty smooth operation in terms of 320 got pretty much under fire from replanning of engine and aircraft, the ACS complexity, which we will overcome and master, and some of these industrial ramp-up challenges. So that is what is ongoing. I can assure you the full attention of the Commercial Aircraft team, Guillaume, Didier Evrard, Tom Williams, Klaus or Evert, Andreas Fehring, is on the subject matter. Everybody is aware what is at stake, the importance in terms of meeting customer expectations and commitments, but also our financial objectives for 2018, but certainly, very much for 2019 as well.

Operator

We are now over to Zafar Khan at Societe Generale.

Zafar Khan

Just had a couple of questions on cash flow, please, Harald. You mentioned the A400M being fairly hefty in the nine months. And I know in the past, you’ve guided to circa 1 billion cash burn on the A400M per annum because you had a lot of provisions to work through. Just wanted some idea of where that number could be for '18 and how it looks for '19 and '20, if you can give us some help on that.

And then the second one is on the A380 program, and I do remember that the breakeven number of units had been coming down. But I guess, if you're only going to do 12 this year and then 6 going forward, what kind of cash negative will the A380 be contributing or taking away from the cash flow in the next couple of years?

Harald Wilhelm

Yeah. Hello, Zafar. So on the A400M, I think we said that 2018, we're going to see our cash burn of about the same level in 2017, same order of magnitude. And I think we suggested that, that would be around EUR billion, and that's well what I see as of today for the full year 2018. But we said as well that then, 2019, the cash burn should come down big times to definitely a lower suite that should -- I mean, the dilution number is, on the one side, I mean, all of the inventories is there.

We're making a progress on the capabilities. We're delivering the aircraft, that's why we should get the cash. And in '19 and beyond, we're also counting on exports to come, which should provide some advances, obviously. So that is clearly the perspective I still have as of today. And again, I mean, that's what we're working, hefty on the industrial side as well as with the nations on the commercial side on the contract commitment.

On the 380, well, I would say, the cash dilution and the EBIT dilution, I see that they are pretty similar all in all. I would say, at 15 aircraft, we said we are around -- we are breakeven, well, healthy breakeven, if I may say, means going down, that is getting more difficult. Clearly, everybody is focused to avoid fixed cost staying there on the program, so this is being attacked. Therefore, I think there's a chance to reduce the rate -- the breakeven point, I mean, below 15 aircraft, but certainly, not down to 6 aircraft. That's what I have to say very clearly.

But thanks to all of the effort, I think the total dilution from the 380 in the future running at 6 on EBIT as well as on the cash side should be in the low 3 digits. This is what we discussed and decided in line with the board at the beginning of the year in association with the Emirates transaction, which gives a long-term visibility. That's not where we want to stay. That's, so to say, the floor and that gives us an opportunity, I mean, then to take some incremental orders on top on the 380, which we clearly see as a potential. And the length and the visibility of the 380 order, I mean, is a good platform for that. So that was the view at the beginning of the year, that is the view as of today and that's what we continue to work upon.

Operator

Okay. We now go to Harry Breach at Raymond James.

Harry Breach

Can I ask two slightly different ones? With the A220 now, Harald, we're I guess four months through program control. Can you give us a feeling -- I think Bombardier had said previously that they expected that program to break even in 2020. With what you see today and the improvements you can make in terms of recurring cost performance, do you think we can bring that breakeven point ahead of the 2020 that Bombardier had guided?

And then similarly, when we think about recurring cost, the A350 has been clearly a really positive story this year. And I think you touched earlier, you said A350 would get to benchmark margins. Did you say in 2020? It feels like the sort of trajectory there in recurring cost has got better as we've gone through this year. Can you give us maybe a feeling about when we think A350 can get to benchmark margin level?

Harald Wilhelm

Hello, Harry. So first, I mean, on the 350, well, I said, we are in good track to get to the breakeven in 2019. Famous question, is it end of year or full year? We keep that a little secret for the beginning of 2019. So that suggests that anyhow, 2020 should be margin and cash positive. I think we can conclude on this, right? But it means on the outside that, obviously, it cannot be benchmark margin in 2020 either.

However, I mean, we don't take it easy, and we continue to work hard. What is it? Improve the recurring cost further, see commercial opportunities and bookings, maybe also on pricing. And on that basis, I would say, well, the benchmark margin should not be only in the second half of the next decade. It should clearly sit in the first half, but I don't want to take some of the focus now, I mean, on a particular year. So let's say, well in the first half of the next decade, we should get there. And on the A220, well, what to say? We got the funding arrangements with Bombardier.

And they basically call for the cash flow spending second half '18, 2019, '20 and '21, and I think you all know roughly what we're talking about in terms of size of funding. And why did we agree and negotiate that is basically, we see this time horizon needed as the pattern to get the program into breakeven; on the margin, breakeven; on the per-unit basis; but then you also have, I mean, a bit of a fixed cost base of the entity to make the CSALP cooperation breakeven. And the funding arrangement, therefore, I would say, gives a bit of an indication how we see the timing and finally, that got acknowledged by Bombardier as well. I hope that helps.

Operator

The next one is over to Melius Research and Carter Copeland.

Carter Copeland

Just two quick ones from me. One, with respect to the organic sort of challenges, Harald, that you highlighted on the 320, I just wondered, between that and the engine availability issues, how that has you thinking about the various rate study commentary on going up? I know there's pressure from the commercial side to take the rates up on the single-aisles, and so I wondered if you might give us some color on how these challenges are shaping your thinking there.

And then secondly, on the A220, just the recurring cost evolution and efforts there, I mean, there's been a lot made publicly about your efforts to get those recurring costs down. I wondered if you might give us a little bit of color on the time line of that and what the risks are of any additional investment to make those gains.

Harald Wilhelm

So on the 320, I would say kind of a three-step, 2018 deliveries, number one; number two, get to the rate 60 by the mid-'19 in view of the challenges I described before; number three, certainly continue to work on the prospective of a further rate increase beyond the rate 60, given the commercial success of the program and the backlog and the booking and the health of the booking.

We continue the discussions with supply chain, in particular, with the engine guys on higher rate as well. But the timing obviously is not within that decade. That's more in the 2020 plus. Again, I would not risk to set out new time line in terms of when we could see that. But you all know that, that would require some investments and, therefore, a bit of a longer lead time to get ready for it.

So I do consider that the challenges I described before on engine side but also on the industrial side, I mean, therefore, can be overcome in 2018 and in 2019 and, therefore, I mean, to be in good shape industrially to accommodate higher rates in the outer years. That's what we are focused upon, I think the engine guys as well. Let me remind you, I mean, that there are modifications on the Pratt engine coming through in 2019. I think, so far, they're on track. And certainly, we monitor that very closely that they are on track when they also get under wing and being delivered from us to customers.

Julie Kitcher

Okay, thank you. So we've got time for one last question.

Operator

Okay. In that case, that will be Christophe Menard at Kepler Cheuvreux.

Christophe Menard

Two questions on my side. A330neo in 2019, we've seen the revision by Rolls of their delivery schedule. I think you mentioned a target of 25 A330neo delivery next year. Is the target changing? Or how do you see the profile in 2019? And can you actually offset any shortfall by class 6?

The other question is A380. We -- I mean, I think Emirates was clear about the fact that it's a question of engine and probably it's also a question of Pratt versus Rolls engine. Are you willing to step in, in the negotiation, especially on the price or the availability of those engines? Or are you leaving this to the engine makers?

Harald Wilhelm

Thanks, Christophe. And Carter, sorry, I forgot to answer the A220 question, but I think I gave some color on that in the answer before to Harry. So Christophe, back to your question on the 330. I actually cannot really remember, I mean, having set out an A330neo objective for 2019. I think what we said was that we would see A330 deliveries all in all, CEO and NEO, to be around 50 aircraft in 2019. And we will give a bit more color on the mix probably when we're getting then to the beginning of 2019 once we have delivered the first ones and certainly continue to monitor the progress on Rolls-Royce side to deliver sufficient level of engines to us for 2019.

On the 380, I would not wish to comment on commercial discussions ongoing between customer and engine suppliers. Just to say that engine suppliers should honor their commitments. We try to be helpful as we can, but the primary axis, I think, is between the engine guys and the customer to fix that.

Julie Kitcher

Okay. And this now closes our conference call for this time. If you have any further questions, once you've had a bit more time to go through all of the materials that you've received, please don't hesitate to send an e-mail to Mohamed, Nicolas or myself, and we'll get back to you as soon as possible. Thank you, and we look forward to speaking to you again soon.