Ladies and gentlemen, thank you for standing by. Welcome to the Airbus H1 2021 results release conference call. I am Clotilde, the operator for this conference. Please note that for the duration of the presentation, all participants will be on a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to your host, Guillaume Faury, Dominik Asam, and Thorsten Fischer. Please go ahead.
Thank you, Clotilde. Good morning, ladies and gentlemen. This is the Airbus H1 2021 results release conference call. Guillaume Faury, our CEO, and Dominik Asam, our CFO, will be presenting our results and answering your questions. The call is planned to last around one hour and 15 minutes. This includes Q&A, which we'll conduct after the initial presentation. This call is also webcast. It can be accessed via our homepage, where we have set a special banner. Playback of this call will be accessible on the website. There is no dedicated phone replay service. The supporting information package was emailed to you earlier this morning. It includes the slides, which we will now take you through, as well as the financial 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 our call. Thank you for joining us today. Together with Dominik, we will take you through our H1 results. The good start we had with our delivery performance in Q1 continued in the second quarter. We delivered in Q2 172 commercial aircraft to our customers, which takes our year-to-date delivery number to 297 aircraft. Our financial performance in H1 clearly reflects that high number of deliveries, but it also demonstrates that we adapted our cost structure during the crisis, and that we maintained in H1 a strong focus on cost containment and competitiveness. Our H1 EBIT adjusted was at EUR 2.7 billion compared to minus EUR 0.1 billion in H1 last year. H1 2021 free cash flow before M&A customer financing was at EUR 2.1 billion and includes a strong positive phasing impact from working capital.
The many actions taken by the teams have delivered a strong H1 performance. From all what we know today, we at Airbus have put our adaptation process largely behind us. Entering the second half of 2021, we shift our attention more towards securing the A320 ramp-up steps as planned. We will work closely with our suppliers. We'll continue to work closely with our suppliers, who play a key role in increasing the production output of the world's best-selling civil aircraft. We also continue to transform our commercial aircraft industrial operations by bringing fuselage assembly back into the heart of the company. The project teams in France and Germany are making progress while we continue to discuss with our social partners. For the full year, our strong H1 performance enables us to raise our 2021 guidance, although we continue to face a rather unpredictable and difficult environment.
The COVID-19 crisis is indeed not yet behind us. We'll continue to work on managing customer deliveries. We have to monitor the risks resulting from new variants of the virus, in particular, the Delta variant. We'll come to the guidance update more precisely later. Let's first have a look at our commercial environment. I'd like to kick it off with some comments on the recent developments of the WTO dispute. We welcome the news of a cooperative framework between the EU and the U.S. regarding the WTO disputes on the large civil aircraft, which resulted in a suspension of tariffs for a period of five years. This will provide a basis to create a level playing field, which we have advocated for since the start of these disputes. To our commercial environment in more detail.
From the discussion with our customers in the most recent macroeconomic data, we observe that the market recovery in the commercial aircraft business is gaining momentum in key domestic markets, which underpins the underlying air travel demand, the pent-up demand. Measured in ASK, domestic China remains close to the pre-crisis levels. Domestic North America benefited from an early and fast vaccination rollout and is converging back towards the pre-crisis demand for air travel. Recent industry forecasts expect a full recovery of the U.S. domestic market by the end of this year or early 2022. The air travel inside Europe, which had been lagging behind in Q1, is now also showing encouraging signs of a rebound. When it comes to international air traffic, we continue to believe that the market will take more time to recover.
Globally, the potential impact from new variants remain a concern, and progress on vaccination is a key element for a sustainable resilience against the pandemic. Let me remind you of our order and backlog in H1. We booked 165 gross orders, of which 158 single-aisle. It includes in June a new order for 70 A321neos. We saw 127 cancellations, of which 27 in Q2. The cancellation in H1 were largely anticipated and embedded in our backlog valuation as of year-end 2020. As a result, net orders were positive at 38 aircraft and our backlog in units amounted to 6,925 aircraft. It is our ambition to continuously adapt and evolve our product portfolio in line with customer needs. As for example, we did it with the launch of the A321XLR back in 2019. I'm sure you remember.
In that spirit, following positive customer feedbacks, we obtained the board of directors approval for a freighter derivative of our well-established A350 platform. Based on the proven efficiency of the A350, the freighter version is planned to deliver lower fuel burn compared to freighter models of that size currently in service. For example, around 20% less fuel burn compared to twins, 30% less compared to tri-jets, and 40% less compared to quads, four-engine planes. It will also meet the ICAO CO2 emission standards, and it will mark another step on our way to lead the decarbonization of the aviation industry. We are convinced that the A350 freighter will provide a strong answer to our customers' needs and expectations and will introduce a healthy competition to this well-established segment. The entry into service is planned for year 2025. Looking at helicopters.
In H1, we booked 123 net orders versus 75 in H1 last year. In Q2, we recorded the previously announced order for France for eight H225M and for a second prototype of the unmanned aerial system, the VSR700, which are part of the French stimulus plan for the aeronautical industry. In 2021, we continue to see good momentum for commercial campaigns in our home countries and in particular in public services. Finally, in defense and space, in H1 our order intake was at EUR 3.5 billion. During the second quarter, orders were booked in the amount of EUR 1.5 billion. This includes, in space system, the authorization to proceed granted by the ESA, the European Space Agency, to Airbus on the Earth Return Orbiter project.
With ESA, we also signed a contract for three additional European Service Modules, which are a mission-critical element for NASA's Orion spacecraft dedicated to the U.S. Artemis return to Moon program. Airbus has also been awarded by ESA the contract to design and manufacture six Galileo second generation spacecraft. This important order is partially reflected in the order intake of the second quarter. In unmanned aerial systems, we booked a renewed service contract agreement for Heron 1, the UAS system. On FCAS, we continue to progress, and we welcome the validation by the Bundestag of the German share of the FCAS phase 1B demonstrator. That is a key step for this strategic European program, which will also further strengthen European technological sovereignty. We are proud of the continued trust that France, Germany, and Spain are placing in us in the frame of the Future Combat Air System program.
On Eurodrone, we continue to make progress. With this, now, Dominik, I hand over to you. Dominik will take you through our financials. Dominik?
Thank you, Guillaume, and good morning, ladies and gentlemen. Our H1 2021 revenues increased to EUR 24.6 billion, up 30% year-on-year, mainly reflecting the higher number of commercial aircraft deliveries in 2021. Our EBIT adjusted increased to EUR 2.7 billion in H1 2021, up from minus EUR 0.9 in the first half of 2020, which you recall included EUR 0.9 billion of charges due to impairment and write-offs triggered by COVID-19. The strong year-on-year improvement of our EBIT adjusted is mainly driven by the deliveries performance. It also demonstrates that we have adapted our cost structure during the crisis and that we have maintained in H1 a strong focus on cost containment and competitiveness. Our research and development expenses decreased by 10% year-on-year.
We continue to expect our 2021 full year research and development expenses to be at a similar level as in 2020, including a moderate amount of R&D expenses for the freighter version of the A350. Our H1 earnings per share adjusted stood at EUR 2.37 per share, based on an average of 785 million shares. Our H1 free cash flow before M&A and customer financing was at plus EUR 2.1 billion. It reflects our continued effort on cash containment on top of strong positive phasing impact from working capital. All in all, in H1, we benefited from a very favorable combination of elements. We saw, firstly, a good number of commercial aircraft deliveries. Secondly, we focused on competitiveness while we are still managing our costs in a crisis mode. Thirdly, benefited from a very favorable exchange rate.
Going forward, we also may start the selective hiring of key employees necessary to secure the required skills when it comes to supporting the ramp of our single-aisle program, new technologies, digitalization, and decarbonizing our products. Now on to the slide regarding our profitability. H1 2021 EBIT reported was also EUR 2.7 billion. Net EBIT adjustments were broadly neutral and included EUR 145 million related to A380, of which plus EUR 174 booked in Q2. We released the provision for the impairment of the former A380 Lagardère facility recognized in prior years, as we are now using the building for the modernized A320 FAL in Toulouse. Minus EUR 170 million impact from foreign exchange and balance sheet revaluation, of which only plus EUR 7 million in Q2. EUR 49 million positive of other adjustments, including compliance costs, of which EUR 75 million positive in Q2, mainly from provision release related to the group-wide restructuring plan.
Earnings per share reported includes minus EUR 30 million of financial results. It mainly reflects the net interest result of minus EUR 172 million, as well as plus EUR 79 million related to Dassault Aviation. The tax rate on the core business is around 27%. Effective tax rate on net income is 18%, including the effect from tax risk updates and the tax effect on the revaluation of certain equity investments, partially offset by deferred tax asset impairments. The resulting net income is EUR 2.2 billion, with earnings per share reported of EUR 2.84. On to our hedging activities. In H1 2021, $10.2 billion of hedges matured with associated EBIT impacts at a rate of 1.18. This hedge rate is unchanged compared to the same period last year. For the full year 2021, we expect an average hedge rate of 1.21 compared to 1.19 in 2020.
For the remaining six months, we expect a negative EBIT impact based on a less favorable hedge rate to materialize in H2, both on a year-on-year and in comparison to H1 2021. During the first half of the year, we implemented EUR 10.7 billion of forwards at a rate of 1.22. In H1, we further adjusted the phasing of our hedges by implementing EUR 4.9 billion of rollovers. As a result, and including EUR 1.2 billion of hedges disqualified in Q1 2021, our total hedging portfolio in US dollars stands at $80.2 billion, with an average hedge rate of 1.26 versus $81 billion, also at 1.26, in December 2020. Going forward, we will continue to adjust our portfolio to match our delivery profile. Now, let's look at our cash evolution in H1 2021.
Our gross cash flow from operations of EUR 2.1 billion mainly reflects our EBIT adjusted and includes a EUR 0.5 billion provision consumption related to the restructuring plan. Our working capital has decreased by EUR 0.7 billion. It includes a positive impact from the inventory reduction in the A350 and A380 programs. It also includes a significant positive phasing impact from the timing of receipts and payments, albeit to a lesser extent than in Q1. Year to date, the A400M continued to weigh on our free cash flow before M&A, but less so than in H1 2020. H1 CapEx was around €4.8 billion negative, down 14% versus H1 2020. For 2021, we now expect our CapEx to be around EUR 2 billion. Free cash flow reported was EUR 2 billion.
M&A activities amounted for only minus EUR 8 million, and our customer financing represented an outflow of only minus EUR 31 million, remaining at a very, very low level in H1. The aircraft financing environment remains solid, with sufficient liquidity in financial markets for our products. We also benefited from the support of Export Credit Agency. When it comes to our fiscal year 2021 free cash flow, and in particular looking at our working capital, we expect the H1 phasing effect to further decrease going forward and to see implications from our single-aisle ramp. Our net cash position has improved to EUR 6.5 billion at the end of June, and our liquidity position remains strong and stood at EUR 33.7 billion.
In H1, we have redeemed a EUR 1.1 billion exchangeable bond into Dassault Aviation shares and prepaid a $1 billion bond in order to reduce our gross debt and further improve our leverage ratios with the objective of supporting our robust credit rating while maintaining a strong liquidity position. Back to Guillaume.
Thank you, Dominik. Now on to commercial aircraft. As already said, in H1 2021, we delivered 297 aircraft to 67 customers. When we look at the H1 2021 situation by aircraft family, on the A220, we delivered 21 aircraft. Our production rate, currently at five per month since the end of Q1 this year, is expected to increase to around rate six per month in early 2022. On A320 family, we delivered 237 aircraft, of which 110 were A321s. In July, we raised our monthly production rate from 40 - 43 as planned, and we will increase our production rate to 45 aircraft per month in Q4 this year. We also called on suppliers to prepare for the future by securing a firm rate of 64 by Q2 2023. As Dominik already mentioned, the modernization of the A320 family in Toulouse resumed in May.
It will increase our flexibility while we are ramping up. On the A321XLR, we recently started the first structural assembly in Hamburg with the rear and center fuselage, followed in early July by the structural assembly and the system equipment of the nose and front fuselage in Saint-Nazaire, which means we're moving forward on time. On wide-bodies, we delivered 39 aircraft, of which 30 A350s, seven A330s, and two A380s. On the A380, three aircraft remain to be delivered. Last week, we delivered the first A350 from our wide-body completion and delivery center in Tianjin, China, taking additional steps in the expansion of our global footprint and long-term strategic partnership with China. While the A330 production remains at an average monthly production rate of two per month, we expect to increase the A350 production rate from five per month to six per month by fall 2022.
Let's look at Airbus Commercial financials for the first quarter. Revenues increased by 42% year-on-year, largely reflecting the higher deliveries as compared to 2020. That was obviously strongly impacted by COVID-19. The increase in EBIT adjusted is mainly driven by the delivery performance, but also demonstrates that we adapted our cost structure during the crisis and that we maintained in H1 our strong effort on cost containment and competitiveness. Let me remind you that our H1 2020 included an EUR 0.9 billion charge due to impairments and write-offs triggered by COVID-19. Looking at helicopters. In H1 2021, we delivered 115 helicopter in total, 11 aircraft more or even helicopter more than in H1 last year. Revenues increased by 11% year-on-year to EUR 2.6 billion, reflecting a growth in services as well as a higher volume in civil helicopters.
EBIT adjusted increased by more than 20% versus H1 2020, up to EUR 183 million, driven by services, program execution, and lower spending on R&D due to the end of the certification process for the H160 and the new five-bladed versions of the H145 in 2020. On to defense and space. Revenues are broadly stable compared to H1 2020. The increase in EBIT adjusted mainly reflects the ongoing cost containment and competitiveness efforts, as well as increased volume in space systems. For the A400M military transport aircraft, we delivered two aircraft in the first half of 2021. We have continued with development activities towards achieving the revised capability roadmap. Retrofit activities are progressing well and in close alignment with the customer.
Risks remain on the development of technical capabilities and associated costs on aircraft operational reliability, in particular with regard to power plants, on cost reductions, and on securing export orders in time as per the revised baseline. Coming to guidance. Let me remind you that we issued our 2021 guidance in February this year. We continue to face a rather unpredictable environment. Our strong H1 performance enables us to raise our 2021 guidance. Let me read our updated 2021 guidance to you. As the basis for its 2021 guidance, the company assumes no further disruptions to the world economy, air traffic, the company's internal operations, and its ability to deliver products and services. The company's 2021 guidance is before M&A.
On that basis, the company has updated its 2021 guidance and now targets to achieve in 2021 around 600 commercial aircraft deliveries, EBIT adjusted around EUR 4 billion, and the free cash flow before M&A and customer financing of around EUR 2 billion. As usual, I want to conclude by summarizing our key priorities. We continue to manage our deliveries and backlog as agreed with our customers. This is, of course, including our defense contracts. It makes us proud that our defense and space capabilities contribute to the peace and security of our home nations, our EU and NATO partners, as well as to UN peacekeeping missions. This defense activity make vital contributions to a more stable and sustainable world. In our commercial aircraft business, we'll shift in H2 our attention to a greater extent towards securing the A320 ramp-up as planned, and we will work closely with our suppliers.
We'll continue to work closely with our suppliers, who will play a key role in the ramping up of single aisle production that is now so important for us and for the market. For the ramp-up, we expect to see benefits from having preserved our capabilities throughout the crisis and from having maintained the stability of our supply chain in that period. We will continue to integrate and modernize our industrial value chain to further support our ramp-up, our long-term competitiveness, as well as our evolving range of products. We remain focused on innovation and on our ambition to lead the decarbonization of our industry. In this context, we welcome and support initiatives and policies which encourage the carbon reduction in aviation, including ambitious targets to scale sustainable aviation fuels and green hydrogen.
Our key priority will, of course, be to deliver on our updated 2021 guidance and to sustain our ability to invest in our long-term ambitions across the portfolio. Finally, on 1st of July, we implemented changes to our executive committee, and we welcome three new members to the team. I'm convinced that these changes to our executive team will be a strong support for the challenges ahead. I guess now we are ready to take 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. As usual, please remember to speak clearly and slowly in order to help all participants, particularly ourselves, to understand your question. Clotilde, please go ahead and explain the procedure for the participants.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may press zero one on your telephone keypad. So it's zero one on your telephone keypad. We have one first question from Mr. Tristan Sanson from Exane BNP Paribas. Sir, please go ahead.
Yes, good morning, everyone. It's Tristan from Exane. Thanks for taking my question. The first one will be a question on the EBIT guidance for this year and the new conversion of deliveries to EBIT. Obviously, you have two parts in the increase of the EBIT guidance for this year. One is the increase of the underlying level of deliveries you calculated from at this level to 600. And then the way these deliveries are converted to EBIT. And if I make a simple calculation, I have the impression that you have an underlying increase of several deliveries of about EUR 1.5 billion to the EBIT guidance. Can you explain a bit where it's coming from, how you identified your progress and cost saving compared to plan, and how you quantified it for us to get a bit better feel of how this guidance is being built?
The second question will be on the margin ambition beyond 2021. I don't know what you want to communicate at this stage. In the early stage of the crisis, you mentioned that your ambition for commercial aircraft was to bring back, over time, profitability to pre-crisis level at around 10%. When we reach pre-crisis level of deliveries, you reach almost 17% in Q2. How should we consider that trajectory going forward? Many thanks.
Oh, yes, Dominik, the question is too difficult for me, so I hand over for you. Thank you, Tristan, for the question.
Okay. Tristan, yes, you're right. Our underlying performance adjusted for flexing for the volumes is very strong and has been, I would say, a little bit of picture perfect quarter where all the factors came together. I mentioned in my introductory remarks that we have been really still running the company in crisis mode. Minimizing the cash, we made very good progress on the, what do you say, restructuring. You've seen the headcount numbers come down significantly. The Forex was very positive. If you look at our disclosure, you see that for the full year, we see a significantly higher rate than the 118 in the first half. There remained to do with a quite big swing on Forex.
Yet we are in the process of ramping, and we had now several quarters in a row where we have been sailing very smoothly without big efforts on continued support, without all the costs we normally see, no liquidated damages. We have to assume that when we accelerate the system, the cost base will increase. Then there are also very deliberate decisions like on research and development expenses, where we will need to snap back to some degree. There were some deferrals to the right. Some of that will be phasing, which needs to be caught up in the second half and beyond. This is why it's not very advisable to just extrapolate from H1.
If I may just to be clear, because the Forex, you mentioned positive Forex, but it's fair ending roughly as planned overall, and the R&D is a small variance, a bit stronger tailwind than expected, but it's not a big driver. The total of EUR 1.5 billion of increase in full-year guidance, it doesn't come from FX and R&D. Where is it exactly coming from?
It also comes from a very strong gross margin because of the very smooth manufacturing process. Frankly, yes, our forecast turned out to be conservative and prudent in that regard. If you look at where it comes from, it's really throughout. We have gone through a very stark reduction in rates. We have readjusted, and of course, it's not easy to recalibrate where you stand. Then the next discussion is phasing versus really sustainable events. I must say, we have deferred quite some projects, which we need to resuscitate, and that will lead to cost increase in the second half and beyond. Again, this is why I would see this as kind of a picture perfect quarter, but not a good base to extrapolate from.
Is that clear? On the margin ambition beyond 2021?
The longer term, I wouldn't change anything to that statement. We've always said that our aspiration is to come back to the 2019 margin performance as we ramp back to the rates of 2019, which you recall were 863, and we think that's still a very good target to aspire to.
Okay. Thank you.
Thank you, sir. Next question is from Mr. Benjamin Heelan from Bank of America. Sir, go ahead.
Yeah. Morning, guys. Glad to hear that you're all doing well. I wanted to come back a little bit on Tristan's question because I guess the guidance that you've given implies a massive reduction in EBIT in the second half of the year, right? It doesn't feel like it's just cost coming back. It sounds, when I ran the numbers quickly, it sounded as though EBIT was going to be down over 50% in commercial, in the second half of 2021 versus the second half of 2020. Again, is there anything else in particular that we're missing there? That would be my first question. Then on the A350 freighter, obviously you've announced that today. Can we get a bit of a view in terms of the cost of developing that, so the non-recurring costs, and how we should think about your expectations for production rates on that program?
Thank you.
Yeah. I think the elements, I can just reiterate. If you think about the move and the remain to do versus the EUR 118 in H1, that's good for kind of half billion-ish or so. Negative variance, you could apply the logic. You take the first half, have it multiplied by two, you look at the puts and takes, the big first block is the ForEx as mentioned. The second one is really the deferral discussions of cost, where the phasing was pushed to the right, the fact that the cost has not been incurred in H1 doesn't mean it's not coming, but it might even come stronger.
If you add all these elements together, plus still the ambiguity we see in the market and the challenges we see with the ramp and the cost that might be associated to really secure it, led us to the guidance you have. Should we be lucky again with a picture perfect environment in the second half, we have to see, but I think it's also important not to get carried away in the environment we are currently facing.
Good morning, Ben. It's good to speak to you. On the A350 freighter, well, no, we don't intend to communicate on the non-recurring expenses of the program. It's a derivative of an existing program, or basically from two existing products mainly. We use the building blocks of what we've done on the A350-1000 mainly, but not only, and also the learnings and the tools and ways of working that we've developed recently with the BelugaXL, the plane that we have developed for ourselves to carry wings across Europe. On the production rates, well, the beauty of that program is that it will be embedded in the A350 production system. We don't need to plan for individual rates for the freighter.
It's a commonality with the -900 and -1000 that we put it inside the Final Assembly Lines, and the production rates will depend on the commercial success of the program at a later stage.
Okay, great.
It would be too early to answer your question in a very specific manner.
Okay. All right. Thank you.
Thank you, Ben.
Thank you. Thank you, sir. Next question is from Madame Celine Fornaro from UBS. Madame, please go ahead.
Good morning, gentlemen. Thank you for taking my question. My first question would be related to the outlook, but probably more so on the delivery outlook to start with, and then on the free cash flow, if I may. Looking at the deliveries, and maybe that explains some of the caution on the EBIT, but is there a particular region that maybe you're concerned about in terms of your H2 delivery expectations? Is it a bit more Asia-PAC focused in H2 than in H1? Even the 600 guidance, which means you're going to deliver the same amount in H2 versus H1, where hopefully we would expect an inventory drawdown as well on the build planes. I see a degree of conservatism in there.
It's early days, and free cash is always very volatile at your end, but low cash generation in the second half. Could you please provide a little bit of color on how we think about that? Thank you.
Hello, Celine, good to speak to you as well. Long time no see. Yes, you're touching an important point, which is the balance between H1 and H2. I think H1 comes as a very strong first half year compared to previous years. That's a bit unusual for us. 300 planes, or 297, was really at the top end of what we could have expected. I think Dominik rightly said that it's been made possible also because of the 15 months of stability we have enjoyed on the production system. That's a bit of a positive from the COVID-19 situation. Now we are ramping up, but we have also a lot of uncertainties that are now on H2 as we did such a strong H1.
That's a bit the background, and we are prudent because the 300 of H1 are done, and around 300 of H2 are still to be demonstrated in a rather difficult environment. Maybe to give more color on the free cash flow, I hand over to Dominik.
I think in the context of the free cash flow, it's really worthwhile looking at the balance sheet development in H1 in more detail. There are two major positions you should analyze, which is the trade liabilities, where you see there's a big boost coming from a reduction, sorry, an increase in trade liabilities, which is of course giving us cash. That was one of the positives. The other big negative is on the kind of development of contract assets and liabilities, which is basically the net of PDP inflows and usage of PDPs by deliveries. What you see there is that we had quite some cash out actually on that front. This is the effect we've already highlighted before, that as the last year, we negotiated all backlog, basically.
Largely all the backlog, we pushed aircraft to the right while really insisting on preserving the PDPs. The customers are kind of in advance of the schedules, that gives us several quarters where there is a lower kind of PDP payment. I have to underline that the customers are very much compliant with PDP payments right now. You have basically three big things there. The operational performance, very strong, the headwind caused by COVID-19 and the PDPs because we've deferred aircraft to the right without deferring the PDPs to the right. Lastly, the trade liabilities. The trade liabilities will not reoccur, the headwind from the PDP adjustment, so to speak, out of COVID-19 deferral will continue in the second half. This explains why we'll see a relatively moderate performance on free cash flow in the second half from our perspective to date.
There's of course, the question of deliveries. Deliveries might move that very strongly. Last but not least, the ramp. The ramp will also absorb some working capital, and this is why we have been prudent, I think, in the second half on the free cash flow.
Thank you, Dominik and Guillaume. I think we're still puzzled, all of us, given how well you managed the way down, that you're not going to manage as well the way up. That is my personal view.
Thank you.
Thank you.
Thank you, madam. Next question is from Mr. Robert Stallard from Vertical Research. Please go ahead.
Thanks so much. Good morning.
Good morning. How are you?
Good, thank you. I've got a couple of questions for you. First of all, Guillaume, obviously you announced the other month your plans on the A320 ramp-up, and your long-term target of 75 per month. Some of your suppliers have expressed some skepticism as to whether that's a realistic target relative to the demand that could be out there. I was wondering if you could give your explanation on that. Also on the narrow bodies, on the A321, could you get to over 60% of A320 family production being the A321? Will you have enough capacity to hit that number? Thank you.
Yes. Thank you, Robert. We have a backlog of A320 that is coming close to 6,000 planes. At rate 40, it will be 15 years. If we go up to rate 60, it will be 10 years or more than 10 years. Obviously you can imagine that the customers which have an A320 or an A321 in the backlog today, they don't want to wait for 12 or 15 years. Actually, if you just do the math, it's obvious that we need to go significantly above rate 60 to serve the backlog. I'm ready to do the math with the suppliers and partners, which are challenging the need for going above rate 60.
We see it as a fact in our backlog, and Dominik mentioned that the customers at the moment are current on PDPs, which is signaling to us that they really want to take delivery of their planes on time. The reason why we've been very transparent and clear to our supply chain and to our partners on our rate is because we really want them to get ready, and I'm really disappointed to see that some usual partners are still challenging the rates. They were challenging the rate 40 a year ago. We've managed to stick to the rate 40, and we really want to manage the ramp-up, the re-ramp-up, as we call it now, on the A320 that has started already in July this year. Question on the A321. Indeed, we want to be able to serve more than 50% of deliveries being A321s.
I mean, the A320 family. I don't know if the 60% mark that you mentioned is the right one, but we will be significantly ahead of 50, or we will be capable of significantly more than the 50%. That's also why we are replacing an A320 FAL in Toulouse by a modern, flexible line that will be capable of both A320 and A321, and will continue to increase the capacity and the flexibility of the A320 family production system to be flexible on the A321, and that will be particularly important 2023 onwards, when the XLR will join the family. As you know, the XLR is an A321. Yes, the 60% mark is probably not too wrong.
I've not done the math and to if and when we go to 60%, but we know that we are with a very strong demand for the 321 moving forward, and we want to serve that demand.
Backlog is at 63 right now.
Backlog is 63. Thank you, Dominik.
That's very helpful. Thank you very much.
Thank you, sir. Next question is from Mr. Jeremy Bragg from Redburn. Please go ahead.
Morning, guys. First question, please, would be on PDPs and Boeing yesterday talking about material headwind in PDPs in the second half of the year and going into 2022. Second question, please, and sorry to come back on it, outlook for free cash flow in the near term raised by EUR 2 billion, EBIT guidance raised by EUR 2 billion. Fine, you're clearly expecting more aircraft out of inventory to be delivered, and also the CapEx guidance is lower as far as I can see. Again, just sort of struggling if I look at it that way as well. Thank you.
On the PDPs, I can only reiterate what I said already. I don't want to comment on what Boeing's challenges are. We do have a headwind on PDPs for several quarters to come because the deferrals have been performed. We felt it's important to ensure that the deferrals are underpinned by PDPs. We have not been forthcoming in terms of returning PDPs to customers because we felt that's prudent to do that. On the free cash flow guidance for the second half, again, it's the puts and takes I mentioned. There was a very strong tailwind from trade liabilities, which will not reoccur in the second half. There is the cash absorption for the ramp, which I think is a bit missing in what you commented. There will be some efforts, not only on the CapEx side, but also some on the inventory side.
We will not necessarily see support from there because we really want to prepare for the ramp and make sure that we can deliver a steep increase. You have heard the rate. I don't want to reiterate the rate profile we've guided. It shows a very steep ramp, which needs to be catered for.
Okay, lovely. Thank you.
Thank you, sir. Next question is from Mr. Douglas Harned from Bernstein. Sir, go ahead.
Thank you. Good morning.
Morning.
As a first question, I want to go back to the longer-term rate plans that you talked about going to 64 a month in Q2 2023 and 75 a month into 2025. We've heard the same skepticism from many suppliers. This is still a ways out, and what I was interested in is what commitments have suppliers actually made on this, such as interim rate increases before that 2023 point? The second question is, historically, Airbus and Boeing have split the Chinese market. Now, given the challenges that currently exist in U.S.-China relations, does this create more opportunities for Airbus there? Do you believe you could take a larger share of the Chinese market at this stage?
Thank you for the questions. When it comes to the rates, we have given firm rates till 2023 to the supply chain. We expect the supply chain to be up to our orders, and that's what we've seen so far. That's the point. Now, when it comes to beyond the rate 64, that's more assessment of the capacity of the supply chain and exploring at what speed and what would be required to go to a rate up to 75. It's more uncharted territory. A 64, we were going to 64. We were close to 64 just before being hit by the pandemic. The production system is in place for that, and we expect the supply chain to be able to ramp up at a much faster pace for the re-ramp up than it was the case for the initial ramp up of the family.
The trajectory between now and rate 64 in Q2 2023 is rather linear, more or less linear. I don't have all the details in mind, but it looks like something that is rather progressive to give the chances to the supply chain to adapt. It goes by steps, which is something necessary, to have some stability in the quarter, as we like to do it. Rather linear growth, and that's basically what we see ahead of us. Anticipating, doing the right things on reviving the skills, the onboarding the people, checking on time the readiness of the physical production system so the ramp up can happen as it was the case just before the pandemic.
On China?
Yeah, sorry. China. Well, I don't really know the situation for the other guys. We see a good number of deliveries for Airbus. We continue to deliver around 20% of our delivery numbers to the Chinese airlines. We've not seen a large order as well for Airbus now for quite a while. We see that the COVID-19 situation is leading to some procrastination and wait-and-see attitude a bit in this region of the world. We would expect things to start to ramp up again to make progress moving forward. I think COVID-19 is playing a role in the bit of the wait-and-see attitude in general. At least that's the way I see it for Airbus, and I cannot comment for our competitor. I don't know.
Okay. Thank you.
Thank you, sir. Next question is from Mr. Andrew Gollan from Berenberg. Sir, please go ahead.
Hi. Morning, gents. Thanks for taking my questions. Two from me. First one is on wide-body profitability. Can you just give us an update there, where you are at current rates in terms of gross margin, really, and how you see that evolving over the next couple of years, say, particularly with the slight increase in A350? Secondly, on the aerostructures reorganization, can you just give us an update there again, really, and just outline the changes that are being proposed, where the progress is on that, and the kind of expected timing, and what benefits you expect Airbus will derive from that in terms of operational improvement?
Dominik, you take the first part?
On profitability of our wide-body programs, no change, I would say, to what we've previously communicated, which is that even at these low rate levels, we want to bring them back to a break-even level. That's not a contribution margin, but really an EBIT break-even level. There is, of course, with the advent of the freighter on the A350 program, a little bit of headwind created, but it's not too massive, and we still want to bring that program back to a break-even position in the not-too-distant future. I'm not sure it can happen already next year because of the ramping NRCs on freighter, but still in the middle of the forecast period, so very roughly, I think we can turn the program around to break even and similar timeline on the A330.
On aerostructures, I don't know if I shall go through the rationale again. I will try to make a simplified version for you. We are today with two subsidiaries, STELIA on the French side and Premium AEROTEC, that we call PAG as well, in Germany, that are in charge of front fuselage and half fuselage, mainly. They are independent organization, and this has led to a rather simplified way of operating the production system for Airbus. We like the fact that we have standalone entities managing a large part of the production system and simplifying the interface with Airbus. Now moving forward, we want to drive simplification. We want to drive better efficiency and going a bit more in that direction.
Removing the transactional relationship we have with those organizations as they were sort of carved out a decade ago with the idea that the fuselage, the airframe, would be commoditized. This has not really happened in the meantime. When we look forward, we see that the decarbonization of aviation will lead to very different architectures, where it will probably no longer be about a fuselage, a simple fuselage, but the airframe will be also the place where the energy management part of the propulsion system and a lot of complexity will be directly embedded. Therefore, we really believe that this will be core moving forward, that there will be a lot of complexity. That's why we are rolling out what we call DDMS, which is a digital design and manufacturing digital platform that will connect end to end the product, the production system, and the services.
This has to go into the future airframe design and manufacturing. That's why we consider it core. That's why we want to bring it closer to Airbus, but managing this simplified way of dealing with the production system. Therefore, the model we have developed, which we think fits very much with our needs, we call them the ASA, the Aerostructure Assembly organizations. There will be one in France combining some of our today's Airbus plants and STELIA, and similarly in Germany, with the more complexity on the German side, that we still have a rather significant detailed part activity in Germany that we think is a bit subcritical, that we don't see as core moving forward, and for which we want to find a positive future.
We are working hard with the social partners to define the best way forward for this part of the activity of the today's so-called Premium AEROTEC. We do it as well in times of lower production rates. It's a good time to transform. We want to be ready on time for when our DDMS platform will be fully available and running, and for the times where we will have to start designing future products, decarbonized products. It's now or never, and we do it now.
Thank you. Can I just follow up there? Is it possible to scale the parts business within Premium AEROTEC, or is it too early to say?
We think it's important to give it a bigger scale, to combine it with other detailed part activities to increase the competitiveness. That's why we think the option to divest it and combine it with the business of other industrials to be able to address other customers than Airbus in aerospace or other sectors is a good way forward for the detailed part. That's one of the options. We are also looking at other options to restructure and make sure we have a good business on detailed parts moving forward, whether we keep it or we divest it.
Yeah. Sorry, Guillaume, for the confusion. I meant scale it in terms of how large is it in terms of revenues, for example?
Yeah. We're talking about EUR 100 million revenue number if we carve it out.
How much?
High triple digit millions.
Okay.
2,500, 600 people around about.
That's great. Thank you very much.
Thank you, sir. Next question is from Mr. Chris Hallam from Goldman Sachs. Sir, go ahead.
Yeah. Good morning, everybody. Two questions. The first on pricing. The price mix effect on A320 was quite positive in the second quarter. Should that be sustained over the coming years as you ramp up production and as A320 accounts for a larger portion of deliveries, as you mentioned? With the recent narrow body orders, particularly on 737, are you noticing any changes to price levels you're seeing in competitions? That's my first question. Secondly, with the better cash performance, I suppose your year-end net cash should be around EUR 6 billion-EUR 7 billion. Of course, you still have the EUR 1 billion-ish Dassault stake, which could be monetized. With all of that, how do you think about when to restart the dividend and at what level?
Thank you, Chris. Good questions. Dominik, what do you think about it?
Should we start with the cash? It's true that our net cash performance is coming in quite nicely. We were more cautious previously because we were still fearing some more vendor financing would be required, but not only do we do better on operating performance, but also basically no vendor financing to a large degree required. That leaves some opportunities to consider what we can do. Next decision is of course for fiscal year 2021, being payable in 2022. We cannot preempt that discussion, but I would not rule it out that we revert to a conservative dividend. We have a dividend policy in place, which is basically 30%-40% of our net income or tax affected EBIT. From that point of view, I would not see that we're very aggressive on that, but the discussion will be had with the board of directors.
Pricing?
Sorry?
The pricing.
The pricing discussions. First of all, you know that the ramp on the A320 is not delivered on new orders, but it's delivered on the backlog and the prices are in the backlog. There's no pressure there. Of course, in other programs where we need new orders, there is a lot of supply in the market. Every order is fiercely contended. That means there is price pressure on programs like A220 and the wide bodies. That is clear. This will take some time to feed through. Important thing is that the real big lift on the A320 is well protected by the backlog. We are not desperate for new orders on that front.
Very clear. Thanks.
Thank you, sir. Next question is for Mr. Aymeric Poulain from Kepler Cheuvreux. Sir, please go ahead.
Yes, thank you for taking my question. Good morning. I've got two follow-up question, please. The first one is on the operational leverage for the 2023 margin target. Given the margin you have right now and the fact where you will be using your capacity 40% more in two years time based on your delivery schedule, what kind of operating leverage should we assume? Also, you mentioned the tariff removal. Are there any benefits we can also take into account in the margin expectations? The second question is, again, around your growth rate beyond 2023 and the production rates going to 75 a month for the A320 family in 2025.
What kind of assumption do you take for the replacement cycle and is there any hint at an acceleration of the replacement cycle due to the recent EU carbon Taxonomy that may be an incentive to go for more fuel-efficient plane? Also, what are your estimates or assumptions for market share relative to Boeing and COMAC in particular? Thank you.
Dominik, you want to take that?
I think the operating leverage is very much related to the question of the margin aspiration we have. At that point in time where we snap back to the 2019 deliveries, we want to be back at the margin levels of 2019. In that context, it's worthwhile mentioning that we want to be at a similar research and development expense level as in 2019. That shows you there is some resuscitation. Yes, we have put a lot of brakes on cost on initiatives that are important but not so urgent that defer them to the right and they will come back. I don't want to go now into a detailed model how that should be put together, but I gave you two data points.
First, the margin should be back to the 2019 EBIT margin level, and that the absolute euro R&D is at a similar level, probably. At that point in time, we snap back to where we had in 2019. That's, of course, a headwind for operating leverage because we increased the research and development expenses.
On the second question, which deals with production rates, just repeating that the trajectory to rate 64 is a plan, and to 75, we are assessing the capacity of the supply chain. We are reviewing what it would take, when, and obviously we would target 2025. That's what we've given to the supply chain as a question, and we will evaluate the result and whether it's relevant to go there, at what pace, a bit later. It has to do indeed with your question on the market. As I said earlier on the call, on the previous call, we will update the GMF, the Global Market Forecast , later this year. And there are a lot of changes coming from COVID-19, coming from the acceleration and the reinforcement of regulations on carbon emissions.
There's a lot of moving parts, and we want to come with the picture that will be as good as possible a bit later in the year. There are tendencies that tend to go in different directions, and we need to weigh them and combine them in something that is as much as possible likely to happen. Obviously we see that the new products will be in demand, that's for sure. We can see it, as Dominik explained, through the PDP. The customers are very current because they want to take delivery of new planes. We anticipate on the short term that we will probably be limited again by production capacities, and we won't be able to serve all the demand, at least on the short term, for the single aisle.
Okay. Thank you.
Thank you, sir. Next question is from Mr. Christophe Menard from Deutsche Bank . Sir, please go ahead.
Good morning. I had two questions. The first one is on the EBIT adjusted Airbus Commercial in H1. It's a very strong performance, and I was wondering whether you were feeling or seeing the impact of the industrial efficiencies that you've been implementing already in H1. If there are some efficiencies already materializing, wouldn't it be fair to think that your margin aspiration by 2023, as you just mentioned, could be higher than 2019 due to those efficiencies? That's the first question. The second is on the convertible bond that you redeemed on Dassault. Is the plan to remain a shareholder of Dassault, or do you have other aspirations going forward?
On the efficiency on H1, yes, we had a very favorable environment. We, since several quarters, run very smoothly. I always, in layman's terms, try to compare it to your experience when you cruise on the highway with a car, and you consume much less fuel if you steadily cruise at 130 kilometers per hour than if you ramp from 80 - 130, despite the fact that you run lower. We basically were running at 80 in a steady mode, and that's a super efficient operating point. Once we restart the ramp, there will be some incremental effort required, which also costs money. The margin aspiration beyond 2019, I don't want to get carried away on that one.
When we snap back to the delivery rates of 2019, because there is really a pretty adverse mix effect from the fact that our wide bodies are running at much lower rates than in 2019. They did deliver in absolute EUR per aircraft, a pretty healthy contribution margin. When you talk about breakeven in 2019 on the A350, that's fully loaded EBIT, it's not the contribution margin. The contribution margin is significant positive. Of course, we sell much less of that. From that perspective, we are really displacing that with A320s, and A320s, as you know, is not delivering us that profile. There we also have to think about the pricing pressure going forward. If you have a contribution margin on a product in a market where there's a lot of supply, that contribution margin will be under pressure from the pricing side.
Last but not least, U.S. dollar. For all these reasons, I would be cautious to try to go beyond what we've achieved in 2019 on that way. Dassault, obviously, we want to. The convertible bond, it had expired. We got the shares back. We currently don't see any urgent need for action. We think we should, at that point in time, keep them, and we don't see any activity looming on that front.
Thank you very much.
Thank you.
Thank you, sir. Last question is from Mr. Harry Breach from Stifel. Sir, please go ahead.
Yes. Good morning. Good morning, Guillaume. Good morning, Dominik. Thank you for taking my question. I just wanted to ask a couple of questions. Maybe when we think about the current level of sales campaign activity, it seems as if certainly the gross order bookings have picked up in recent months. Guillaume, can you give us your feeling for the level of sales activity at the moment, and how that's going forward? Then in a related idea, can you give us a feeling of the sort of the balance of your customers' requests maybe to accelerate delivery? Are you starting to see more acceleration requests compared with deferral requests? Then a completely different question, maybe more for Dominik. Dominik, please, can you help us to understand just a little bit more in terms of some of the headcount reduction and furlough benefit dynamics?
Are we now fully achieving the benefits from headcount reduction? Were there still furlough benefit payments benefiting EBIT in the second quarter? Then just on PDPs, I know, Dominik, you said, look, you're still going to face a headwind from effectively the slow normalization of PDP flows. Could you give us any feeling at all about when you're going to be maybe 50% of normal flows or back to total normality, just so we can have a sense of how that headwind gets back to normal, please?
I take the first part. Actually, there are a lot of discussions ongoing, if not campaigns or early discussions for new orders. I would anticipate around the end of the year, or at least in the second half of the year, that we would see the orders picking up. That's, I think, quite reasonable to say given the very dynamic discussions we're having at the moment. Balance to accelerate, well, we can't offer possibilities to really accelerate the deliveries, but we have to consider offering some slots in the early years when it's about larger orders for many, many years. As you might have seen from at least one previous big order, we are not able to completely cope with the request for short-term deliveries. Need to accelerate, yes. Ability to accelerate, not that much. Opportunities to take orders on the short-term, not that much.
On the midterm and the long-term, yes, obviously, and I think there will be many coming starting this year, probably more next year. There will be some this year. There have been some this year already, by the way.
Headcount reductions, furlough schemes, you've seen the headcount come down from the peak in March 2020, to end of June this year by 10,500. That's effective workforce. There's still a little bit remained to do, but we are also going to hire again, so I'm not sure that we go much deeper than that. In terms of furlough schemes, they are gradually unbound because we are ramping, but they are not fully unwound. There's still some furlough schemes in place. Of course, the full year effect of the headcount reductions will only come to bear next year because we are gradually implementing them in 2020. The other important point is really the snapback also we see on variable compensation. It's not only executive bonuses, but also very broadly applied profit and success-sharing mechanisms, which depend on the profitability in absolute terms of the group.
As we recover profitability, the big numbers we saved last year on that front will be gradually eroded, and that's a headwind against all these savings. On the PDPs, if you dive into our balance sheet and add all the kind of contract assets liabilities, you see a net balance of EUR -1.4 billion. I can tell you that from commercials, because of that deferral topic I was describing before, a little bit more than that is coming. We have a very significant headwind in a half year. I'd say that's maybe not a bad yardstick as a kind of order of magnitude we could see in the next coming two, three half years. By the end of next year, I think we should be through that, and then have a better ability to cash convert at the target of 1, which is always the target of Airbus.
Of course, you still have the A400M, the A220 topics to overcome in that cash conversion aspiration. The PDP issue itself will be definitely digested before the end of 2022.
Great. Thank you very much, gentlemen.
Okay, I think that will soon conclude our call. Before handing over to Thorsten, I'd like to share with you that was the last quarterly call for Thorsten, at least in that role, obviously. Thorsten has been so successful in managing a good second quarter that we are now contemplating having Thorsten helping us on managing the ramp-up. He will transition later in the quarter to a new role. As it was actually his last presence in our quarterly call, I wanted to thank Thorsten, to tell you that we've been very happy to have Thorsten for a couple of years with us, at least something like almost 3 years now.
Wishing him all the best for later when you will transition to your new role as we really count on you to be as successful on managing or helping us managing the ramp-up of the single aisle as you've been successful on delivering last quarter as a Head of Investor Relations. I hand over to you.
No, thank you very much.
raising the bar.
I think it's quite clear that it is one thing talking about numbers and the other thing delivering the numbers. I will do my best, of course. The famous last words, yeah? This closes our conference call for this time. If you have any further questions, please send an email to Philippe, Gustav, and still to myself, and we will get back to you as soon as possible. Thank you, and I look forward to speaking to you again, and I think say, still can say soon.
Very soon.
Bye.
Next week. Okay, thanks a lot, everyone.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.