Ladies and gentlemen, thank you for standing by. Welcome to the Airbus half year 2019 results release conference call. I am Angela, the operator for this conference. Please note that for the duration of the presentation, all participants will be in 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 host, Guillaume Faury, Dominik Asam, and Thorsten Fischer.
Thank you, Angela. Good morning, ladies and gentlemen. This is the Airbus half year 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 90 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 our website, but t here is no dedicated phone replay service. The supporting information pack was emailed to you earlier this morning. It includes the slides, which we will now take you through, as well as the financial statements. Throughout this call, we will be making forward-looking statements. The package you received contains the safe harbor statement, which applies to this call as well. Please read it carefully.
Now, over to Guillaume.
Thank you, Thorsten. Good morning, ladies and gentlemen. Welcome to the call. It's a pleasure to be with you here today. It's been about six weeks since we last spoke during the Paris Air Show, and we are now back to give you our H1 2019 results. Let's start with the H1 highlights. The sector fundamentals remain solid, with healthy traffic growth, load factors higher than 80%, and still robust profits forecast for the airline industry. We continue to see good demand and strong endorsements of our competitive product portfolio, as demonstrated by the 383 firm orders and commitments recorded at the Paris Air Show at Le Bourget, including for our latest member of the A321XLR. However, we continue to see a complex geopolitical environment and competitive market, particularly on wide bodies. On the financial, our H1 results mainly reflect the A320 ramp-up, including the transition to neo.
It also reflects further progress on the A350 financial performance and the A330 as well. Our focus continues to be on the A320 ramp-up, and in particular on the A321 ACF. We decided to taper the ACF production plan, but we will still be ramping up ACF deliveries very significantly in H2, and it remains challenging. For the year, we continue to target 880 to 890 commercial aircraft deliveries in 2019, which remains challenging. A lot remains to be done before the end of the year to fulfill our commitments. On that basis, we maintain our 2019 guidance. Now, let's take a closer look at H1 2019. As an opening comment, I want to highlight that we are increasingly concerned about the rise of protectionism and, in the context of the WTO dispute, the intention of the USTR to apply tariffs on our products.
Aviation is a global industry, which relies on free trade and free circulation of people. A negotiation to find a common agreement is the only solution before this escalates into an industry-wide issue. Starting with commercial aircraft. In H1, we booked 213 gross orders. This includes 151 firm orders announced at Le Bourget. We successfully launched the A321XLR with 249 firm orders and commitments, which is a great endorsement of the XLR. Overall, in Q2, we saw five additional cancellations, which brings the net orders to 88 and our backlog to 7,276. Overall cancellations remain in line with historical trends as a percentage of backlog. On the A220, we see good order momentum. Our backlog is now at 473 aircraft, and we are actively working on additional campaigns, as you have seen.
We will continue ramping up to a max target rate of 10 a month in Mirabel and four in Mobile by the mid of the next decade. Next, on the A320 family, we booked 131 firm orders in Q2. Our backlog of 5,871 aircraft supports our ramp-up, and we're preparing to go to rate 63 mid of 2021 as indicated already. We are fully booked through 2024 now. We continue to stabilize the industrial flow and to study potential further rate increase beyond 2021. Moving to the A330, the backlog is now at 275. We saw good endorsement from key customers, as highlighted at the Paris Air Show. We target to deliver around 50 aircraft this year, of which more than 1/2 as neos. On the A350, we have a backlog of 605 aircraft and have stabilized production at rate 10.
We see the A350 and A330 combined production as the right level for our widebodies. In services, we are making good progress on extending the Skywise platform, with now more than 80 airlines connected to Skywise. On to helicopters. While the civil and parapublic market remains soft, we continue to see momentum in military and have good prospects with ongoing active campaigns. In H1, we booked 123 net orders, including 23 NH90s for Spain and 11 H145s just in Q2. In defense and space, we had an order intake of EUR 4.2 billion in H1, supported by key contract wins in Q2. On the A400M, we signed the contract amendment with OCCAR. We were awarded a contract to integrate and certify Directed Infrared Counter Measures system for the German Air Force. We have also signed the so-called new A400M Global Support Step 2 contract with OCCAR.
In space, we won a satellite campaign with an innovative solution with Inmarsat for Ka-band satellites. Also in May, we delivered with our partner, Dassault Aviation, a proposal for the first demonstrator phase of FCAS, the Future Combat Air System. Lastly, together with our partners, again, Dassault and Leonardo, we submitted a proposal to OCCAR for the initial launch contract for the Eurodrone. Overall, we continue to see good prospects, in particular in the military aircraft business, but the exact timing of contract awards is difficult to predict. Now, Dominik will take you through our financial performance. Dominik, I hand over to you.
Thank you, Guillaume. Revenues in the first half of the year grew to about EUR 31 billion, up 24% year-on-year, mainly driven by more deliveries in commercial aircraft, as well as a favorable foreign exchange impact. On EBIT Adjusted, as a reminder, in 2019, we expect an approximately 15% increase in EBIT Adjusted on a full year basis, supported by the single-aisle ramp-up and progress on A350 performance. Where are we at H1? Our EBIT Adjusted more than doubled year-on-year to about EUR 2.5 billion, mainly driven by the performance in commercial aircraft. The A320 ramp-up and neo premium, further progress on the A350 financial performance, and a 4% improvement in Forex in the quarter drove that jump in profitability. We also continue to ramp up our investment in innovation and digitalization, which will accelerate in the second half.
Our EPS adjusted strongly increased to EUR 2.25 per share, using an average of 776.3 million shares. Moving to free cash flow, our H1 free cash flow before M&A and customer financing of about - EUR 4.0 billion reflects mainly the working capital build supporting H2 deliveries. This means we need to deliver about EUR 8 billion of free cash flow in the remaining six months, that is EUR 1 billion more than in the second half of 2018, on about the same number of deliveries. The remain to do on free cash flow is therefore challenging, and we will continue to focus on execution and cash generation. Putting all that together, we had a strong increase year-on-year. However, we still have a lot to do in the second half of the year to achieve our targets.
On to page seven and our profitability, which shows EBIT reported at around EUR 2.1 billion. The level of EBIT adjustments is a net - EUR 436 million and includes the following: a - EUR 208 million related to the prolonged suspension of defense export licenses to Saudi Arabia by the German government, of which EUR 18 million were booked in Q2 2019; a -EUR 136 million related to the A380 program cost, of which EUR 75 million booked in Q2 as part of our continuous assessment of assets recoverability and quarterly review of onerous contract provision assumptions; EUR 90 million of other costs, including compliance; and a small negative impact related to Forex and balance sheet revaluation. EPS reported includes the negative impact from finance results, mainly driven by the recognition of a loss on Forex hedges as a result of the prolonged suspension of defense export licenses.
The effective tax rate on net income is 36%, where we continue to see the impact of the aforementioned charges related to the prolonged suspension of defense export licenses, as well as the reassessment of 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 results. The resulting net income is about EUR 1.2 billion with earnings per share of EUR 1.54. Now, on to our hedging activities. By now, our hedging strategy provides significant coverage through 2021. We ramped up our hedging activities in Q2 as the euro-dollar rate was most favorable. In H1 2019, we implemented $19.6 billion of forwards at an average rate of $1.22 per euro, mainly for 2022 and 2023, while $13.1 billion of hedges matured at a rate of $1.27.
We again adjusted the intra-year phasing of our hedges to better reflect our delivery profile and rolled over about $4.1 billion of hedges in total for the year. While this impacts the quarterly distribution, the full year hedge rate is virtually unchanged. Our portfolio stands at $87.4 billion with an average hedge rate at $1.23. We remain well protected, and we will implement new hedges based on the overall foreign exchange environment in line with our policy. Now let's look at our cash evolution in the first half of 2019. Our gross cash from operations of about EUR 2.8 billion broadly reflects our EBIT Adjusted. Working capital reflects the inventory built to support the ramp up, the improved engine delivery stream and other changes in working capital, including payments to suppliers as we had already highlighted post Q1. The free cash flow also includes the dilution from the A220.
Recall the A220 cash dilution is currently still largely covered by the funding arrangement, which is recognized in cash flow from financing activities and therefore outside free cash flow. The A400M continues as well to weigh on free cash flow before M&A, albeit less so than in the prior year. In the first half, cash flow from customer financing was very limited as the appetite for commercial financing remains high. At around - EUR 0.9 billion, CapEx is broadly in line with the H1 2018 level. On a full- year basis, CapEx is still expected to be around EUR 2.7 billion. All in all, this gives us a free cash flow reported of - EUR 4.1 billion and a net cash position at the end of June of EUR 6.6 billion. The 2018 dividends of EUR 1.65 per share, or EUR 1.3 billion in total, was paid in Q2.
We also reviewed the demographic underlying assumptions of our pension obligations. This resulted in an increase in pension provisions in Q2, which reflects the global decrease in discount rates, as well as a change in our estimates for the valuation of employee benefits in Germany. As we mentioned in Q1, we still expect to continue topping up the funding level of our pensions this 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, in particular, interest rates. Our objective remains to increase the pension funding ratio to benchmark levels. Now back to Guillaume for a closer look at our businesses.
Thank you, Dominik. Now on to commercial aircraft. During H1, we delivered 389 aircraft, 86 more year-on-year. The remain to do to achieve our year-end target is 490-500 aircraft. A similar number to 2018, when we delivered 497 aircraft in H2, but we see challenges mainly from the ramp- up of the ACF in H2. On the A320 family, we delivered 294 aircraft, of which 234 neos. As I just mentioned, we have had to slow down the ACF production plan, but we will still be ramping up ACF deliveries in H2, which remains challenging. We have delivered so far more than 850 A320 family neos since entering to service with an operational reliability equivalent to the A320ceo.
Given the recent commercial success of the A321 with the ACF and the XLR, as demonstrated at the Paris Air Show, we are studying different options to increase the share of the A321 in the current A320 family production capacity. On the A220, we delivered 21 aircraft. Remember, we target 45 deliveries this year. Production will start in Mobile in Q3 this year. We also announced performance improvement on the A220 with an increase in range and max take-off weight available from 2020. Moving to the A330, we delivered 17 aircraft, of which 13 neos. We are focused on the neo ramp-up to secure our H2 deliveries. On the A330-800 , the flight test campaign is progressing as planned with type certification targeted by year-end. On the A350, we delivered 53 aircraft in H1. That's a + 33% versus H1 2018.
We are making good progress on A350 recurring cost convergence, and we are on track to reach our breakeven target for the year. Operational reliability is as high as 99.3%. On the A380, we delivered four aircraft. We are making progress on preparing the wind down of the program and securing in-service support for the next decades. While 2019 is another challenging and back-loaded year, we are on track. Now moving on to helicopters. We have stable revenues driven by program phasing and compensated by growth in services. EBIT Adjusted reflects less favorable delivery mix, partially compensated by increased contribution from the services. Now a look at the defense and space business. Revenue increase, supported by military aircraft. The EBIT Adjusted mainly reflects effort to support ongoing campaign. We have a lot left to do in H2, and we are focused on program execution across our program lines.
H1 2019 EBIT reported reflects a -EUR 208 adjustments due to the prolonged suspension of defense export licenses to Saudi Arabia by the German government, of which - EUR 18 million were booked in Q2. H1 2018 includes the net capital gain from the disposal of the Airbus Defence and Space Communications Inc business in the U.S. Now on to the A400M. We delivered seven aircraft in H1 2019, bringing the in-service fleet to 81 aircraft. As I mentioned, we signed the A400M contract amendment with OCCAR. This contract signature concludes the discussion between both sides on the so-called Global Rebaselining of the A400M program. With this contract amendment, we have agreed on a new capability development plan, a new production delivery schedule, and a new retrofit delivery schedule and new financial terms. The anticipated impact of the Global Rebaselining was reflected in our 2018 results. Thank you.
On the guidance, as the basis for its 2019 guidance, Airbus expects the world economy and air traffic to grow in line with prevailing independent forecasts, which assume no major disruptions. Of course, we're paying particular attention to Brexit and the growing trade tensions. Airbus 2019 earnings and free cash flow guidance is before M&A. Airbus targets 880 to 890 commercial aircraft deliveries in 2019. On that basis, Airbus expects to deliver an increase in EBIT Adjusted of approximately + 15% compared to 2018, and free cash flow before M&A and customer financing of approximately EUR 4 billion. Now a few words on our key priorities to wrap up. I hope that based on what you heard from us today, it's apparent that management and all our teams are focused on delivering our 2019 objectives. We have a lot to do with concrete plans to get there.
We've done it before, but it's a greater challenge this time with the ATF in front of us. The focus is clearly on the A320 family ramp-up, and we are studying further rate increases, beyond 2021. On the A350, rate 10 is stabilized, and we are continuing our journey to our cost convergence. We're focusing on program execution across the business. On the A330, we are focused on the neo ramp-up. We are continuing A220 integration with focus on commercial momentum, production ramp-up, and cost reduction. In defense and space, the key priority remains on the A400M program execution and securing exports. In helicopters, the focus is on improving competitiveness for pursuing transformation efforts. Our services priorities are to expand current businesses worldwide, explore new services, and expand Skywise and the customer base.
Finally, in digital and innovation, we have long-term ambitions in leveraging digital and accelerating innovation within Airbus. We are progressing step by step and deploying solutions on current and incremental developments as well as new platforms. Now, let's turn to your questions. Thank you for your attention.
Thank you very much. We will now begin our question- and- answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question.
Start our Q&A time.
Yes. We've received the first question. It is from Doug Harned of Bernstein. Your line is now open. Please go ahead.
Thank you and good morning. Two questions. First, on the A321neo ACF, can you talk about the supply chain and the timeline over which you expect to be able to resolve the issues around delivery delays there? Second question also on the neo. You said that you're going to look in H2 to make a decision on single-aisle rate increases above 63 a month. Can you talk about what's involved in that? Are engines the major decision point there? When do you expect to finish up A320ceo deliveries?
Thank you for the questions. I'll try to answer as best as I can, putting in perspective different topics which are different but connected. The first one is the ramp-up. We are in a ramp-up in numbers for the A320 family. In this overall ramp-up, we have a specific so-called Airbus Cabin Flex, which is the new configuration of the A321 that supports as well the LR. The ramp-up of the ACF is very complex and this is where we have our challenges and difficulties. That's one topic. The ramp-up is mainly on H2. That's the challenge of H2. The second topic, which is the mix. We see more and more of the bookings coming from the A 321, where historically, it was dominated largely by A320 and not A321.
We need to be able to increase the mix of A321s, more A321s in the overall A320 volume. When we come to that volume, we are limited by a number of bottlenecks in the ramp- up, especially coming from the supply chain. We have made a supply chain assessment last year that led to the rate that you know, which basically says we go up to rate 63 by mid of 2021. For the moment then, we are stable beyond 2021 at rate 63. We are conducting, again this year, another assessment of the supply chain to see what we can do beyond 2021 to support the very strong demand we see on this family of products. Where are the bottlenecks?
Well, there's a number of small bottlenecks here and there on the suppliers, but the most challenging one last year was the feedback from the engine manufacturers that clearly expressed the fact that they were not ready to commit and to ramp up beyond 2021 to volumes that are consistent with 60. I hope I'm clear with the different perspectives on the A320 family. Now, there was a question on when we will end up the production of the ceos. Dominik?
While I cannot precisely answer the question, I think I can give you useful hints what that means. We have delivered 60 A320ceos, which is only 20% of the single-aisle seat in the first half, so it was already a very small share of it. In the backlog, there's only about 2% or a little bit more than 100 aircraft left. If you think about us kind of delivering 60 in half a year, and there is only 100 left, it means that they will be kind of through very soon.
If I can, on the engine, when you're talking with the engine manufacturers, have you seen progress there in terms of their ability to think about going up to rates beyond the 63?
We've seen some progress. Not at the speed we would like.
Okay. Thank you.
Next question, please.
Thank you. We've received another question. It is from Ben Heelan of Bank of America Merrill Lynch. Your line is now open. Please go ahead.
Morning, everyone. Thank you for taking my questions. I wanted to ask first on the guidance, because you've obviously had a very strong start to the year. You've done almost EUR 1.4 billion of EBIT improvement in the first half of the year. The guidance implies a little bit less than 900 aircrafts. I wanted to understand why the guidance is being kept and why it implies quite a dramatic reduction in the second half. Thank you.
Maybe I answer that. First of all, just putting the guidance into context. If you compare it to last year, yes, there was an increase, we need a significant increase in the full- year guidance. On the remain to do, if you take the second half of last year and would add that to the current EBIT, you would get to, I think, EUR 7.2 billion or something. The question is, of course, what is the exact impact on different factors in the calculation? There is always the imponderability to the aircraft delivery. You see, we said 880 to 890 aircrafts. 10 aircraft make a difference, of course, on EBIT. It's a low double-digit number, and it's a kind of mid double-digit number for free cash flow.
These two sensitivities kind of provide the caution in our guidance, because depending on where exactly we want to end up here, it will be a different impact. T he impact is, of course, much stronger in terms of the sensitivity to the free cash flow than it is to the EBIT. This is also why we highlighted that the free cash flow guidance is actually more challenging.
If I could just follow up on that. My understanding was that we should expect further progress on the A350 in the second half of the year. We could still have some mixed benefits on the A320s and a little bit more pricing tailwind in the third quarter. EUR 500 kind of reversal in the second half of the year just seems like a very significant number on the EBIT side of things. I understand on the cash flow side of things. I just wanted to understand, is there anything I've missed that I should be thinking about when considering why we could see this reversal of EBIT in the second half of the year?
Maybe we should highlight still the kind of ramp cost for ACF, as already we talked about, this is a burden on the second half still. There's also a little bit of a front-end loading in the improvement we achieved on A350 profitability improvement. The first half was quite successful. There is still some A220 dilution coming. A220 is ramping, as was discussed. In general, I have to confess, yes, we are certainly more comfortable in terms of the EBIT guidance than on the free cash flow, precisely of the reason I gave before, which is the sensitivity to any changes in delivery.
T hat's great. Thank you very much.
Thank you. The next question is from Céline Fornaro of UBS. Your line is now open. Please go ahead.
Yes. Good morning, everyone. Thank you for taking my question. My question would actually be on the free cash flow bridge to the year. Basically, as you highlighted, Dominik, you have less volume benefit in the second half. You potentially have a tailwind from the A350, because maybe you have some inventories that you're releasing, and similarly on A380. I was wondering if you could help us framing how you get to this EUR 8 billion, which last year were very challenging when you have a headwind from prepayments, as you've highlighted as well at the Paris Air Show. My second point would be on the pension contribution. Just trying to understand, at the moment, the pension underfunding seems to be 60% funded. Maybe you need to be at least at 70%, which would mean another EUR 1 billion of top-up on pension. Is that a reasonable assumption?
Thank you.
On the free cash flow bridge, putting it into context as you've done with last year. Last year, we had to generate about EUR 7 billion in the second half. This year it's EUR 8 billion, and this makes it indeed more challenging. The exact timing of the PDP net flows is not so transparent for the second half year. This is not the big moving part. I think it was very much affecting also the first half of the year already. It's really what you already alluded to, which is inventories. Also there is a little bit of a better structure in the business because we have more higher cash flow product. When we get the payment upon delivery, while the margin impact might not be so big between A320s, A321s and ACFs, on the delivery payment, of course, it's significant.
Really working on the working capital, making sure that we ship all these aircraft is the key imponderability. There we have the full focus of delivering that, because any aircraft that is slipping into the first quarter is a mid-double-digit million loss if it's a single-aisle, and you know that the challenge is on single-aisle. Basically, it's the same topic we've been working on last year. On the pension topic, you will find some disclosure on page 17 of our short notes, what has been happening there. There is a big impact from interest rates falling further, and then there were some secondary effects that the interest rates, as they fell so low. Recall that the bond is now below zero on a 10-year basis. The behavior of our employees is actually affected by that.
They choose certain options which are actually, I'd say, more painful to us, and we reflected that in a more granular analysis of the pension. Now, if you kind of gross it up, you see that the pension DBO, the DBO itself, is about EUR 20 billion actually, because what you see on the balance sheet is only the net of the assets and the pension liability, and you can, of course, make the math what funding ratio we have. It means that there is actually more to do than just EUR 1 billion or so. The timing is the key question. As we are underfunded, we are not hedged against interest rates. We cannot be, because there is no assets to cover all the liabilities. That means if and when interest rates at some point in time improve, we'll also see the pension deficit reduce.
From that perspective, we'll very gradually look at this, and we stick to the statement we made, that we're not going to fund at the tune of last year, which was EUR 2.5 billion. That's at a significantly lower rate. Observe over the coming years, how do we play the catch-up, so to speak.
Thank you very much.
Thank you, Céline .
Thank you. The next question is from David Perry of JP Morgan. Please go ahead. Your line is now open.
Good morning, gentlemen. Can I ask two questions? The first one, just can you comment on Brexit? I think Guillaume made a comment this morning to the press saying Airbus is prepared. Could you add a bit of color to that? What potential EBIT or cash impact you might see? What contingency planning you're doing if we have the harder Brexit? Secondly, Dominik, if I can just follow up on pension. You said less than EUR 2.5 billion, but there's a big range, I guess, between EUR 0 and EUR 2.5 billion. If you could give us a bit more color on your thinking, that would be helpful. Thank you.
Maybe Dominik start with the pension, then I take Brexit.
Yes. It's really kind of in that range. I don't want to be more precise than that because it's not really decided yet. We are also contemplating really making sure that we work with the social partners on these topics. Funding will be one part of that discussion, and I don't want to kind of jump the gun there, so to speak, on that one. I would guess that from a valuation point of view, long-term, it should not make a difference because it's a financial liability we have to deduct, and if and when we fund it, is a secondary effect, so to speak. Bear with us, we will provide more clarity by the end of the year.
Okay. Thank you.
On Brexit, well, we had to be as prepared as we could by end of March because the no-deal Brexit scenario was a scenario on the table. Now it's much more likely that it will look like a no-deal Brexit by end of October. We are preparing again. It's not a fully bulletproof way of preparing, as there is uncertainty with a no-deal Brexit. This is what we highlighted many times. The no-deal Brexit being more likely, we see by far more willingness from the governments to prepare for this scenario, which basically means for us, the ability to move parts. For the other risk or problems of the Brexit, we think we have done the appropriate preparation with our supply chain, but the most risky part is the logistics basically, and the so-called friction at the border.
Anyway, it's now very likely that it will not impact 2019, and it's more a risk for the beginning of 2020. Still, we are working hard to first protect ourselves with inventory, sort of a month of inventory for the majority of our suppliers and parts, not all of them, and working with governments to get clarity on how the customs and the logistics will work in case of a no-deal Brexit.
Thank you for that.
Thank you. The next question is from Tristan Sanson of Exane BNP Paribas. Your line is open. Please go ahead.
Good morning, gentlemen. Tristan from Exane. The first question is on the A321 ACF, please. Could you give us a few data points or KPIs to help us quantify the progress you're making on it, like the number of head-of-version you dealt with in Q1, Q2, and how many you want to deliver in H2 or maybe the assembly lead times? Anything that can give granularity to improvement in the industrialization of the aircraft would be useful. Second is a simple question on the A380. The termination charge assumption that you made in Q2, is that full and final, or is it subject to potential further revisions, in Q3 and Q4? Thank you.
Well, on ACF, we started the deliveries last year. We are ramping up in 2019. We had a few tenths of airplane in H1. It has to be significantly more in H2. We are late, or we will be late in H2 compared to the commitments we have made to our customers. It's still a very steep ramp-up that we have in our plans, which means we have had to change a bit the mix to be able to deliver more A320s or non-ACF A321s, given the difficulties we have on increasing the ACF. It's a lot of header versions as we are at the beginning of the life of this product, and each time we have a new customer, we deliver a new airline, and you see a press release of a first delivery to an airline, it means it's a header version.
As you have seen so far, we have a lot of them. On the A380, maybe you take the question, Dominik?
Sure. On A380, recall that we still have the social charges out there, which have not been accrued yet because there is no agreement with the social partners on that yet. I would anticipate that the amount you have seen in the last two quarters will probably trend down more. I don't want to rule out that it's all over. It's a massive supply chain behind that, where there's a lot of negotiations ongoing with different stakeholders, and we have to quantify them every quarter. I'm anticipating a certain kind of moderation of that type of issue going forward to maybe a low double-digit million, if anything. The big chunk still out there is the social charges, and then, of course, we will do another very thorough review in the context of a fiscal year-end to assess. Still a little bit of a moving part here.
Thank you very much.
Thank you. The next question is from Olivier Brochet from Credit Suisse. Your line is now open. Go ahead.
Good morning, Guillaume, Dominik, Thorsten. I wanted to go into the practical consequences from the WTO tariffs if they are applied, please. Based on the conversations that you have with airlines and lessors, do you expect that they could actually refuse to take deliveries, or are they thinking of differing orders? I would like to go back one second on the ACF to understand practically what exactly is wrong at the moment. Where are you making progress and where are your main risks from a very practical point of view, please?
On WTO, I think it's, of course, still in the move, and our key focus is not so much— We have all the data and all the spreadsheets about which aircraft is going where to be prepared if and when it comes, of course, our key focus for the time being is on trying everything we can to convince the stakeholders that it's not a good idea and to avert the situation. Just want to reemphasize that we are also doing everything we can to make sure that the aircraft we can deliver to our U.S. customers will be there, because this is a key priority to make sure they understand that we are fully committed to them. What happens if these tariffs come is hard to predict because, first of all, it will depend on the percentage applied.
If it is a significant percentage, you can assume that it's uneconomical for our customers to pay the tariffs. I say to pay the tariffs because for aircraft to deliver from the E.U. into the United States, that would basically be the consequence because our customers would then be asked to pay that. What they are then going to do is, of course, their privilege to decide. It's not up on us to have a view on that. This is also why we cannot be more precise on a scenario here because we don't want to speculate on what our customers are doing in such a scenario. There is also a topic with Mobile. In Mobile, we send kits, and we send them there, and if from there we deliver them to U.S. customers, there is also some tax issues.
Everything is still in the makings and hard to predict. This is why we want to not speculate on the precise amount for the time being.
The if and when and what and how is still very unclear. That's why we can't speculate, just try to prevent this from happening, obviously. On the ACF, well, there's a lot happening, and we are making progress. The thing is, it's been very successful from a commercial standpoint. The industrial ramp-up of the ACF proves to be more difficult than what we had anticipated. It's the speed of ramping up the ACF, which is slower than what we had in the plan, and this is what we've had to adjust. The complexity comes from the complexity of the plane itself. It's a very performing plane, more flexible in the way you decide to install the cabin. There's more capacity for more configurations. You can put more seats, basically, in a A321 with the ACF configuration. It's very competitive as a plane.
It's challenging as an industrial ramp-up. You know that we had our issues in 2018 that took a lot of energy focus to solve the consequences of the engine crisis we had beginning and middle of last year. Therefore, overall, I think we have lost time in preparing for ACF. I am convinced that this remains, and this is a great plane when we deliver it. It's a matter of speed to get there, basically.
Thank you.
Thank you. The next question is from Andrew Gollan of Berenberg. Please, your line is now open.
Oh, hi. Thanks for taking my questions. I'll just switch to defense for a moment, if I may. The performance in defense was slightly below expectations, I would say, at the margin level. I think you mentioned in your prepared remarks, just a fairly low detail comment reflecting efforts to support ongoing campaigns. Can you just expand on exactly what that means, please? Then looking longer term in defense, legacy programs, A400M, it's all stabilizing quite nicely now. Where is your optimism in the future in terms of growth? What might be the ambition in five years? We have the A400M still going through at zero margin. Where do we get margin expansion? Just some comments around that division.
Maybe I comment on the kind of margin impact that you have highlighted, and then Guillaume will comment on the strategic long-term outlook. This is a big impact because we're currently really driving massively certain campaigns and the most prominent ones are, of course, FCAS and Eurodrone. These are really huge projects which require a lot of resources in the bidding process. This is the key driver here.
Which paves the floor for the long-term answer. We are a bit at a turning point, where we have historical programs behind us, and we sell those programs, those products, those solutions as well to export. We are at a turning point because we see those new major programs arriving. Eurodrone, FCAS are two of them. You've seen probably as well the ambitions in space, in defense, and this is also a turning point. We are actively working on a large number of new programs or new projects, and this is expensive. Now, that's what make me optimistic for the future in defense as Europe overall is ramping up its ambition, its budget. We see now very specific projects popping up. We are involved in those major projects, and that's the future of what we are contemplating.
We need to take the lessons from the difficulties we've had in the previous projects. This is what we are doing. I believe in the growth of defense business, but it's going to take time to materialize. On export, there's a lot going on. As I said in my introductory notes, the timing is more difficult to predict. Hope it answers your question.
That's great. Thank you very much.
Next question, please.
Thank you. The next question is from Harry Breach of MainFirst. Your line is open, please go ahead.
Good morning, Guillaume, Dominik, and Thorsten. Just a couple of questions if I can. Firstly, can you give us a little bit of commentary about the commercial aircraft sales environment, and particularly if you're seeing any pricing behavior changes from Boeing, perhaps in response to its recent issues? Second question, completely different. Just when we look at A330neo, are we seeing the engine OEM delivering on schedule there to final assembly? Any remaining issues there or is that now completely resolved?
On the commercial aircraft side, as I said, we see a strong demand for our product, and the demand for the single-aisle, in particular, is very strong and very solid, and looks very sustainable with the new variants being very successful. That's a key point. It was the case before the events of our competitor, beginning of 2019. We think the XLR is adding to the portfolio of competitive products we are offering with an entry into the middle of the market for the A320 family. We are now fully booked till 2024. That's some of the limiting factor. That's why we are looking at more capacity for the A321 on the one end, and we're conducting this supply chain assessment as we speak to see if we can increase, beyond 2021, the overall volume of the A320 family.
That's what I would like to say. The rest and the reaction of the airlines and of the industry to the MAX issues is something we see in the press, and you can see in the press as well. On the A330neo, we've been impacted in 2018 by the Trent delays, the Rolls-Royce engine delays in entering to service, mainly production issues on the Rolls-Royce side. We're humping up our deliveries. As you have seen, we've delivered more neos than ceos in the first half. It will be the case as well, in the full year of 2019. It's the year of what I call the crossover from ceo to neo on the A330. It was the case last year on the A320, and it's obviously a lot of complexity and challenges. We are getting the engines to support this objective in 2019.
It should be okay from an engine perspective for 2019. The challenges are obviously on getting the planes to the delivery center and having them accepted by customers. All of these are, or most of them are planes of a new type with a new customer, so it takes a bit of time. It looks good for the A330neo by year-end, and with the engines as well.
Thank you very much.
Thank you. The next question is from Robert Stallard of Vertical Research. Please unmute your line if you're listening.
Thanks so much. Good morning. Couple of quick questions. First of all, Guillaume, you mentioned the widebody pricing environment as being competitive. I was wondering if you could comment on what you are doing in response to this situation. Are you essentially matching your competitor on price, or are you prepared to walk away from some deals? Secondly, on the investment in digitization, I was wondering if maybe you could put some numbers around what the R&D or CapEx implications could be from this shift. Thank you.
Two important topics. On the widebodies, well, the first thing we've done is to size the production capacity at the level we think we can sustain, without adding to more capacities and being forced into price war where we don't want to go. There's no one size fits all to your question. It's on a case by case. We want to compete. We think we have a better product. There are some times where we go to what we think is appropriate, and we don't go further. We've had successes so far in 2019, including at the Paris Air Show and more recently with Air China. We think that's the right thing to do. We are still in the market, and when there is price pressure and some volume approach by the main competitor, it defines the market condition. Digitalization.
We have several initiatives, but we have two main projects ongoing. One is on Skywise, and the other one is what we call DDMS, which is basically putting 3D across the board for the product, which we have already the production system. That's quite new in aerospace to have the product and production systems in one set of data and going to the support and services. An end-to-end approach to the data. That's very structuring. That's a big change in that industry where we have the largest and most sophisticated product from the Industrial Revolution, I would say. It's triple-digit numbers, what we are investing in digital, but basically there's not a clear frontier between what is digital and what's not.
I think what is relevant for Airbus today is what we do in R&D and CapEx, I think this has been commented several times, maybe Dominik, if you want to comment on R&D and CapEx, it's included in our numbers, I would say.
I mean, the number we've given is that we have about a EUR 0.5 billion ticket for CTO, DTO earmarked here, and this will be a little bit back-end loaded than this year.
That's great. Thank you very much.
Thank you. The next question is from Jeremy Bragg of Redburn. Please go ahead, your line is now open.
Morning, guys. Two questions from me. One is on ACF again, sorry for that. Y ou say you're considering options to increase production, and I wanted to ask you to elaborate on that. I also kind of wanted to explore what the margin impact of these problems have been, because I would venture that these aircraft are making a lower margin now than they should ultimately be because of the problem. Should we expect a step up in A321 margins next year? It's obviously important because it's a large percentage of deliveries. The second comment really is on demand environment. I know Harry asked and a couple of other people, but we've seen traffic growth slow from seven basically to something with a four on the front. I just want to ask, at what point do you start to get worried?
Are you seeing any signs of any kind of softness in demand for your products, please? Thank you.
I let Dominik comment on the margin of the ACF. I try to answer the two questions together. Basically, from an Airbus perspective, we continue to see a very strong demand for the single-aisle aircraft. We are limited by our capacity to produce and by the fact that we are fully booked till 2024 and having a significant share of the backlog already sold for 2025 onwards. That's why we need to ramp up, and it's mainly an additional demand coming from the A321. We are really focusing on the A321 on one side, as I explained with this supply chain assessment on the overall volume. What are the options to ramp up on the A321? You know that 2022 onwards, all A321s will be ACF, at the end it's the same. There are different possibilities. What is the situation today?
Our four lines in Hamburg are A320, A321 lines. The four lines are capable of the A321, this is where we do the ramp-up today. We delivered a handful of A321s from Mobile in H1, it's not really contributing to the size of the answer we need. The lines which are in Toulouse are A320s, the line in Tianjin is an A319, A320 as well. It just explains the possibilities. We're suffering in the ramp-up of ACF in Hamburg. There are probably possibilities to do better in Hamburg, but there are other possibilities, and we are looking at all possibilities within the frame of the existing production system, within the frame of the existing site, because we would like to be fast. Now we have just started the study, and it will be premature to come to conclusions. We are not yet there.
Coming to the ACF margin discussion, I would not overestimate that. I don't want to quantify it, but the big thing is not the efforts, which we call continuous support to really ramp. The impact is more on the cash side. It's on the inventory side, because the cycle times are too long. We want to bring that down and improve on the inventories. Céline mentioned this topic about the prepayment flows, and there the inventories give some counterbalance, so to speak. Then also, of course, the deliveries are much more sensitive. The real sensitivity is not so much on the efforts we make to ramp, it's really on the deliveries themselves.
Great. Thank you.
Thank you.
Thank you. The last question is from Christophe Menard of Kepler Cheuvreux. Please go ahead, your line is now open.
Good morning to you and to the team. Two questions on my side. The first one is actually on the free cash flow. Just wanted to have a better understanding of the phasing in H1. Did you have excessive impact from A400M in H1 versus a more spread out impact last year, in H1 and H2? Can you quantify, if possible, the impact of the inventory linked to Brexit? Just to understand that phasing on the free cash. Second question is going back to defense and space, actually, the margin. Is space margin also under pressure? We've seen some of your competitors having some difficulties. I mean, the market is difficult. Are you seeing some downward pressure on your margin? We've seen that you won quite a number of contracts, but was it at the detriment of the margin? Any indication would be helpful.
On the phasing of the free cash flow, you've seen that not much happened basically in Q2. There was a very negative number in Q1. I think it's not so dissimilar to last year. On A400M, I think there's a little bit of a front-end loaded profile on cash out, but I don't want to go into more details there. There's less to come definitely in the second half. Brexit inventories, I've mentioned there's one month of buffer stock, but I cannot precisely quantify that. If we are really able to release that already by the end of the year, I'm not so sure either because it really depends on how the Brexit will come along.
Margin on defence and space, yes, obviously the market is highly competitive, but I don't want to now project there is a kind of secular trend to margin erosion in that sector. I think that would not be warranted based on what we see so far.
Inventories and stock for the Brexit, a very significant share of it is with our suppliers. Their commitment is to be able to deliver to us. In that uncertain environment of a no-deal Brexit, we have asked them to prepare to be able to deliver in spite of a degraded environment. Therefore the majority is on their side.
Thank you very much.
This was the last question. This closes our conference call for this time. If you have any further questions, please send an email to Mohamed, Nicolas, or myself, and we will get back to you as soon as possible. Thank you, and I look forward to speaking to you again soon.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.