Ladies and gentlemen, thank you for standing by. Welcome to the Airbus Q1 2019 results release conference call. I am Aurelia, 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 hosts, Guillaume Faury, Dominik Asam, Julie Kitcher, and Thorsten Fischer.
Thank you, Aurelia. Good morning, ladies and gentlemen. This is the Airbus Q1 2019 results release conference call. Guillaume Faury, our CEO, and Dominik Asam, our CFO, will be presenting our results and answering your questions. As you may have heard, after 11 years in investor relations, I've transitioned to a new role. It has been an absolute pleasure working with you, and I would like to thank you for the high-quality, engaging, and challenging exchanges over the years. Now it's my pleasure to introduce the new Head of Investor Relations and Financial Communication, Thorsten Fischer, who many of you already know. I'm confident that Thorsten and the team will do an outstanding job to serve you under Dominik's leadership. Thorsten, now I hand over to you, and I wish you all the very best in your new role.
Thank you very much, Julie, and congratulations to you in your role. Good morning, ladies and gentlemen. I'm happy to be back in investor relations. Some of you I know already, and for those I haven't met, I look forward meeting you soon. Now, on to Q1. This call is planned to last around one hour. 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, but 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 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, Guillaume, we open with you.
Thank you, Thorsten. Thank you, Julie. Good morning, ladies and gentlemen, and welcome to our Q1 2019 results call. Very happy to be here with you today. Dominik and I are pleased to be in our new roles. Dominik has been here since the beginning of the month, bringing with him a finance, engineering, and international background to serve and to help Airbus. We have been working closely together now during the last few weeks and are looking forward to exchanging with you today. Our goal is to better serve our customers, increase the Airbus competitiveness, and grow Airbus in a sustainable way. To achieve this, we are building on the benefits of the integration and the work that we started years ago under Tom's leadership. We will put customers at the heart of our work and our decision-making.
We are leveraging the digital revolution and the technologies, including in overhauling our industrial systems. We see our duty to strengthen our environmental performance and step up our efforts as Airbus in responsibility and sustainability. Now, let us go through some Q1 highlights. In Q1, we have observed a more competitive and volatile environment. All in all, the commercial aircraft environment remains robust. The airline traffic growth continues in 2019 with +5.3% passenger traffic increase and load factors at around 80% in March. The airline's forecasted profitability is expected to surpass the EUR 30 billion mark again in 2019. Long term, our industry fundamentals remain solid, with passenger traffic expected to be doubling every 15 years. On the financial side for Airbus, we saw the A320 ramp-up coming through. Our results mainly reflect this ramp-up and the 2019 delivery phasing.
As I presented during the 2018 results, we target to deliver 880 to 890 aircraft in 2019. On that basis, we maintain our 2019 guidance. The new management team in place, and myself, are now fully focused on our targets. Now, let us take a closer look at the Q1 2019, starting with commercial aircraft. In Q1, the market situation was complex, with some specific customer issues in terms of airline transformation, including fleet restructuring and some financial issues to be managed. In Airbus, we booked 62 gross orders, including 38 A350s. The Q1 net orders of -58 after cancellations mainly reflect the winding down of the A380 and the commercial agreement with Etihad. At the end of March, our backlog was 7,357 aircraft.
It does not reflect the latest wide-body agreement with Emirates yet. After years of record orders and backlog, in the current market environment, our focus is on deliveries and execution. Achieving a similar level of bookings as last year is a good ambition. On the A220, there are now 65 aircraft in operation, and we continue to see customer interest following our latest demo tour in March. On the A320 family, our backlog of more than 5,900 aircraft supports our ramp-up plans to rate 60 by mid-year and beyond, as we target rate 63 in 2021. Regarding the A330, we are progressing with our engine partner and suppliers and target 50 deliveries this year. On the A350, Lufthansa increased their fleet by an additional 20-900 aircraft, bringing their total order to 45 aircraft. Also in March, STARLUX Airlines became a customer with an order for 17 A350, including 12-1000s.
On services, the Skywise customer base now includes more than 60 airlines, representing more than 5,000 aircraft, and we expect the number of customers to continue to grow. On to helicopters. The civil and parapublic market remains soft. We continue to see good momentum in military with solid prospects. We booked 66 net orders in Q1, including 20 Super Pumas, of which 16 for Hungary. The H145 saw another strong commercial momentum with 16 orders, and we also launched an enhanced version of the product with a five-bladed rotor. In our defense and space business, we had an order intake of EUR 1.1 billion. We continue to see good prospects, but the exact timing of contract awards is, as always, difficult to predict. Mid- to long-term market perspectives are positive, particularly in military aircraft with the Eurofighter and the FCAS, and in unmanned aerial systems.
The FCAS project passed an important milestone in Q1 with the launch of the so-called concept study. Spain committed to become an active FCAS nation, which is an encouraging sign for future European cooperation. In space, the first satellites were successfully launched by OneWeb, an important milestone to build the largest satellite constellation in the world. We also received the authorization to proceed with the third European service module for the Orion program. Now Dominik will take you through our financial performance. Dominik, I hand over to you.
Thank you, Guillaume, for the kind introduction, and good morning, ladies and gentlemen. It's my pleasure to speak with you for the first time as Airbus CFO, and I look forward to meeting as many of you as I can over the coming months. I'm delighted to join Guillaume and the rest of the management team, and to actively contribute to the continued success of Airbus around the globe. I'll walk you through our Q1 financial performance in a bit more detail. On revenues, Q1 was at EUR 12.5 billion, which mainly reflects higher deliveries in commercial aircraft as we continue to ramp up. Revenues also include the A220, which has been consolidated into Airbus since July 1st, 2018.
On EBIT adjusted, let me remind you that in 2019, we expect an approximately 15% increase on a full fiscal year basis, supported by single-aisle ramp-up and progress on A350 margins. Where are we in Q1? Our Q1 EBIT adjusted was about half billion EUR, a strong improvement year-on-year. It mainly reflects A320 ramp-up and NEO premium, as well as further progress on A350 financial performance. At Airbus Helicopters, we see higher contribution from support and services, and in defense and space, we see stable performance. We also continue to invest in innovation to prepare for the digital transformation of the company, modernize the production system, and expand our digital services offering. Our EPS adjusted strongly increased to EUR 0.47 per share, using an average of 775.7 million shares.
Moving to free cash flow, our Q1 free cash flow before M&A and customer financing of around minus EUR 4.3 billion mainly reflects inventory increases and other changes in working capital. We understand the cash flow is consistent with the delivery phasing as we've seen in years before, but are not satisfied with the current intra-year volatility. This will be a key focus area for us going forward. Now on to page seven and our profitability, which shows EBIT reported of around EUR 200 million.
The level of EBIT adjustments is a net negative of EUR 368 million and includes the following elements: A negative EUR 190 million as a consequence of the prolonged suspension of defense export licenses to Saudi Arabia by the German government, a negative impact from FX and balance sheet revaluation, minus EUR 61 million related to the A380 program cost, and minus EUR 34 million of other costs, including compliance. EPS reported includes a financial loss of EUR 107 million on FX hedges for the contract affected by the prolonged suspension of defense export licenses. The effective tax rate on net income is 68%, as no deferred tax assets could be recognized on any charges related to the prolonged suspension of defense export licenses. The tax rate on the 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 about EUR 40 million, with EPS of EUR 0.05 per share. Now on to our hedging activities. Our hedging strategy provides significant coverage through 2021. In Q1 2019, we implemented $6.7 billion of forwards at an average exchange rate of $1.24 per euro, mainly for 2021, 2022, and 2023. While $6.3 million of hedges matured at a rate of $132. We also adjusted the intra-year phasing of our hedges to better reflect our delivery profile and rolled over $3.3 billion of hedges in total for the year. Whilst this impacts the quarterly distribution, the full-year hedge rate is virtually unchanged. Our portfolio stands at $81.8 billion, with an average hedge rate of $1.23 per euro.
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 Q1 2019. Let me start with a short comment on IFRS 16. On January 1st, 2019, we adopted IFRS 16 leases. Most operating leases must now be recorded on the balance sheet, and the corresponding commitments are booked as financing liabilities. As these, by definition, are part of net cash, our net cash position was reduced by around EUR 1.4 billion because of first-time adoption of the new standard. Now on to the gross cash flow from operations, which was EUR 0.7 billion. Working capital reflects the inventory build to support the ramp-up, the improved engine delivery stream, and other changes in working capital, including payments to suppliers. The A400M continues to weigh on our free cash flow before M&A.
In Q1 2019, cash flow from aircraft financing was very limited. The appetite for commercial financing remains high. At around half a billion EUR, CapEx was slightly above the Q1 2018 level. On a full-year basis, CapEx should be around EUR 2.7 billion. A220 impact on free cash flow was limited. All in all, this gives us a free cash flow reported of around minus EUR 4.4 billion and a net cash position at the end of March of around EUR 7.5 billion. The dividend for 2018 of EUR 1.65 per share was approved at the AGM and was paid earlier this month, resulting in a cash-out of about EUR 1.3 billion. Furthermore, we expect to continue topping up the funding level of our pensions this year, albeit at lower levels than last year. Now back to Guillaume for a closer look at our businesses.
Thank you, Dominik. Now on to commercial aircraft. In Q1, we delivered 162 aircraft to our customers, to 59 customers, which is a significant increase year-on-year. On the A220, we delivered eight aircraft in the quarter, and we plan to deliver around 45 aircraft this year. Moving to the A320 family, we delivered 126 aircraft, of which 96 NEOs. The Airbus Cabin Flex ramp-up continued in Q1 but remains challenging. We are working to improve execution in our internal industrial systems and monitor engine performance. Overall, we are on track to reach the 60 aircraft per month by mid-year, and we are preparing for rate 63 in 2021. Now to the A330. We delivered five aircraft in Q1, including three NEOs. NEO deliveries continue to ramp up, and we are working closely with our engine partner and suppliers to deliver in line with customer commitments.
The Dash 900 ETOPS certification beyond 180 minutes was granted by EASA, and the flight test campaign for the Dash 800 is progressing. A350, the deliveries increased by roughly 30% year-on-year with 22 aircraft delivered in the quarter, of which, three Dash 1000s. Overall, we are stabilizing production at current rates, including the Dash 1000 ramp-up, where we continue to improve performance of the program and progress along the learning curve and the cost curve. On the A380, we delivered one aircraft to ANA, which is becoming the 15th A380 operator. Moving on to helicopters. The performance is in line with the expected trajectory for 2019. The revenues and EBIT adjusted reflect higher volume in services.
For the year, we expect some top-line support from military deliveries and support and services to offset the soft civil and parapublic market. Moving to the defense and space, revenues and EBIT adjusted reflect overall stable business performance. Q1 2018 includes the net capital gain from the disposal of Airbus DS Communications Inc. business in the U.S., and Q1 2019 EBIT reported reflects a 190 million EUR adjustment due to the prolonged suspension of defense export licenses to Saudi Arabia by the German government. This is the border security contract. Now on to the A400M. We delivered one aircraft in Q1, bringing the in-service fleet to 75 aircraft. I'd like to say that an additional two aircraft have been delivered in April. We continued with our development activities as agreed in the revised so-called capability roadmap and successfully completed certification flights for the cargo hold tanks refueling unit in Q1.
The retrofit activities are advancing in line with the customer-agreed plan, and the approval process towards the contract amendment is progressing. 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. For example, we pay particular attention to Brexit and growing trade tensions. The 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 +15.15% compared to 2018, and free cash flow before M&A and customer financing of approximately EUR 4 billion. Key priorities. Basically, no change. It is clear that we have a lot to do to deliver our guidance, and the team in place and myself are fully committed.
Our single-aisle ramp-up is coming through, and we will be at rate 60 by mid-year. We will continue to ramp up ACF deliveries, as I said earlier, but it remains challenging. The A350 is doing well and will reach breakeven this year, and we will improve margins beyond. Dominik and I will be spending time in the Defence and Space business together with Dirk, as far as Dominik and myself are concerned, to learn and with Dirk to understand and position this business to take advantage of our product portfolio and capture opportunities both in the short term and in the long term, in space or with Euromale and FCAS. More broadly, digital and innovation are key levers as we invest in our tools and industrial systems to improve the way we design, manufacture, and service our aircraft and customers.
To conclude, our goal is to better serve our customers, to increase the Airbus competitiveness, and grow Airbus in a sustainable way to deliver our earnings and cash growth potential. Now, thank you for listening, and let's turn to your questions.
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. Also, as usual, please remember to speak clearly and slowly in order to help all participants, particularly ourselves, to understand your questions. Aurelia, please go ahead and explain the procedure for the participants.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press zero one on their touchtone 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. First question is from Douglas Harned, Bernstein. Your line is now open. Please go ahead.
First question, I wanted to understand a little more on the A320neo, if you could give us a little more insight into the production challenges that you're having and engine deliveries as well, just in terms of understanding how you're going to be up at 60 per month in mid-year, how you're going to make that progression. As a second question, the A400M, the negotiations have taken quite some time, and it would be very helpful to understand more about how those are proceeding and what that means for expectations for cash flow over the next two to three years.
Okay. I'll start with the A320. First, I'd like to say that the Q1 deliveries reflect all the efforts we have made in 2018 to recover from the very difficult situation we were in in H1. You remember we had around 100 planes, plus so-called gliders without engines, parked, and we had to put them back into the production system and organize a specific way of completing the planes and delivering them to reach the 800 overall volume we had in 2018. Which basically focused a lot of resources for the 2018 Q4 deliveries, and therefore, a start, which is a bit slower than what we would have liked for Q1 2019 on the A320 family. This being said, it is a strong ramp-up and a strong improvement compared to Q1 2018. We are accelerating in 2019.
The Q2 will be stronger than Q1, on that basis, as we said before, we maintain the guidance for 880 to 890 aircraft overall in 2019. When it comes to engine deliveries, well, basically we are receiving engines on time, we have a significant engine inventory, by the way, as we have a rather slow start compared to a linear production rate in Q1. That's basically where we are, moving forward on trajectory. When it comes to A400M, well, it's a negotiation to come to the final agreement with a number of countries, with different countries. We are moving ahead. We are moving forward to come to an agreement which is targeted by mid-year. When it comes to cash flows on the A400M, Dominik?
Sure. You recall we have booked a net provision of EUR 36 million at the end of last year. I think in that communication, we also stated there's probably about EUR 1 billion of outflow still coming for the entire program, for the entire charge. Previously, in 2018, we booked EUR 1 billion. We also said that for 2019, there would be about half of that hitting our cash flow statement. This is still the case. The remainder would kind of trickle out, so to speak, over the next couple of years afterward.
Very good. Thank you.
The next question is from Robert Stallard, Vertical Research. Your line is now open. Please go ahead.
Thanks so much. Good morning. You mentioned in your commentary about the first quarter competitive environment for large aircraft being challenging. I was wondering if you could give some more color on what's going on there, whether you expect this to persist through the year.
First of all, the comment was on the market in general. We see a competitive and volatile environment. As you have seen, a couple of airlines are in difficulties or have been in difficulties, and we have had to record cancellations, and we've not been the only ones in the industry to record cancellations. This is what I was suggesting. Now, on the wide-bodies, it's been a very competitive situation with Boeing, and we expect this to continue.
Okay. Just a follow-up. Obviously, Boeing's 737 MAX is grounded at the moment. Have you seen any customers changing their conversation with you about potentially switching over to the A320?
The A320 is the A320, and the MAX is the MAX. We are having conversations with our customers, based on their current fleet, their backlog, the deliveries of the A320. As you know, we are limited by production for the next years, therefore, there's not much more I can say. We are having discussions. We see a strong demand for the A320. It was the case before the event. It continues to be the case, linked to the growth of the market in general, linked to the appetite for the A320 itself. It's a product which is very well received with the NEO, with the ACF, with the A321LR, and more. We see a good case for continuous growth and continuous performance of the A320 family in Airbus. That's what I can say.
Okay. Thank you very much.
From Celine Fornaro, UBS. Your line is now open. Please go ahead.
Yes. Good morning, gentlemen. Thanks for taking my question. My first question would be regarding this demand environment, especially for the narrow bodies, which Guillaume, you characterized as pretty active. I know you tried to test the supply chain, and you've come to the conclusion of a rate of 63 in 2021. I was wondering when you're going to run again the exercise of testing the supply chain, as some of your suppliers seem to think in February that there wasn't enough or sustained market demand out there. If you could share your thoughts on that and how quickly you could ramp up beyond the 63 compared to history, given the increased digitalization, robotization, and all these tools that you're investing in, which should bear fruit by then. Thank you.
Good morning, Celine, and thank you for the consistency of your questions. Yes, we will be running the supply chain assessments in mid of 2019 as we did mid of 2018 to understand the capacity of the supply chain to go beyond the rate 63, 2022 onwards. This being said, we have decided the rates for 2019, 2020, 2021, and communicated about it. We are not unhappy to have that situation in front of us to better distribute the deliveries in the quarters. As you see, Q1 is not as strong as the average that we should have for quarters in 2019. It's a backloaded year, and we want to use 2019, 2020, 2021 to significantly rebalance the year. It will be time to further ramp up. Moving on to your other questions. I think I addressed it. How quickly? It's fixed.
It's defined for 2019, 2020, 2021, the rates for the out years are not yet decided, it will be based on our own ability and appetite to ramp up, but as well as the capacity of the supply chain to do a reasonable ramp up. We want to focus on our ability to deliver on time, on quality to the airlines, that's basically one of the drivers moving forward.
Thank you.
The question is from Benjamin Heelan, Bank of America Merrill Lynch. Your line is now open. Please go ahead.
Yeah, morning, guys. Thank you for taking my question. I had two. You alluded to it a little bit, Guillaume, but you made up around 50% of the increase in deliveries X A220 that you're guiding for in Q1. You said that Q2 will be stronger, but how should we think about Q3 and Q4 in terms of delivery phasing this year? Then a question on how that will impact cash flow. Fairly sizable drag from inventories in Q1. Can you give us an idea on how this will phase through the year with the expected delivery profile? Assuming we can get a more stable delivery profile, how should we think about the cash flow phasing in 2020? Thank you.
Thank you. Very good questions. It's a bit work in progress, I have to say, it will be a bit difficult for Dominik, I suppose, at that stage to be specific on the 2020 cash flow profile. Basically, Q2 will be significantly stronger than Q1 in deliveries. I don't want to be specific at that stage. We will be disclosing our deliveries for April in a couple of days, it will be an indication or a confirmation that we are moving forward in the right direction. Unfortunately, it will still be a backloaded year with a guidance around 880 and 890. It's very likely that the second half of the year will be backloaded compared to the first half. This is what I can say at that stage. It was not coming as a surprise, we are executing 2019 as we expect.
We are not in the situation of 2018, where we had major supply chain issues. As you remember, a couple of weeks ago, I was a bit worried about the potential consequences of a no-deal Brexit. This is now off the table for Q1. That's good news. We don't know yet what's going to happen by end of the year, but based on today's understanding of the supply chain capacity to follow us, we should have a stronger Q2 than Q1. Cash flows, what does it mean for cash flows in 2019, Dominik?
I think the most important statement is obviously that we maintain our free cash flow guidance of EUR 4 billion, which leaves a pretty significant amount of free cash flow to be generated in the remaining nine months. I agree with that. What are the key drivers that will bring us up? The first and most important one is, of course, the deliveries, because there's a significant payment upon delivery, which will boost the free cash flow. We've also highlighted that there is quite a healthy engine situation, so we have to also make sure that we manage our working capital there. Of course, always without jeopardizing the ramp itself. There is also some positive impact looming, both on earnings and on free cash flow with regards to the hedging rates.
You've seen in the back, in the appendix, that we had a pretty high hedge ratio in Q1, that is getting much better in Q2, Q3, and Q4. We have been rolling quite some hedges, which of course has also generated some negative cash flow in the March quarter, and we will benefit then from higher cash flow.
In the outer nine months. How exactly that phases into the quarters, I think we've never commented on that, and I don't want to do that either. I think the main message is here, we have a clear view as to how we want to manage the free cash flow over the residual nine months of the year.
Great. Thank you, guys.
Thank you.
The next question is from Olivier Brochet, Credit Suisse. Your line is now open. Please go ahead.
Yes. Good morning, everyone. Olivier Brochet with Credit Suisse. I have two questions, if I may. The first one is on the export ban. Would like to understand what can change on the year on that front, if this can be reversed, and what the impact is on cash flow, please. The second question is on the A330neo, for an update on the engine situation there.
Hi, good morning, Olivier. The export ban for the moment is impacting the Saudi Arabia contract for border security. More specific on the cash flow, Dominik, what can you say?
I think there's not much we can say because obviously, now that we are kind of handcuffed because of the export ban and cannot complete the contract as planned, we have to talk to the customers and obviously we're not going to disclose details. My expectation is this is not something that will happen quickly, but will take its time.
On A330neo, after a slow start end of 2018, we are accelerating. As I said before, we expect to be delivering around 50 airplane, including the NEOs on the 330 program, in 2019, and there will be a significant acceleration of deliveries as soon as Q2.
Thank you.
Thank you.
The next question is from Tristan Sanson, Exane. Your line is now open. Please go ahead.
Yeah, good morning, Julie, Guillaume, Dominik, and welcome back to Thorsten. The first question is on the FX hedging phasing. It is a bit technical, but I would be keen to understand a bit better how the rollover of the hedges work, knowing that you rolled over EUR 3.3 billion, I think, of hedges from Q1 to later quarters. That is about a third of what you have for Q1, and you improved your achieved hedge rate. Also, you deteriorated your achieved hedge rate versus target for Q1 by EUR 0.05, which seems to be a very big impact. If you could explain the mechanics, that would help. The second is on your communication strategy now that you have a full team in place.
When do you think, Dominik, you will be able to provide visibility to the market on your midterm ambitions, or when should we expect to have a gathering with a set of midterm targets provided to the Street?
Thank you. Good morning, Tristan. I hand over directly to Dominik.
Yes.
On the technicalities of the hedge.
Of course, the Forex is something that I've looked into in my first month a lot, for Q1, I think the story is quite simple. The hedges that have been maturing in Q1, there were too many of them because there was a different planning in the phasing, and that meant we had to roll over quite some hedges. That means that the negative exchange rates were materialized through the P&L for also stuff that's coming basically now in later quarters, and that gave us the deterioration you allude to. As I also mentioned, and if you look at page 18 of our deck, you see that we're catching up on this one pretty much for the full year because the implied hedge rates are then dramatically improved to $1.23 in Q2, $1.17 in Q3, and $1.20 in Q4.
It's more a timing phasing issue as opposed to really negatively weighing on us, and that means that gives us good leg up in EBIT and also free cash flow for the remaining nine months.
Thank you, Dominik. On the second part of the question, when it comes to, I think you called it long-term EBIT guidance. I take the risk to disappoint here, at least for today. I think the building blocks are known, they're clear, we're focusing on delivering our earnings and free cash flow growth potential while preparing the foundations for the future. You saw in the discussion on the rate of the A320, for instance, that there's more to be decided at later stage. I would like to stay focused on our 2019 and short-term objectives, which are important for going along that path.
I'm sure we'll discuss that again at the year two. Thank you for your answers.
Yes. Thank you.
The next question is from Andrew Humphrey, Morgan Stanley. Your line is now open. Please go ahead.
Hello. Good morning. Thanks very much for taking my questions. I've got a couple, please, on similar subjects. The first is, I think this is the second quarter in a row that you've highlighted the A320neo premium in your press release. This is obviously an area we've been discussing for a while. Is that a sign that you're getting more confident on that?
I guess, what is the extent of the improvement we've still got ahead of us on that compared to what's already been seen? The second question is around the A321 on cabin flex. Clearly, expectations at the moment are for A321XLR to be launched at some point this year. I wonder, should we be thinking about any potential knock-on effects on future iterations of that platform?
Okay. Thank you, Andrew, for the questions. I think on the NEO premium, what we are indicating is that with the ramp-up of the NEO, we see the premium going from the backlog to the deliveries. I think this is what is meant. Maybe if you want to give more color.
No. The NEO penetration is already very high. Of course, that kind of layering in of more NEOs also is then kind of tapering off to some degree, I'd say.
Well, it's not supposed to indicate changes, but simply the fact that it's confirming the NEO premium going into the revenues and EBIT and free cash flow. When it comes to ACF, well, basically, it's the year of ramp-up in numbers for the ACF and in numbers of so-called head of versions. We have a very significant number of ACFs to deliver in the second half of the year. That's why I take the precaution to indicate that the ramp-up on this version is important. When it comes to further versions of the long range of the A321 NEO, well, this is something that we are preparing, and we will be more specific later this year, especially at the Paris Air Show. At that stage, it's not indicating other upgrades or versions of the A320 family.
It's going to be a lot on our plate with a very strong backlog, and we are Okay.
Great. That's very helpful. Thank you.
Thank you.
The next question is from Jeremy Evans, Redburn. Your line is now open. Please go ahead.
Morning, guys. Two quick questions. Firstly, one for you, Dominik. At the start of the call, you said that you weren't happy with the quarterly volatility on free cash flow. My question is, how are you going to fix that, please? What does it mean for capital allocation? Because one of the reasons that you've had to sit on such a big net cash balance sheet is because of this quarterly volatility. The second question, please, on how are you feeling about NMA, because if Boeing delay the release of it, does that take a bit of pressure off you to do A321 A321XLR or any other kind of updates on R&D in a world where that NMA comes later, please? Thank you.
I think on the free cash flow phasing, Guillaume already said that we are going to really work hard at trying to linearize more over the next couple of years, this is exactly what I refer to, that we try to really become more linear the way we've been operating so far. We had always a very tricky March quarter a very strong December quarter, I think that's what more than what this comment from Guillaume was, which I then basically wanted to reflect on the free cash flow side. Also, of course, our strong commitment to work hard in the current fiscal year to make sure we hit the EUR 4 billion target. With regards to the capital allocation, please bear with us for a little bit more.
Guillaume and I think really have to dive into the details of the balance sheet, of the risks and opportunities, to make sure that we understand it inside out before being more granular on that question.
Thank you.
Thank you, Dominik. Jeremy, on the NMA question, well, I'd like to say that we are moving forward with what we think is appropriate for the A320, A321 product, trying to anticipate and answer the customer's expectations and the market needs, we keep doing this. We have as well the A330neo with a dash 800 that is in the certification phase, the dash 900 that is now on the market. We think on the Airbus side, we have the right products to address the middle of the market, I don't see changes on that way of doing things on our side. As you know, from the Airbus perspective, we think the space for Boeing to launch an NMA is rather small, it's on them to decide if and when they launch a product and what the product looks like.
I would like to say that it's on them to decide what they want to do. On our side, we are moving forward with two strong products, that's the plan for 2019 and beyond.
Thank you.
The next question is from Christophe Ménard, Kepler Cheuvreux. Your line is now open. Please go ahead.
Yes, good morning. I have two questions. The first one is on Skywise. You continue to highlight the progress you are making on that solution, and I was wondering if it had not any positive impact you could quantify on EBIT, because Q1 EBIT was actually quite good on the Airbus commercial, and I was wondering whether there was not something material around this. Any kind of clarification would be helpful here. The second one is on the German export ban. You mentioned the border security contract. What about your Eurofighter? Do you have any issues with the supply of parts to your Eurofighter, especially in services?
Okay. Thank you, Christophe. On Skywise, basically, I said end of last year, beginning of this year, that the priority for 2019 is to continue to increase the customer base, and with the target to be around 100 airlines with us on the platform by end of this year. Q1 shows that we are on trajectory to reach or to come close to this objective, which we see then as a strong basis for developing the services and the activity around the Skywise potential. The EBIT in Q1 is not reflecting a strong and fast development of the Skywise platform and the relationship with customers. I think this is going to come much later. I indicated already that the detailed business model of the new digital services is still in the making, and we are discovering what it means moving forward and learning with the airlines.
When it comes to the ban, well, what we have in the Q1 results is linked to the border security contract. We have not given indication of any other consequences of the ban on other programs or products. I'm not aware of impact on spare parts, but maybe Dominik has a bit more.
No comment at all.
It's a recent ban. It has been extended by six months. We're working with our teams and customers to fully understand the consequences. It's obviously a headwind that we have to face. The development of this situation is not positive for us. It's something we're working on with our customers.
Thank you very much.
The next question is from Sandy Morris, Jefferies. Your line is now open. Please go ahead.
Morning, gentlemen. I'm afraid I'm going to come over as Mr Nasty. I've tried to phrase this carefully, but my feeling is that the first quarter free cash flow and the movement in inventories reflects the fact, to a degree, that we moved heaven and earth to reach our deliveries target for 2018. I know how important that was, but inventories isn't typical and shouldn't repeat. Could you add anything to that statement?
Thank you, Sandy. Basically, I don't disagree. We had a very specific situation to manage in 2018. We did everything we could at that moment to both fulfill our customers' obligations to deliver planes in spite of the deep issues we had with engines. This was very consistent with the targets we had given to ourselves in terms of aircraft deliveries, but the main priority for us was to recover a situation with airlines expecting the planes in 2018. This has come with consequences on the speed of start in 2019. Unfavorable consequences. We are in that situation. We have, again, a 2019 that is back-loaded due to that situation last year, and I think it will take two or three years to come back to a more linear and appropriate situation on the A320.
Please don't neglect the fact that last year, on top of the engine issues in Q1, it was the year of transition from the CEO to the new. It was the year of ramp-up from 50 to 60. It was the year of the introduction of the ACF, of the A321LR. We had a lot on our plate last year, and it didn't come without some consequences for the start of 2019. I don't like this situation. What you said is fair, and it's top of our priorities to have a better 2020, and targeting a 2021 that should be as linear as possible, and therefore having a free cash flow execution in the year much better than what we have in 2018 and in 2019.
That's great. Just in passing, is there anything going on from the rather dreadful events unfolding with the FAA and certification that causes you any concern that you and EASA or whoever may need to sit down and also have a think about it going forward?
It's a bit early to draw conclusions. Basically, we see that the events are creating a lot of tensions, of questions, and we see growing concerns on many topics, more scrutiny coming from all around the place. That's a fact of life we have to face. Now, what we have as an very important set of conditions in aviation, in airline industries, the alignment of the FAA and the EASA. It has been a very strong basis of our industry, and we hope that these events will not create disalignment or not create mid-term or long-term disalignment between the two main authorities in this industry. It's a concern at that stage. It's too early to draw conclusions, and we are basically more observers at the moment than anything else.
Okay. That's lovely. Thank you very much. I'll try and ask nicer questions the next time. Thank you.
Thank you.
The next question is from Harry Breach, MainFirst. Your line is now open. Please go ahead.
Good morning, everyone. Can I just ask my two questions slightly differently? Guillaume, can you give us any more sense now about what you would do differently running the firm, in terms of your priorities? Completely different topic, the regulatory investigations, I guess, have been a feature for the last three years or so. Can you give us any feeling about whether you think they're moving into a concluding phase yet? Any sort of sense you can impart to us about where we are with those and the negotiations?
Good morning, Harry. What I would do different, basically, we have a team in place now, and I think the results are team results. Basically, I gave a bit of indication of the directions I believe are important to take, in this 21st century and for the decades to come. One is the move from a product-driven company, and we have had fantastic products with a huge success on the market, to product and production systems. That's something I consider a key enabler for the continuous growth, in terms of quantity and quality of what we do, and profitability moving forward. This is going to be based on digital. Tom launched the digital initiative in Airbus very successfully.
It goes in many directions, and this will come as well with the introduction of 3D across the board and end-to-end digital, from product to production systems to support and services. This is what we call DDMS, and it's been a very strong focus of myself and will continue to be the case in the future. I believe we have growing pressures and challenges on environment and, I think environment is not nice to have. It's going to become, for this industry, a key driver of performance and sustainability. Generally speaking, I think Airbus is more than a company, and we see our role in sustainability, responsibility, and working with communities around the world, very important.
I'm very proud of the foundation, but I think we can do more, and there is more which is expected, and you cannot have a strong brand for a global business like Airbus in the future without this larger impact, and this is what we will be focusing on. I can elaborate a bit if you want, but these are some directions which I believe are important. They're not necessarily completely new, but I believe they are very important and will be working hard on those topics. Compliance. Basically, always a bit difficult for us to comment. We are not in charge. Investigations are ongoing. We are fully cooperating. I'd like to say it's making progress, but I cannot say much more, because I don't know when things will come to an end.
I don't know what will be the conclusions, therefore, there's not much more I can say than what we have shared a couple of weeks ago.
Great. Thank you very much, Guillaume.
Thank you.
This closes our conference call 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, I look forward to speaking to you again soon.
Thank you. Have a nice day. Bye-bye. Thank you, Thorsten.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.