Ladies and gentlemen, thank you for standing by. Welcome to the Airbus Nine Month 2019 Results Release Conference Call. I'm Alexandra, the operator for this conference. Please note that for the duration of the presentation, all participants will be in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to your hosts, Guillaume Faury, Dominik Asam, and Thorsten Fischer.
Thank you, Alexandra. Good morning, ladies and gentlemen. This is the Airbus Nine Month 2019 Results Release Conference Call. Guillaume Faury, our CEO, and Dominik Asam, our CFO, will be presenting our results and answering your questions. This call is planned to last around 60 minutes. This includes Q&A, which we'll conduct after the initial presentation. This 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. There is no dedicated phone replay service. The supporting information package was emailed to you earlier this morning. It includes the slides, which we will now take you through, as well as the financial statement. Throughout this call, we will be making forward-looking statements. The package you receive contains the safe harbor statement, which applies to this call as well. Please read it carefully.
Now, over to Guillaume.
Thank you, Thorsten, and good morning, ladies and gentlemen, and welcome to our nine-month 2019 earnings call. Let's start with the nine-month highlights. We observe a commercial aircraft market that remains solid, even against a challenging macroenvironment. FTKs continue to grow, albeit at a lower pace. Load factors are at record levels. Overall, 2019 is expected to be the tenth consecutive year of airline profitability. We see healthy demand for our products across global markets, fostered by the long-term growth of our industry. Our latest GMF, Global Market Forecast, estimates traffic growing at 4.3% annually and demand for 39,000 new planes over the next 20 years. In particular, we see appetite for single-aisle, long-distance operations, where the A321XLR is ideally positioned. Our nine-month results are mainly driven by the performance in commercial aircraft, reflecting both the A320neo ramp-up and progress on the A350.
We are focused on the A320neo ramp-up and improving the industrial flow while managing the higher level of complexity of the A321 ACF in particular. We have taken underlying actions to secure a more efficient delivery flow in the next years towards rate 63 per month in 2021. This is reflected in our nine-month deliveries, and on that basis, we have updated our delivery outlook for 2019. Our full-year free cash flow guidance has been adjusted to reflect this revised delivery outlook. Our EBIT-adjusted guidance is maintained, and we're focusing on meeting our customer commitments and, at the same time, preparing the production system for the future with higher volumes and higher complexity. Now, let's take a look at nine-month 2019 commercial positioning. First, I want to address the recent imposition of tariffs.
They've been implemented since October 18th, on Airbus aircraft imported from the EU into the U.S. The tariffs, as announced, do not include components delivered to Mobile. Aircraft delivered from Mobile are not subject to tariffs, but aircraft delivered from Europe are levied a tariff of 10%, which severely impacts our U.S. customers. We are working with our U.S. customers to manage the consequences of those tariffs. Next year, the WTO is expected to entitle the EU to impose tariffs on U.S. products at a significant level. I remain hopeful that the U.S. and the EU will find a negotiated solution before creating serious damage to the aviation industry and to the global economy. The second important concern is still the risk of a no-deal Brexit. We plan for a no-deal scenario and run a major exercise to understand, eradicate, and/or mitigate risks.
The shape of the future EU-UK relationship remains of critical importance to us. Let's take a closer look at our commercial positioning, starting with commercial aircraft. Our backlog is at 7,133 as of end of September. In nine months, we booked 303 gross orders, including 20 A330neos and 22 A350s just in Q3, which shows customer endorsement of our wide-body products. Nine-month net orders were 127 aircraft, following 51 cancellation in Q3, including the cancellation of 40 A220 from Republic. On the A220, we continue to see good order momentum with 14 gross orders in Q3 and a commitment from Air France for 60 A220s, not yet reflected in the order book.
Our backlog is now at 435 aircraft, and we're working on additional campaigns. We target to deliver around 45 aircraft in 2019, and we continue to ramp up to a max target rate of 10 in Mirabel and 4 in Mobile by mid of the next decade. Looking at the A320, we booked 34 firm orders in Q3. We have a backlog of more than 5,700 aircraft, and we're fully booked through 2024. We're working towards rate 63 in 2021, and discussions for further rate increases beyond 2021 are underway with suppliers. I'm sure you will raise question on that. Moving to the 330, the backlog is now at 278 aircraft, and on the A350, we have a backlog of 601 aircraft, and we are producing at around 10 a month.
In services, we're making good progress on extending the Skywise platform with now more than 100 airlines, 15 suppliers, and about 8,500 aircraft connections. Moving to helicopters, we booked 173 net orders in nine months, including 12 H135 in Q3. We also booked the first Airbus Corporate Helicopters H160. Globally, the civil and parapublic market remains soft, always, especially in oil and gas, but we continue to see good momentum in military with ongoing campaigns, including NH90s for the German Navy and H135s for the U.S. Navy trainer. Defense and Space, we had an order intake of EUR 6.1 billion, in nine months. In Q3, order intake was EUR 1.8 billion, supported by key contract wins in Space, including an order for two SpainSat NG satellites and a contract to develop the Constellation Optique en 3D, which is Earth observation program for the French Space Agency.
In CIS, we see good momentum for our so-called Pléiades Neo satellite imagery service. We unveiled the commercial platform for geospatial data analytics. In unmanned AI systems, we submitted our Eurodrone proposal together with our partners in H1. Contract negotiations are underway with the customers. In military aircraft, France and Germany recently agreed to contract the demonstrator phase for the FCAS early next year. This is a key step in moving this ambitious project forward. We are also pleased to see that France and Germany have committed to develop a common position on exports for joint defense projects in the future. Overall, we continue to see good prospects, particularly in defense, although the exact timing of awards is difficult to predict. Dominik, I'm looking at you. I now leave the floor to Dominik that will take you through our financial performance.
Thank you, Guillaume. Good morning, everybody. Our nine-month revenue grew to EUR 46.2 billion, up 14% year-on-year, mainly driven by higher deliveries, favorable mix, and to some extent, a favorable exchange rate development. In the nine months, our EBIT Adjusted grew to EUR 4.1 billion, up about 50% year-on-year, mainly driven by the performance in Airbus. The year improvement, broadly unchanged versus the first half of the year, is largely driven by the A320 ramp-up and neo premium, progress on the A350 financial performance, and the foreign exchange improvement, which has already materialized in the first half. We also continue to ramp up our investment in innovation and digitalization, which should accelerate in the Q4 as we ramp up demonstrators and the DDMS. Our nine-month free cash flow before M&A and customer financing was minus EUR 4.9 billion.
It mainly reflects the working capital build to support future deliveries, including advanced stage aircraft close to delivery. As Guillaume mentioned, we have updated our delivery outlook to around 860 aircraft. On that basis, we target approximately EUR 3 billion of free cash flow before M&A and customer financing. Recall that for every single aisle built but not delivered within the year 2019, we lose a mid double-digit million amount of free cash flow. To put remain- to- do into perspective, this means we plan to generate at least EUR 8 billion of free cash flow in Q4 2019, versus about EUR 7 billion in Q4 2018, on a slightly lower number of aircraft delivered. Finally, on WTO, based on the current U.S. tariff scheme and the measures we've taken, we see a single-digit number of single-aisle deliveries left from Europe to the U.S.
For 2020, we are in discussions with our customers regarding deliveries from Europe. We may have to defer some deliveries and reallocate affected slots to other customers, which could take additional time and cost. Let's turn to page seven to deep dive into our profitability. Our EBIT reported was around EUR 3.4 billion. The level of adjustments was a negative EUR 702 million and includes the following: minus EUR 253 million related to the foreign exchange rate and balance sheet revaluation, minus EUR 221 million related to the suspension of defense export licenses to Saudi Arabia. To March 2020, of which minus EUR 13 million occurred in Q3. Minus EUR 68 million related to the A380 program cost, of which EUR 22 were booked in Q3 as part of our continuous assessment of asset recoverability and quarterly review of onerous contract provision assumptions.
Minus EUR 70 million of other costs, including compliance costs, partially offset by a positive EUR 45 million capital gain from the sale of Alestis. Earnings per share reported includes a negative impact from financial results affected by the recognition of a loss on Forex hedges as a result of the defense export license suspension already booked as of Q1. The effective tax rate on net income is 32%, where we continue to see the impact of the aforementioned charges related to the defense export license suspension, as well as the reassessment of deferred tax assets and liabilities. The tax rate on core business is around 27%. For 2019, you should continue to assume a tax rate of around 28% on the core business result. The resulting net income is EUR 2.2 billion, with earnings per share of EUR 2.18. Now, on to our hedging activities.
We continued to ramp up our hedging activities in Q3 as the euro-dollar rate was more favorable. Our hedge portfolio provides good visibility for the coming years at attractive rates. In the 9 months 2019, we implemented EUR 37.5 billion of forwards at an average rate of $1.21 per euro, mainly for 2022 and 2023. EUR 17.4 billion of hedges matured at a rate of $1.26. We again adjusted the intra-year phasing of our hedges to better reflect our delivery profile, and rolled over EUR 5.1 billion of hedges in total for the year. We also rolled EUR 3.4 billion of hedges from 2019 into 2020. We'll continue to adapt the phasing of our hedges in line with our delivery plans. Our portfolio stands at EUR 101 billion with an average hedge rate of $1.22.
We remain well-protected, and we will implement new hedges based on the overall FX environment in line with our policy. Let's look at our cash evolution in the first nine months of 2019. Our gross cash from operations of EUR 4.5 billion broadly reflects our EBIT Adjusted. Working capital reflects the inventory build to support the ramp-up and other changes in working capital, including payments to suppliers. The free cash flow also includes dilution from the A220. As a reminder, this dilution in 2019 is largely covered by the funding arrangements up to an amount of $350 million for the year. This funding is recognized as a financing cash flow and therefore outside free cash flow. The A400M continues to weigh on free cash flow before M&A, actually at a slightly higher level than anticipated.
On a fiscal year basis, we should see lower cash consumption than in 2018, but the exact free cash flow impact will depend on progress towards our capabilities, delivery roadmap, and securing export business. In the nine months, cash flow for customer financing was limited as the appetite for commercial financing remains high. At around EUR 1.5 billion, CapEx was broadly in line with the nine months of the prior year. On a full year basis, CapEx should be around EUR 2.7 billion. All in all, this gives us a free cash flow reported of minus EUR 5.1 billion and a net cash position at the end of September of EUR 5.6 billion. Regarding our pension obligations, we again had to reduce the discount rate assumption in Q3. The global decrease in rates resulted in an increase in pension provisions by EUR 1.3 billion.
As we mentioned in the first half, we still expect to top up the funding level of our pensions for the end of the year, but at a lower level than last year. If, when, and to what extent we are going to fund this increased deficit in the future will depend on different factors, but in particular, interest rates. Our objective remains to increase the pension funding ratio to benchmark level. Now, back to Guillaume for a closer look at our businesses.
Thank you, Dominik. Let's start with Airbus. We delivered 571 aircraft in nine months, 68 aircraft more year-on-year, which is an increase of 14%. Let's take a closer look at where we stand on each program, starting with the A320. We delivered 422 A320 family aircraft, of which 338 NEOs. 338 out of 422. Our A320neo fleet has about 99.7% operating reliability, which is very high and equivalent to the A320ceo. We also delivered the 1,000th A320neo, as well as the first A321 ACF for Mobile. On the ACF, we continued our ramp-up in nine months, which remains challenging. In Q4, we will further ramp up the ACF, with about half of this year's ACF deliveries expected in Q4. As our full-year target approaches triple-digit territory for ACF, this means a large increase from the 12 ACF deliveries in 2018.
The teams are focused on improving the production system and the industrial flow. We have developed and deployed necessary resources to reduce so-called outstanding work, including on a number of almost finished aircraft. Efforts will continue throughout 2020 to improve the industrial maturity and efficiency of the program towards a successful way forward, looking at 2021. We also inaugurated the new A320 structural assembly line in Hamburg to help build additional efficiency in our production plan. As part of our plan to ramp up to rate 63 in 2021, our files in Tianjin and subsequently Mobile will be at rate 6 soon. In addition, we continue to study different options to increase the share of the A321 in our current A320 family production capacity. On the A220, we delivered 33 aircraft, and we started production of the first U.S. assembled aircraft in Mobile.
Switching to the A330, we are in the year of the crossover. We delivered 34 aircraft, and we see the neo ramp-up coming through with 26 deliveries in nine months. The type certification for the A330-800 is expected in early 2020. On the A350, we delivered 77 aircraft in nine months. We have now 30 A350 operators. We continue to make good progress on cost convergence, and we are on track to reach our break-even target for the year. For the A380, we delivered five aircraft. On to slide 14 on helicopters. Stable revenues were supported by growth in services, reduced by program phasing. EBIT Adjusted was stable and reflects an increased contribution from services, reduced by less favorable delivery mix. In September, we delivered our 1,000th Super Puma. Today, the Super Puma is operated by nearly 100 customers in 50 countries.
Let's have a look at our defense and space business. The increase in revenues was mainly driven by military aircraft. EBIT Adjusted mainly reflects efforts to support ongoing and future campaigns. The team is focused on performance and cost control. Looking at Q4, we have a lot left to do, and we're focused on execution across our program lines. Our EBIT (reported) reflects an adjustment of minus EUR 221 million due to the prolonged suspension of defense export license from Germany to Saudi Arabia. This is indeed the fourth time in 12 months that the German government has prolonged the suspension. 9 months 2018 includes the net capital gain from the disposal of the Airbus DS Communications, Inc. business in the U.S. for memory. On to the A400M. We delivered 10 aircraft in 9 months, bringing the in-service fleet to 84 aircraft.
During Q3, we achieved several key milestones towards full capability, including the deployment of 58 paratroopers from a single side door and the certification flight test for the dispatch of 80 paratroopers from both doors simultaneously. Finally, we achieved the first air-to-air so-called dry contact refueling with an H225M helicopter. These were our major milestones. As Dominik said it, the A400M cash consumption is reducing, however, not at the pace we're targeting. We will continue with development activities towards achieving the revised capability roadmap. Retrofit activities are progressing in line with the customer agreed plan. Challenges remain, particularly on exports. On to the guidance slides.
As I said before, our nine-month delivery numbers and the adjusted delivery outlook for the year reflect the underlying actions to secure a more efficient and a more predictable, sustainable delivery flow in the next years as we progress to rate 63 per month in 2021, with a lot of more complex planes with more value. For year 2019, we have updated our guidance. Of course, we will continue to monitor how the situation on U.S. tariffs and Brexit evolves. Airbus 2019 earnings and free cash flow guidance is before M&A. Airbus now targets around 860 commercial aircraft deliveries in 2019, which reflects the updated delivery schedule. On that basis, Airbus maintains its expected increase in EBIT Adjusted of approximately +15% compared to 2018. Airbus now expects free cash flow before M&A and customer financing of approximately EUR 3 billion.
Our full year free cash flow guidance has been adjusted to reflect the revised delivery outlook. Based on our nine months performance and the operational measures we have taken, we are increasingly confident in our ability to meet our EBIT Adjusted target for the year. A few words to wrap up. Our key priorities remain the same as last quarter. The entire team of Airbus is focused on deliveries for the remainder of the year, but also on ramping up the ACF and improving the efficiency and the underlying performance of the delivery flow in 2019, in 2020, and moving forward to 2021. This should and will support the A320 ramp up to rate 63 in 2021, and should help achieve a more linear delivery profile, which we are focusing on. We are also continuing our discussions for further rate increases beyond 2021.
We will provide an update on this topic with our full year 2019 results disclosure. On the A350, we've made good progress, and we are continuing our efforts to drive further cost convergence. Beyond those two main topics, we remain focused on the A220 integration, commercial momentum, ramp up, and cost reduction on the A400M program execution, on improving our helicopter business competitiveness through the transformation efforts, leveraging the digital and accelerating innovation within Airbus, and continuing to expand our services businesses worldwide with the help of Skywise. Thank you for your attention. Now let's turn to your questions. Thank you.
We will now begin the question and answer session. Anyone who wishes to ask a question may press zero one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press zero two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press zero one at this time.
We now start our Q&A time. Please introduce yourself and your company when asking a question. Please limit yourself to two questions at a time. This includes sub-questions. As usual, please remember to speak clearly and slowly in order to help all participants, particular ourselves, to understand your questions. Alexandra, we go ahead with the procedure for the participants.
The first question is from Olivier Brochet of Credit Suisse. Your line is now open.
Thank you very much. Good morning, Guillaume, Dominik, Thorsten. I would go for two questions. The first one on the free cash flow for Q4. Your guidance implies something like EUR 8 billion, despite the cut. Can you walk us through some bridge element to think about in Q4? Anything to note, for instance, from Defense and Space that would help us understand how you get to EUR 8 billion? The second question would be on the WTO conversations. Airbus and Europe have been calling for a negotiated solution. Is there a case where it does involve Airbus at some stage and in particular, cash from Airbus? Thank you.
On the free cash flow, yes, you're right, that we are basically increasing the remain to do from EUR 7 billion last year to EUR 8 billion, and this on a slightly lower number of aircraft. You can easily calculate that the guidance implies eight and lower aircraft. What are the puts and takes, so to speak? The first one is, as you mentioned already, that Defence and Space is quite back-end loaded, and there are certain profiles in terms of order intake, but also deliveries, which trigger that. Secondly, yes, we do have higher payments per aircraft because of the mix improvement as we move from A320neo to A321, and then ACFs are increasing to ramp up in earnest.
We do half of the round about 100 we do this year in that quarter, and that should give us a very strong pickup there, and this is why we're confident on the revised guidance.
On WTO, where we are negotiating with our customers, the remain to do in 2019 from European production sites is rather limited, and you have noticed that the tariffs do not apply on aircraft delivered from Mobile. Therefore, it's a discussion that is now much more looking at 2020, and this will be obviously difficult to manage, especially in the second half of 2020 as tariffs, as you know, are in fact import duties that apply to airplanes exported to the U.S., and therefore, the airlines have to pay for those tariffs. This will be a discussion for later. In the meantime, there will be the WTO ruling on the case, EU against the U.S., where we expect another set of tariffs to be put in place in the other way around, and therefore even more reasons for a settlement.
That's basically what we think will happen, and we are trying to contribute to that discussion to a de-escalation of this useless tariff war that we see at the moment.
Thank you so much.
The next question is from Benjamin Heelan of Bank of America. Please go ahead.
Yes. Morning, everyone. Thank you for taking my questions. I guess the first for me is to what degree is this delivery cut to ensure better delivery ramp as you move towards 63 a month? To what degree is it about you continuing to underperform expectations in that ramp up of the A321 ACF? What confidence can you give people on that ramp? Because this is the second delivery cut that you've given us in two years now. The second question I've got are on the implications of this for 2020. Should we be thinking about this delivery cut as resulting in a more balanced delivery profile in 2020? As a result of that, what could be the implications for cash flow in 2020? Thank you.
Yeah, I think this is at the core of the call today. Well, basically, what we are doing here is a disappointment on the 2019 delivery, but it's completely in line with our efforts to ramp up efficiently to the rate 63 in 2021. We have to look at the future with delivering more airplanes. We are targeting 63 in 2021, but I have indicated that we will continue to ramp up on the outer years given the very strong demand on the single aisle. At the same time, we see a demand that is growing for aircraft with more value, but also more complexity. We have to prepare to transform our production systems to do this in an efficient and sustainable manner. This is really what we are doing this year, and we will be doing as well in 2020.
We are doing this to secure our ability to serve efficiently 2021, 2022. It goes with transformation. That's what it is. We were targeting more planes, but we're facing the situation that doing both ramping up production and transforming the production system is a difficult thing to do. Will it lead to a more balanced delivery in 2020? Well, we are looking at it as we prepare 2020, but we are suggesting that we will go step by step towards 2021. I think we'll be able to update in more details on that question, probably at the next call, which will be the full year results. Importantly, I really want to say, we are doing the right things.
We are doing things to prepare the future and to make sure we are going on top of the industrial problems we have been facing in the last two years, for very different reasons, mainly driven by engines last year and driven by the ramp-up of the ACF this year. We want to be at the right place moving forward. That's a transformation exercise that we are running, and it comes with some consequences for 2019, but I really believe we're doing the right thing.
Okay, thank you.
The next question is from Tristan Sanson of Exane. Your line is now open.
Hi, everyone. I guess it was me that was just announced, Tristan Sanson from Exane. The first one, looking at what you did on the hedge book, the rollover of a bit more than $3 billion of hedges from 2019 into 2020. The way I read it is that you will probably get back on track with your initial ramp-up program into 2020, and maybe even catch up a few deferred A321 ACF deliveries over that year, hence the deferral of hedges on that year. Is that the correct way to look at things? Second, if we dig into your Q3 numbers, we get a very high underlying contribution per aircraft delivered at Airbus. Can you give us a few elements underpinning that profit contribution per aircraft improvement? Is it coming from cost or price on the A320?
Is it coming from faster move up the learning curve of the A350? What is delivering better than expected right now in the business? Thank you.
Dominik, you take those questions?
Happy to do so. Hedge book, I cannot hide here that, it should not come as a surprise as we revise the delivery guidance downwards, that rolling the hedges into the new year was simply a result of us delivering less aircraft this year than what we had initially thought. Technically, you shouldn't interpret too much into the kind of phasing here, because we don't have the precise delivery dates yet for next year, and we've kind of parked these hedges in the Q1, and then we will distribute them to the precise delivery date by rolling them forward next year. Be a little bit careful on assuming too much for Q1 here, because this will be adjusted again.
You have seen also in the backup of our slides that, in general, there is a more attractive hedge rate in there for next year than for this year, with a grain of caution that we need to re-phase potentially next year. The Q3 contribution was indeed not bad. If you think about us delivering less aircraft than last year and maintaining the EBIT Adjusted, I think the upsides here have been commented a couple of times already, is the good progress on A350 recurring costs. It is the mix improvement, the structural improvement, in terms of delivering more higher value added and also higher margin product. If you compound all of these effects, there's a lot of smaller effects which give us the ability to basically offset the lower deliveries at the same EBIT Adjusted contribution.
Okay. Thank you.
The next question is from Céline Fornaro of UBS. Your line is now open.
Yes. Good morning. Thank you for taking my questions. I have two. The first one would be on the A321 and the ACF ramp-up, in terms of trying to understand the relationship with the workforce in Hamburg, and if there, the extra times implementation is starting to pay off or not, and what's your view on that beyond also the industrialization? Secondly, on the A400M, you mentioned an increase, a slower, I would say, bleed on the cash than you expected, or recovery, sorry, of the bleed.
I was wondering on that one, you also flagged the export risk, if you don't secure an export. Maybe you could put a little bit more color on the timelines and what's the time pressure there. Is it within six months, one year, or you have a bit more room to maneuver? Thank you.
Good morning, Céline. Thank you for your question. I take the first one on the ACF. Yes, we have implemented a lot of measures in two directions. As I said, transforming the production system, automation, robotization of activities, but as well additional workforce to cope with the complexity and training the people for the long-term growth of that complexity. As you rightly indicated, for the moment, it's mainly Hamburg, and we have all the complexity sort of concentrated in Hamburg. We want to change that in the future and sort of de-bottleneck Hamburg. To manage the situation, we have put in place new labor structural organizations, and especially what you call extra time, I think you're referring to additional work that we have organized. Yes, it's paying off. It's paying off in both the increased volume of the ACF.
As Dominik indicated, we intend to deliver half of the ACF '19 in the last quarter, so it shows that those products are in the production pipeline. As well in the transformation I was mentioning before, and the underlying improvement of our production systems. Now, it's not a three-month exercise. It's a sort of two years exercise, and we'll be focusing on doing this consistently end of '19 or second half of '19, 2020, and moving forward. A400M, Dominik, I hand over to you.
Yes. Thanks, Céline. Hi. The question related really to the export business there. There's two things we have to take into account. Firstly, when we get an order in for export, we of course book PDPs, which are quite significant in the military business. For this year, basically, is the only thing that would give us some more cash flow is really getting an order and then receiving the PDPs on that order. There is another aspect which is more longer term. The initial contract with OCCAR on the A400M is spanning across the next decade. We have to do every year an Estimate at Completion or is a triggering event which we don't have at present. Every year we have to do it anyhow.
On that front, it of course matters what is the assumption, how many of these export orders can be placed by when, and how many can be delivered within the timeframe of that initial contract, because this Estimate at Completion is for that initial contract. That means here we talk about a timeframe of a decade to come.
Sorry, the decade, they start once the contract was revised at the end of last year?
No, this is from now on, it's kind of going to the 2030 type of timeframe. I'm not exactly when it would end, but this is kind of the timeframe we talk about for this contract. It's until the last delivery of the OCCAR customers is done, this is how long the contract runs.
Okay. Thank you very much.
Thank you.
Next question.
The next question is from Christophe Menard of Jefferies. Your line is now open.
Yes, good morning. Two question on my side. The first one is on the free cash flow in 2020. Could you give us some indication on whether your efforts to normalize the production across the year will have a significant impact on your free cash flow targets? The second question is, the U.S. tariffs. It is 10% tariff. Are you willing to take that, I would say, impact on your deliveries in the sense that, will you have your customer pay for that, or could you take that hit on your pricing, basically?
Well, Dominik, maybe you take the first one, and I take the risk to take the second one.
Thanks for giving me the easier part. On the free cash flow, we of course have indicated we want to do linearization, yet we want to do some progress already from the turn of coming out of 2019 into 2020. If you look at our balance sheet, you'll see that we have a very high inventory number, actually up EUR 3.7 billion over the year, and that we have also said that not all of these aircraft, many of which are very close to be completed, will be delivered this year. Of course we have an opportunity to ship them early next year. From some other structures we tried to mitigate. We do want to have a better free cash flow in 2020 than we had in 2019 to start linearizing. However, I would caution that linearization will not be completed that quickly.
It will take the full next year, and then, of course, come 2021, we really want to shoot for that famous cash conversion of one, and so this is the game plan, and I think we can hopefully show a certain step in that way already at the turn of this year.
Indeed. On the tariffs, well, these are import duties. By contract, they have to be paid by the customers, by the airline themselves. Now, there's a lot of complexity on the short term, so we are managing that complexity with our customers sort of aircraft by aircraft. Moving forward in the middle of next year, we want to be in a situation where the tariffs are paid by the customers. 10% is a lot of money, which means they will have to choose between paying the tariff on the airplanes or to deliver plane to the U.S. airlines and the ability for the U.S. airlines to have the capacity they need in a market which is very strong. Therefore, we think it's a lose-lose, and it's a lot of lose for the U.S. industry.
That's why we continue to push for amicable settlements between EU and U.S., especially with the perspective of the next WTO ruling sort of May or June next year that will give the ability to EU to sort of retaliate, to put tariffs on goods coming from the U.S. to Europe, and especially Boeing airplanes. It's time to come to reason before we are in that escalation scenario. If we come in that escalation scenario, we'll have to live with it.
Thank you very much.
The next question is from Jack Harnett of Bernstein. Your line is now open
Yes. Thank you. Good morning. I'd like to go back to the A320 family, and really what is it about the ACF that has been so difficult from an industrial standpoint? It doesn't seem like it should be that difficult a variant on the surface. The first question is, what has been so hard about that? Second, related to your digitalization strategy, MROs have pushed back pretty hard against the proposal to charge royalties for data. What does that mean for your overall strategy here, and your opportunities to monetize some of the work you've been doing around digitalization and data?
Why is ACF so hard? That's a good question. In fact, it turns to be harder than what we probably have anticipated. Well, the fact is the ACF is an aircraft with a new cabin and a new rear part of the plane, including with the capacities, with the provisions for new systems like fuel tanks, because the ACF is also the LR version. Therefore, the rear part of the plane is new and is more complex, which means we have to relocate, to re-route wires, harnesses, fuel system to modify the airframe. We have a big one-off for all the heads of version of the new ACF, as we have to redo all the design, the industrialization of all those new heads of version, and they come in very large numbers as we have sold a lot of ACFs.
There is more work content, there is more complexity in that plane, not in the wings, but in the rear part, the rest, the cabin, the harnesses, all the hydraulics and fuel systems. There's a lot of industrialization, okay, to be done, especially for each of the heads of version. Therefore, this big one-off comes with a lot of additional work, and as I said before, we are doing this, at the same time we are improving the underlying structure and performance of the production systems, to ramp up to higher rates with even more ACFs next year. You remember that by, I think, end of 2021, all A321s will be ACFs. It's not rocket science, to be clear, but it's a lot of work in a short period of time.
We are gearing up for rate 63, so 63 airplane a month, and higher complexity at the same time, higher value of the airplane. We want to be prepared to do this in a sustainable and predictable way. On the MRO. Well, I'm not completely happy in the way we have introduced this fee on our IP, and we're working with the MRO shops and the airline to update our policy and move forward in a more cooperative way with them. Work ongoing, and I would say we are in the transition on this thing. That's a bit of a small event compared to the bigger one, which is the move towards digital and the change of nature of the services we are delivering, going more to flight hour services.
There's a big change of business model, and we can see that there are some difficulties on the way, but I'm sure we will overcome those difficulties.
Okay. Thank you.
The next question is from Harry Breach of MainFirst. Your line is now open.
Good morning, Guillaume, Dominik, and everyone. I'm sorry to labor the point. With ACF, Guillaume, I think you touched in the remarks earlier about having made 12 deliveries last year. You touched also just earlier, I think on saying by the end of 2021, all A321s will be ACFs. Can you give us any more data points in terms of just the annual numbers and the numbers of heads of version in particular? Separately, can I just clarify something that I think Dominik said. Dominik, did you say earlier on that in 2021, we'll be looking at free cash conversion of one, and does that mean that your free cash before M&A will be equal to net income adjusted? That will be the target for 2021.
Okay, Harry, I'll take the first question. Well, number of ACF for full year 2019 will be probably reaching triple digits. That's basically what we are targeting, and as I said before, it's half of them in the last quarter. You see that we have an interesting last quarter to manage, well we're on the way. A lot of them were in Q3 already, and that's part of the explanation of why we've been down in number of planes compared to Q3 2018. It's only part of the explanation. Last year in Q3 2018, after a couple of months without engines, we were starting to deliver our famous gliders, planes that were parked and therefore easier to deliver. It's difficult to make a year-on-year comparison. Basically, what is important is that we are now in the ramp-up of the ACF.
It will be even much higher in 2020, so it's similar pattern in 2020, but targeting a rate 63, 2021 with a very vast majority of planes of A321s being ACF, and as well, the target to debottleneck Hamburg to regain room to maneuver and sustainability of what we are doing. There was a second question?
The heads of version, Guillaume?
Yes?
Just the heads of version.
Oh yeah, sorry.
Yeah.
Yeah, each and every new customer is a head of version. There's a lot of new customers, as you can see now, [Price Hill] is leaving Hamburg with an ACF. It's in dozens of heads of version. It's a lot of heads of version in 2019 and 2020. That's why this is really the two difficult years for the ramp-up of the ACF. It's a lot of new lines. Once we have industrialized the head of version and we can reuse the drawings and the work that has been done for one head of version to the next one, then we are becoming serial. Therefore, the most difficult heads of version are the first 30, 40, 50 heads of version. That's really a one-off that we have to digest, and we are currently doing it.
When will we get to number 50?
Sorry, can you repeat the question?
Sure. I think you just said, sorry, the first 30, 40 or 50 heads of version are the most difficult. Can you share, can you give us any idea of when we get through those first 30, 40 or 50?
Not precisely as we speak, but what I can tell you is this complexity that we are digesting is second half of 2019, 2020. By end of 2020, we will have digested the very large quantity of new heads of version for which the industrialization is not existing and needs to be developed. That's what we're doing currently in 2020.
May I just point to add, you know that the A321 represents way more than 40% of our backlog. When Guillaume says that by end of 2021 you will reach 100% penetration with ACF, you can imagine how steep the ramp is even beyond 2020. On the cash conversion, it's always a very tricky thing because our cash flow is so sensitive to cut-off effects like what we just discussed. In general, of course, we see opportunities that once we have gone through this linearization, which will be actually cash consuming in 2020, and we have stabilized the production process, there is opportunities to significantly improve on working capital. As a result of that, of course, we want to kind of converge towards that goal.
Is that goal 2021 or is it further beyond?
Sorry?
Did I hear you say, Dominik, that that goal of the conversion of one was in 2021, or were you talking about beyond that, beyond 2021?
Of course, we'll try to do it as quickly as possible, but it will take some time to stabilize.
Got it. Thank you. Thank you very much.
Next question, please.
The next question is from Carter Copeland of Melius Research. Your line is now open.
Hey, good morning. Good morning, team. Just wondered if, Dominik, if you could expand a little bit. Help us bridge the difference between cash flow guidance, which obviously came down in the reiterated EBIT guidance. How much of that relates to better profit contribution per aircraft? As we think about that going forward, is there any reason, given that you've got drag on the profit contribution due to the ACF, is there any reason that as you work through your plans, that you think that won't sustain or even expand on a profit per aircraft basis? Just help us think through that. Thank you.
We have previously also commented that one single aircraft, which has been built but is slipping, is generating a low double-digit EUR million amount of profit contribution and a mid double-digit EUR million amount of free cash flow, which is basically the payment upon delivery. If you take the very average temperature of the hospital of our deliveries, you can talk very roughly EUR 30 million-EUR 40 million delta between the profit contribution and the cash contribution of an aircraft that's already built. If you apply it to the 25 aircraft less we are guiding now, it's pretty much the kind of delta of EUR 1 billion. It hits the kind of free cash flow more strongly. On top of that, we said there is a little bit of some headwind on A400M.
You see that actually these communicating tubes between deliveries, profit contribution, and cash flow are very much intact.
Okay, no real change actually, despite the performance in Q3.
Well, we have been moderately better because otherwise we could not keep the guidance. We have lost a little less than 3% of deliveries and could keep the EBIT. From that perspective, there is a slight improvement but no kind of fundamental trend. Underlying assumptions are intact and steady, I'd say.
Okay. Just one kind of verification. Were any of the deliveries that are slipping out in 2019 related to anything tariff related, or were they all production challenge related?
They are not tariffs related.
Okay. Thank you very much, gentlemen.
Next question, please.
The next question is from Zafar Khan of Société Générale. Your line is now open.
Thank you. Good morning, everybody. I have two, please. Two questions. First one is just on the pension deficit. I note that the EUR 1.3 billion increase that you flagged, Dominik, is on the discount rate. I see between the nine months last year and Q3 this year, the deficit's gone from, or the liability I should say, on the balance sheet has gone from EUR 6.7 billion to EUR 11 billion. Can you please help me understand that a little bit, that big ballooning in the pension liability?
Sure.
The second question. Shall I ask the second one, or?
Yeah, go on.
The second question is just on the 787 rate cut. Clearly in the Airshow you did mention the pricing pressure in negotiations because Boeing had gone to 14 per month, and you were saying that was putting pressure on prices for the A350 and the A330neo. With Boeing kind of conceding on that and cutting to 12 per month, does that actually ease the pricing pressure or does that make it more intense? They will now want to maintain 12. If you can just help me understand what the dynamic will be there.
Maybe I start with the second one. Then I hand over to you, Dominik, on pension. Well, yeah, basically we said that we thought there was too much production compared to the market demand moving forward, which was sort of suggesting that there was something to happen. The skyline of Boeing was not appropriately filled with orders. We are not surprised that they reduced their production rates from rate 14 to rate 12. That just reflects, I think, the reality of the market.
Dominik?
Yes, on the pension, you're right, there was more than just the discount rate. We did that actually in the Q2 results. What had happened is that we've seen that the interest rates have come down significantly. That has triggered some changes in the way our employees or retirees choose to exercise their options to get the pension entitlement. That change in the actuarial assumption was representing a little bit less than half of the overall nine-month impact. The bigger portion of the impact was the discount rate itself. The other one was more a secondary effect of changes in assumptions about how our people behave in terms of choosing certain payout assumptions.
Thank you.
Last question, please.
The next question. Yep, the last question is from Andrew Humphrey of Morgan Stanley. Your line is now open.
Hello. Thank you for taking my questions. One thing, we've obviously seen some headlines yesterday about a very large potential order on the A320s, and I think you alluded to that in your prepared remarks. Can you give us an indication of the latest discussions you've had with your supply chain partners about what kind of visibility they feel they need to increase production? My second question is, I guess also on supply chain, in a way, you highlighted that you're planning now basically for a no deal Brexit, in terms of your U.K. operations. Can you talk a little bit about what you believe your longer term options may be on that and whether we might be looking at an increase in investment on alternative production facilities at some point, to hedge the risk of your U.K. facilities?
Okay. On the first question, with suppliers, we have engaged last year heavily with the suppliers in the perspective of ramp up of the single aisle family. The outcome of these discussions is the rate 63 in 2021. We are doing the same this year. We are scouting, we are assessing the capacity of the supply chain to continue to ramp up. That's why I said, in our full year results, 2019, let's say in February 2020, we will be updating on the objectives, on the targets we take, in coordination with the full supply chain for 2022 and 2023. What we are doing is fully supported by the supply chain. We don't take bets when it comes to ramping up.
We really share with our suppliers the perspectives. Their ability to ramp up their capacity to do it and the time frame it requires to do it. I hope it answers your question. On the Brexit. Well, you might remember that we prepared ourselves for a no-deal Brexit by end of March. The main risk was the so-called friction at the border and the risk on logistics. We thought at that time the countries and the customs of the countries were not prepared for a no-deal Brexit, therefore, we have pushed very hard. We've pushed back a lot on the risk of a no-deal Brexit. Brexit has been pushed to 31st of October. The risk of a no-deal Brexit now by end of October are remote, as far as I understand. Anyhow, we have prepared ourselves again for a potential risk of a no-deal Brexit.
I think we are now more looking at the long-term implications of Brexit, and I think there's still a lot of uncertainty. There can be opportunities as well. On the short term, we can't move our production out of the U.K. We are very happy with the production efficiency and the skills and the knowhow of our employees on wings in the U.K. Obviously, there are major changes on the long term in the relationship between the EU and the U.K. For the future of investments, we will have to adapt to those long-term changes.
Thank you, Guillaume. This closes our conference for this time. If you have any further questions, please send an email to Mohamed, Nicolas, or myself. We will get back to you as soon as possible. Thank you, and I look forward to speaking to you again soon.
Thank you very much. Bye-bye. Have a good day.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.