AIRBUS - 2019 Registration Document

Management’s Discussion and Analysis of Financial Condition and Results of Operations  / 2.1 Operating and Financial Review

and its associated recovery plan, technical issues related to the aluminium alloy used for some parts within the aircraft, recurring cost convergence issues, an updated assumption of export orders during the launch contract phase and finally some delays, escalation and cost overruns in the development programme. During the second half-year 2016, the programme encountered further challenges to meet military capabilities and management reassessed the industrial cost of the programme, now including an estimation of the commercial exposure. As a result of these reviews, Airbus Defence and Space recorded a charge of €2,210 million in 2016 (thereof €1,026 million in the first half-year 2016). This represented the best management assessment at the time. In 2017, 19 A400M aircraft were delivered. In total, 57 aircraft have been delivered as of 31 December 2017. In 2017, the Company continued with development activities toward achieving the revised capability roadmap. Given the order of magnitude of the cumulative programme loss, the Board of Directors mandated the management in February 2017 to re-engage with customers to cap the remaining exposure. The Company signed a Declaration of Intent (“DOI”) with the A400M Launch Customer Nations (Germany, France, United Kingdom, Spain, Turkey, Belgium, Luxembourg) defining the framework for achieving a mutually binding contract amendment initially expected later in the year. The Company, European defence agency OCCAR (who is managing the A400M programme on behalf of the seven Launch Customer Nations) and the Customer Nations had agreed to work on a number of contractual elements including a revamped delivery plan as well as a roadmap for the development and completion of military capabilities for the A400M. The DOI, finalised on 7 February 2018, represents an important step towards reaching a contractually binding agreement also mitigating the commercial exposure while satisfying customer needs with regard to capabilities and availability of the aircraft. This DOI provided a new baseline on which to evaluate the A400M contract. A detailed review of the programme concluded in the fourth quarter of 2017 including an estimate of the financial impacts of the above mentioned adaptations on schedule, capabilities and retrofit resulted in an update of the loss making contract provision of €1,299 million (reported) for the year 2017 (restated equivalent loss following the implementation of IFRS 15 was €992 million for the year 2017). The Company’s remaining exposure going forward is expected to be more limited. In 2018, 17 A400M aircraft were delivered. In total, 74 aircraft have been delivered as of 31 December 2018. The Company continued with development activities toward achieving the revised capability roadmap with the achievement of an important development milestone according to schedule. Retrofit activities are progressing in line with the customer agreed plan. In 2018, the Company has been working together with OCCAR and concluded the negotiations on a contract amendment. In the fourth quarter 2018 an update of the contract estimate at completion has triggered a net additional charge of €436 million. This reflects the outcome of the negotiations, updated estimates on the export scenario during the launch contract phase of the A400M programme as well as applicable escalation and some cost increases. The contract amendment has been successfully completed in June 2019, after each nation finalised their domestic approval processes. This new contract de-risks the programme and provides the Company, OCCAR and customers greater visibility, which supports future planning and preparedness.

sales and marketing efforts in recent years. As a consequence of this decision, deliveries of the A380 will cease in 2021. At year-end 2018, in view of the above, the Company has reassessed accordingly the expected market assumptions and the recoverability and depreciation method of specific assets allocated to the A380 programme. As a result, the Company has impaired specific A380 assets in the amount of €167 million, recognised an onerous contract provision for an amount of € 1,257 million and updated the measurement of refundable advances including interest accretion for a total amount of € 1,426 million. As a consequence, the recognition of the onerous contract provision as well as other specific provisions and the remeasurement of the liabilities have negatively affected the consolidated income statement before taxes by a net €463 million in EBIT and positively impacted the other financial result by €177 million as of 31 December 2018. A350 XWB programme. In 2016, Airbus delivered 49 A350 XWB aircraft, including to 7 new customers. To reflect expected lower revenues escalation, increased learning curve costs and delivery phasing, Airbus recorded a net charge of €385 million on A350 XWB loss making contracts in the second quarter 2016. In 2017, Airbus delivered 78 A350 XWB aircraft. The level of outstanding work in the Final Assembly Line had been significantly reduced. Despite the progress made, challenges remained with recurring cost convergence as the ramp-up continued. The A350 programme was preparing to reach the targeted monthly production rate of 10 by the end of 2018. In 2018, Airbus has delivered 93 A350 XWB aircraft. New order intakes, cancellations, delivery postponements and other contractual agreements to the end of December 2018 have been reflected in the financial statements. The industrial ramp-up is progressing and associated risks continue to be closely monitored in line with the schedule, aircraft performance and overall cost envelope, as per customer commitments. Despite the progress made, challenges remain with recurring cost convergence as the ramp-up continues. In the first three months 2019, Airbus has delivered 22 A350 XWB aircraft. A400M programme. Technical progress on the A400M programme resulted in the recognition of A400M-related revenues of €1.7 billion in 2016, €1.9 billion in 2017 (reported), €2.2 billion in 2017 (restated) and €2.1 billion in 2018. In 2016, 17 A400M aircraft were delivered, resulting in 38 cumulative deliveries up to 31 December 2016. Acceptance activities of one additional aircraft were finalised at the end of December 2016, but transfer of title only took place on 1 January 2017 (corresponding revenues were recognised in 2017). Industrial efficiency and military capabilities remained a challenge for the A400M programme and furthermore, the EASA Airworthiness Directive, linked to the Propeller Gear Box (“PGB”) on the engine, and various PGB quality issues strongly impacted the customer delivery programme. The first major development milestone of the mission capability roadmap defined with customers earlier in 2016 was successfully completed in June with certification and delivery of “MSN 33”, the ninth aircraft for the French customer, however achievement of contractual technical capabilities remained challenging. In the first half-year 2016, management reviewed the programme evolution and estimated contract result incorporating the implications at this time of the revised engine programme

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Airbus / Registration Document 2018