Welcome to the Safran Q3 2020 revenue conference call. At this time, I would like to turn the conference over to your host, Philippe Petitcolin, Safran CEO, and Bernard Delpit, Group CFO. Mr. Petitcolin, please go ahead.
Thank you very much and good morning, everyone. I thank you for joining us to this Q3 2020 revenue conference. First, and more important, I hope that you are all safe and healthy. I will start the presentation with the Q3 business highlights, then I will talk about our recent air traffic trends and the impact on our activity, and I will end with an update on where we stand on our path to adapt Safran to this ongoing crisis. Afterwards, Bernard will go more in details on our financials, and I will conclude the presentation with our 2020 outlook. I'm now on slide number five. In Q3, the activity is a bit better than in Q2, but we are still working at levels that are very low compared to 2019. Revenues at EUR 3,382,000,000 was down 42% on an organic basis compared to -47.5% in Q2.
On an organic basis, all divisions did better than in Q2. September was better than July and August for propulsion and equipment, but not for aircraft interiors. In the first nine months, revenue decreased by 33.4% on an organic basis at EUR 12.149 billion. Turning on slide six, some propulsion business highlights for this quarter. In propulsion, we delivered 211 engines in Q3, including 172 LEAP engines compared to 455 in Q3 2019. Our market share on A320neo family remains at 61% as of September 30, 2020. We delivered also 39 CFM56 compared to 69 in Q3 last year. Our civil aftermarket indicator decreased by 56.2% year-over-year in Q3, bringing it to a decrease of 41.8% for the nine months. Bernard will give you more details on this. On helicopter turbines, the Airbus H160 helicopter, equipped with our engines, Arrano, received its type certificate from EASA.
Going to slide seven in the Equipment, Defense, Aerosystems, and Interior divisions. Safran new generation Euroflir optronic system has been chosen by the French Navy for their H160 helicopters. In carbon brakes, Safran signed contracts with two Asian airlines for A320neo and Boeing 787-10. Even if Aircraft Interiors is the division that is the most affected by the COVID-19, Safran has been selected by a U.S. airline to provide business class seats for its new 787, and by an Asian airline to provide economy class seats for its future A321 and business class seats for its new 787. Turning on slide nine, an update on the COVID-19 impacts on air traffic. The very uncertain landscape we were describing in July has evolved in different ways in different parts of the world. We see a very gradual recovery, even if September has been weaker than what we expected this summer.
We see encouraging signs of development of testing, but on the other hand, we also see a resurgence of the COVID-19 cases in several regions of the world. The second wave of the pandemic is striking Europe. China remains the only main domestic market to have readily recovered. We are today between 95% and 98% of scheduled domestic flights, with up to 80% load factor. Last month, IATA has lowered its 2020 global RPK forecast to a reduction of 66% compared to 2019. It was, I remind you, -63% in July. After the steady increase in cycles for CFM that we have seen through Q2, the improvement in flight cycles has been modest for CFM56 engines through Q3. The improvement has been better for LEAP engines, which flight cycles are now down only -15% year-on-year on a global basis.
The increase in flight cycles has been improving more steadily for GE90 and also more evenly around the world. On slide 10, our main actions to reduce our cost. Our workforce has been downsized. It's down by more than 15,000 permanent workers, and by another 4,000 if you count temporary workers. The activity transformation agreements reached in France is valid until end of 2021 and renewable. It is getting implemented now. For instance, the long-term furlough scheme provided by the French government is in place since October 1st. We estimate that this only scheme will allow Safran to maintain 6,000 jobs. At the end of September, purchasing programs are scaled down in line with the activity reduction. We have decreased raw material and supply expenses, as well as subcontracting expenses by 42%.
CapEx commitments are being cut by 74% in the first nine months of 2020, above the objective of -60% for the full year. R&D expenses have been reduced by 33%. Finally, OpEx has decreased by more than 20% in the first nine months of the year. Slide 11 to conclude my presentation, some key takeaways. First, we are dealing with a very uncertain environment, and the lack of visibility remains strong. We have observed a slight improvement in Q3 compared to Q2, but there is still some significant pressure on Q4. Safran approach was quick, proactive, and the benefits of the adaptation plan are already materializing thanks to a strong operational execution from all Safran's team worldwide. I do believe that measures that we have taken will structurally enhance the competitiveness of the group in order to benefit from the recovery.
We have been profitable every single month since the month of April. As of today, a gradual recovery is still the central scenario, with air traffic expected to go back to 2019 levels by 2024. In this context, we think that civil aftermarket is likely to recover faster than OE. Safran is more exposed to narrow body, and we see that the recovery is likely to be faster in domestic or regional routes on narrow body. Having a young fleet as a CFM56 fleet is a key asset, less likely to suffer from higher retirements and part-out after COVID-19 grounding. As I have had the opportunity to say on several occasions, Safran is definitely committed to address the climate change challenge. The growing state support in 2020 and in the next couple of years will help us keep a high level of R&D activity. I now give the floor to Bernard for the financials.
Thank you, Philippe. I'd like to jump to slide 14 on FX. The average spot rate was 117 in Q3. It was 111 last year's Q3, and it creates a negative translation effect on revenues. Year to date, the average spot rate is now 112, and the cumulated impact of currency was a positive EUR 53. Under current spot conditions, the impact of currencies should turn negative for the full year at the end of Q4. Hedge rate is 116 in Q3. No change here. Improved by EUR 0.02 versus 2019. Still on hedging, a few comments on slide 15 with regard to our hedge book. It totaled EUR 24.9 billion as of October 15th, up EUR 3.3 billion from what we disclosed in July.
For the period 2021-2023, the average net exposure is revised downwards from EUR 8 billion in 2020 to EUR 10 billion in 2023, it was EUR 11 billion before, to reflect a more cautious view on future USD flows as lack of visibility remains strong. With the weakening of the USD in the summer, some KO barriers have been triggered, leading to deactivate some options for 2022 and 2023. New options have already been put in place to replace knocked out options within the targeted range of hedge rates. KO barriers have also been moved and are now between 121 and 127. We closely monitor the situation as volatility may be a risk for the hedge book and the targeted hedge rate in case of sudden and significant weakening of the USD against euro in the next weeks.
On slide 17, adjusted revenue for Q3, it reached EUR 3,382 million in Q3 2020, down 44.5%. It is exactly the same amount of revenue as in Q2. Organic decrease was 42%, with a lesser deterioration for all the businesses compared to Q2, but still very heterogeneous. As I mentioned before, currency impact was negative during the quarter, change in scope was almost neutral. On slide 17, details on the revenue per activity in Q3. For propulsion, revenue were EUR 1,559 million, down 47.8% or 45.9% on an organic basis. OE revenue were down 48.8% due to LEAP production decrease and CFM56 continuous rundown. Services revenue in propulsion are down 47%. Civil aftermarket is down 52%. This decrease is somehow not as strong as we expected with spare parts sales for high thrust engines, notably GE90 and services contracts better than anticipated.
As planned, M88 engine deliveries were down and amounted to six units in Q3 compared with 20 last year. Equipment revenues were EUR 1,461 million, down 36.4% or 33.6% on an organic basis. OE revenue for equipment was down 34.2%, mainly driven by lower volumes of nacelle as well as wiring and power distribution activities, and to a lesser extent, by landing gear. Services within the equipment division were also down 41.1%, driven by carbon brakes, landing gear MRO, nacelle aftermarket, and to a lesser extent, by EO systems. Aircraft interiors revenue were EUR 357 million, down 55.7% or 51.8% on an organic basis. OE revenue within the division dropped by 51.9%. Sales were strongly impacted in cabins due to lower volume for lavatories, galleys, as well as catering. Seat programs, mainly business class seats, were strongly impacted by delivery reschedulings.
Within passenger solutions activities, connected cabin air management and custom cabin interior activities were all impacted. Services revenue within aircraft interior decreased by 64.9%, mainly due to seat aftermarket as well as cabin spare parts sales. On the other hand, revenue decrease in Q3 were attenuated by more resilient businesses. Helicopter supplies activities improved, low double-digit increase compared to 2019. Within defense activities, sighting and navigation system were flat compared to the year ago period. I will not comment here today sales on slide 18. For slide 19, I will only repeat that the 37.3% decrease in propulsion takes into account 41.8% decrease on civil aftermarket. I remind you that in Q1, it was 3.3% negative, in Q2 it was 66%, and in Q3 it was 56.2%. Last word on liquidity. Safran liquidity position is strong and sound.
The refinancing of the EUR 3 billion bridge facility is still going on with a tap issue of EUR 200 million of convertible bonds in October, on top of the EUR 800 million we issued in May 2020. More than the 50% of the bridge facility has already been refinanced. I remind you that on top of that, we have a EUR 2.5 billion available RCF in case of dysfunctional commercial paper market. I leave the floor to Philippe for the final words on our final guidance.
Thank you, Bernard. On slide 22, let me have a word on our 2020 guidance. Despite remaining uncertainties regarding the pace of air traffic recovery, Safran is confident to meet its fiscal year 2020 outlook, with adjusted revenue to decrease by approximately 35%, recurring operating margin around 10% of sales, and a generation of a positive free cash flow in H2. This is the end of our presentations. Bernard and I are now ready for any questions you have. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. Thank you. We have a first question from Olivier Brochet from Credit Suisse. Sir, please go ahead.
Cecilia, I hope you're all well. Thank you for the presentation and taking my question. I would have two, please. The first one on civil aftermarket, if you could give us some elements of color around the breakdowns between services, spares, the content, the number of shop visits and so on. The second question is, in H1, you mentioned in a second half headwind from payments to certain Airframer. Is there any remaining such headwind in Q4, please?
Thank you, Olivier. I will start with the first question. I will let Bernard to maybe get a bit more color on details on the civil aftermarket question, and I will let him answer the question on cash coming from Airframer. In terms of civil aftermarket, as you could see, in Q3 we do better than in Q2. That was expected. When we look at the color of this index for the rest of the year and the beginning even of 2021, there is a reduction in the quantity of shop visits, especially for the CFM56 engines. Basically, we are around 50% reduction in quantity of shop visits compared to what we got last year. We didn't see a reduction of value per shop visits. It's always a kind of questions that people have. Do you see a huge reduction or big reduction in the value of shop visits?
Not really. There is a small reduction in some of them, but it's not really material. The improvement, as we said in the presentation compared to Q2 and Q3, is coming mainly from services and wide body engines, especially the GE90, which is doing a lot better because the GE90 is flying a lot more than what we were expecting. Don't forget that the 777 is today the airplane of choice for freighters, and they use the GE90 a lot for freighters. We do a lot better on GE90 on services. We do better on, generally speaking, in services. In terms of CFM, we are in line with what we were expecting. Bernard?
Yes, some more color. As Philippe said that the volume of shop visits is approximately the same profile as the total aftermarket sales. It's approximately 50% down at the end of September. We had more shop visits in Q3 as in Q2. That's the rebound that we have seen. If I try to break down the civil aftermarket, the 56% in Q3, it's more or less 66% for spare parts, but 34% only for contracts. Parts are still depressed, I would say, but the contracts have improved in Q3. Year to date, the 41.8% decrease, it's 48% on parts and 26% on contracts. For Q4, we expect that for parts, I mean, for CFM56 parts, we see some improvement in Q4. I expect that for a high percentage in the good trends that we've seen in Q3 will remain.
For contracts, it's a bit early to tell. We might have some negative impact of what we do every end of year in terms of regularization for some contracts. We believe that Q4 will be okay for aftermarket. Still on the positive trends that we've seen in Q3. For the cash, yes, I still consider that we'll have some negative or let's say some headwinds in terms of working cap in the next month for the reasons that I gave when making comments for the H1 results. We have some agreements with Airframer to flow to them some of our concessions back in a given number of days. That's what we have decided with Airframer, and this will be a headwind in Q4, and that's why we still are very cautious on the free cash generation in Q4. We are confident we can keep it positive.
Thank you, Bernard. Just to come back one second on the Q4 on aftermarket. I'm not sure if I understand correctly, because you suggest that there is an improvement, but at the same time, you say that it is on the same trend as Q3 which was pretty much down.
It's pretty much down, but it's less down than in Q2.
Than Q2. It's compared to Q2. Okay.
Yeah.
Yeah. Q3 is better than Q2, and Q4 should be better than Q3. That's what he said.
Okay. Very clear. Thank you.
Thank you. Next question from Ben Heelan from Bank of America. Sir, please go ahead.
Yes. Morning, Philippe and Bernard and Cecilia. Thank you for taking my question. I wanted to ask, we saw kind of the headlines on Everson's call this week that they'd ask the supply chain to be prepared and to protect, to ramp A320 to rate 47. I was wondering, what are the implications of that for you in terms of CapEx, staffing, inventory as you head into 2021? Then a second question on Boeing and the ramp of the MAX. Do you see a decent ramp of both 737 MAX deliveries of LEAP 1B next year? Do you think it will be relatively slow? Thank you.
Thank you for these questions, Ben. Regarding A320, we are in discussions, of course, with Airbus in order to meet their requirements. We are in a negotiation which is, in my opinion, extremely good and I believe that we should be in line with the requirement of our customers in the next coming days or weeks. I do not foresee a problem with Airbus as long, of course, as the requirements materialize. We want to be sure that it's not only a wish list, but it's something where there are some commitments.
Do not forget that we have stopped for a long period of time, some parts of our supply chain, for example, the big forging, the big casting suppliers, they didn't want to stop their deliveries during the first phase of the crisis, and we had to buy a lot of parts that we didn't need on a short time basis. Now we have to use all this inventory and at the time we relaunch the supply chain, we want to be sure it is for good. It's not something which is going to last a couple of months and then drop again. In our business, we don't like sharp movements. We like soft movements. If it's a sharp increase, okay, as long as we are not two months or three months later with a sharp decline.
In terms of CapEx and in terms of workforce, we are fine. Don't forget that we set up a production system on the LEAP engines in order to be able to build 2,300 engines. We are talking in 2020 of something 800 plus LEAPs to be produced, and next year should be broadly in the same vein. We have plenty of investments to do what is requested today by Airbus. No problem. In terms of workforce, by the same thing. We will have a lot of people in furlough that we are going to bring back to full-time work. We do not expect any problem on this side. The only question is it real or not? For the MAX, the ramp-up in 2021 will be slow. That's the way I see it.
We expect now a return to service, a green light coming from the authorities, especially the North American authorities, in the next coming weeks. From there, the production, which has already restarted at Boeing will continue to grow. Don't forget that they have more than 450 airplanes on the tarmac sitting, and they will have to take that into consideration before thinking about increasing their production rate. We are in line with what Boeing said that by the beginning of 2022, there would be somewhere in the range of 31 airplanes a month. We are in line with that. Do not expect in 2021, a huge impact of the ramping up of the MAX on our engines. I hope it answers your question, Ben.
Yeah, no, that's very clear. Thank you.
Thank you. Next question from George Zhao from Bernstein. Sir, please go ahead.
Hi, good morning, everyone. If we contrast the engine aftermarket versus the equipment aftermarket, in which one are operators incorporating higher utilization of used service material today, and how do you see that going forward? I guess related to that, across the different products within your equipment business, so you know, Nacelles, landing systems, wheels, and brakes, et cetera, I guess, how would you contrast or rank them in terms of the inclination for operators to turn to USM?
Thank you, George, for this question. In fact, we do not see really a great use of used parts in equipment. It happens, but usually, we don't have a lot of used parts, and this is not the kind of thing we see. If you talk about carbon brakes, for example, used carbon brakes do not exist. As soon as they have been used, you have to reinforce and put more carbon in them before sending them to the airline. It doesn't happen. In interiors, we see a few used parts could be used on seats, but generally speaking, the percentage of used parts in equipment and interiors is extremely low.
By essence, because of the products do not like to use used parts, and by the fact that there is not really a huge network which has been developed around this kind of opportunity. In engines, of course, we all know that used part is a common factor of the competitiveness of a shop visit. We do not see a lot of retirements of CFM engines airplanes. We didn't see, since the beginning of 2020, an increase in terms of retirements of airplanes. You don't see a huge amount of available spare parts, used spare parts. Again, more, generally speaking, in engines than in equipment. We do not have a trend where we would see a lot more used parts available on the market.
Thank you.
Thank you. Next question from Robert Stallard from Vertical Research Partners. Sir, please go ahead.
Thanks so much. Good morning.
Good morning, Robert.
Philippe, a couple of the U.S. aerospace companies were talking about using this downturn as an opportunity to take out structural floor space. I was wondering if you have some similar opportunities at Safran as this downturn continues. That's the first question. Then secondly, on interiors, as you noted, it's got a bit worse in Q3. When do you expect this part of your business to trough out?
Thank you for these questions, Robert. Regarding the floor space, you have two kinds of floor space. You have the one for production, and you have the one for all the support functions. With what we are doing every day in order to remain competitive and reduce our costs, yes, we are going, and we have already started to get rid of some plants. We have closed a plant in Thailand. We have closed two plants in the U.S. We have closed plants in the U.K. Of course, we try to take advantage of this reduction in terms of recurring costs for the future. Yes, but it is directly related to the consolidation of our business and the consolidation of our operation.
The second part of floor space is related to people in engineering, people in support function, where today there is really a push from governments for them to work from home. We have not yet factored an improvement in terms of cost coming from this part of our company. I am not a huge pro of working from home. Don't forget that we use very big computers. We use big systems, and especially now on D, you need the people to work together. In engineering, yes, for working from home, but not full time. Same thing from the support functions. We think that it is nice, but not at 100%.
I believe that the company is made of people, and the people have to meet, have to discuss, have to work together, and by definition, working from home is not really a catalyst for this support and this competitiveness coming from working together. We have, today at Safran, a system where people work from home for support functions two to three days a week. I would like to try to keep that on the future. For engineering functions, they are part of the business. I cannot imagine production people working alone in a plant and all the support being from home. You need to work together. That's the reason I think that engineering should mostly be done from the company. For support function, I would agree with you.
We still have some improvement to make and cost reduction coming from the reduction of floor space for support function. Interiors. Question on interiors on how are they doing? Yes, as you just said, they have been hit more than others by the crisis, just because they depend a lot directly from airlines, and airlines today do not cancel, but delay, push on the right all their orders. In terms of recovery for our interior business, I do not see it in 2021. I think that 2021 should be a year where we would be at breakeven. I mean, the objective for 2021 is a good breakeven, is a nice breakeven. The recovery of interiors should come in 2022.
That's great. Thank you very much.
Thank you. Next question from Jeremy Bragg from Redburn. Sir, please go ahead.
Hey, Philippe, Bernard.
Hey, Jeremy.
Hey. Two questions, please. Another one on 737 MAX. Slightly different angle on this. Boeing have got 450 aircraft. They've admitted that they need to reconfigure and remarket quite a number of those. Put it another way, they've got quite a number of white tails, and quite a number of those aircraft were originally destined for China, where it might take a bit longer to get approval for the aircraft to fly again. What I've really wanted to understand is how that impacts you in terms of pricing on the engine and your views on pricing on the LEAP-1B generally going forward. Then the second thing, please, Philippe, is could you give us an update on the supply chain and the health of that? Because that's something that's really hard for us to see outside the company. Thank you.
Difficult questions, Jeremy, I will try to answer them. Regarding the MAX, you're right. When you look at these 450 + airplanes, which have to be delivered, I believe that today there is a percentage of them which have to be reconfigured. I'm not talking about white tails. A white tail is a plane that you build without a defined customer. The 450 airplanes which are sitting today at Boeing, they had customers. They may have lost their customers because bankrupt, because contractual disclosure. When they built these airplanes, they had customers. We think that it's a Boeing problem, and we are not directly involved in this situation, because the situation is coming from the grounding, and Boeing now has to find customers to reconfigure these airplanes. For the future of the LEAP-1B, it's a different story.
We are a risk-sharing partner of Boeing, and of course, we are a 100% risk-sharing partner. If Boeing has to make some marketing effort in order to sell new airplanes, of course, we'll be next to Boeing and work with Boeing. Regarding our supply chain, of course it is something that we are really looking in details, especially now. We have a kind of watchtower, where we follow today about 620 suppliers. These 620 suppliers are really screened on a regular basis by our people. From there, you have about 440, which are French, so mainly coming from France. We found that on these 620, you have about 100, which are critical. We cannot let them down. We really are behind them, helping them as much as we can.
As you know, we are part of a kind of equity fund, and Bernard may give you a little bit of color on this equity fund that is supposed and will support these suppliers that we really need for the future, either by bringing them some cash or by acquiring them if necessary. Bernard?
Yeah. The first one is the one that is activated by the government and by banks. In France, we have specific loans that have been granted to the supply chain. Sometimes for small suppliers, we help them having access to those loans. The second way of supporting supply chain is the equity fund that Philippe just mentioned. It's something that we already talked about in July. We have invested EUR 58 million in an equity fund that is now EUR 630 million, funded by the French government, by the main French aerospace company with Airbus, Thales, Dassault and ourselves, and lastly, by Tikehau, a PE firm. I think that they will continue to raise fund in order to get from EUR 630 million to EUR 1 billion, which is the target.
This fund is now completely operating, they have announced a first transaction, I think it was two days ago, for a small supplier in France. We think we have the tools. We have the structure in terms of watchtower in order to be sure and to coordinate actions within all the big aerospace company in France. We know it's critical. It's a key issue in order to keep our whole business healthy. As Philippe said, we have one other suppliers that we follow to be sure that once we ramp up, they are there to follow the efforts.
Thank you, guys. Could I just ask a quick follow-up one on the pricing on LEAP-1B? Would you be mostly talking about working with Boeing and standing beside them as a risk-sharing partner on the OE pricing? I'm guessing you'd be far less inclined to discount the pricing on spares or any long-term agreements on the aftermarket on those engines, please.
It's both, in fact, Jeremy. When you're a partner, you're a partner for the total life of a product. Of course, we will support Boeing, and it is contractual. We will support Boeing for the OE sales, and if we need to help also on the service side, we'll do our best. Our objective is of course to be sure that Boeing wins new contracts, and we'll do our share of the work.
Understood. Thank you very much, Philippe. Thank you, Bernard.
Thanks, Jeremy.
Thank you. Next question from Nick Cunningham from Agency Partners. Sir, please go ahead.
Thank you. Good morning, gentlemen. Yes, Boeing said several times that it expects the oldest tranche of aircraft, perhaps the oldest five years' worth, which I think is about 16% of the fleet, perhaps to retire very quickly. They said on Wednesday that they thought that would have a sort of multi-year recession impact on their aftermarket services business. The question is, does that apply to Safran? If so, in what way? I'm guessing it's much more equipment and propulsion for those, let's say 1990s aircraft. The second one is, do you expect it to-
Could you come back on the first question, Nick? I didn't really understand the first question.
Yes. Well, the first question is, if that oldest five years' worth of aircraft retires, and so therefore you end up with a much younger fleet.
Yeah
Boeing seem to be saying, that that will impact on their Boeing Global Services business, going forward.
Oh, okay. Understood. Yeah, understood the question. Okay. All right.
And also on-
Second question.
Yes, the second question is effectively closely linked, which is that if you have that younger fleet, will that impact on the replacement element of OE demand over the next, I don't know, five years, decade or whatever, as we get into recovery? Thank you.
Well, that's two big questions. In terms of aging of the airplane and the implementation of this in terms of influence on services, it's different if you talk about propulsion, if you talk about equipment. For propulsion, as we said already many times, during the life of an engine, you have three, four shop visits. The first two shop visits, which happen after six, seven, eight years for the first one, according to the number of cycles the engine fly and where they fly. Second one, 12, 14 years. Third one, 17, 18, and the fourth one, if there is any, 20, 21, 22 years after entering into service. We really make our money in terms of selling new spare parts in the first two shop visits. Starting on the third one, you see more and more used parts.
When you talk about the last shop visit, if you do a shop visit after 18 years, for example, you have 90% of used parts in the engine. Only 10% of new parts. The influence of the aging of an airplane on our propulsion business is very limited because, again, we make our money for the first 15 years of services of an airplane. For equipment it's different because some MRO are done, for example, after so many years. You don't care if, for landing gear, for example the revision of the landing gear has to be done after, for example, 10 years, every 10 years. It doesn't matter if the airplane flies 10 times a day or only two times a day, you have to do it after so many years, eight years or 10 years.
In this one, of course, the age of the airplane has some importance, but it is factored already in all our business plans, and I do not see really a big impact if this 25 years could drop to 20 years. Very limited impact, if any, on our products. The second question is on OE. If there are more OE, is it a problem for us in terms of services? Not really. We have a match. As you know, our business is done at, in propulsion, 45%, OE 65%, services in equipment is 70%, 65%-70%, between 65 and 70 OE, 30% - 35% in services. For interiors, it's even less in terms of services. It's a mix of both, and you are healthy if you do not depend only of services and if you have a good mix between OE and services.
That's what we want to keep. So far, when we look at the fleet which are flying today and we look at what the airframers are saying in terms of new airplanes, we believe that we have a good split of businesses, both for propulsion and equipment between what we do in OE and what we do in services.
Thank you.
Thank you. Next question from Zafar Khan from Societe Generale. Sir, please go ahead.
Thank you very much. Good morning, everyone. Bernard, I like your slide 15, the currency one. It's always very helpful. What I find particularly interesting this time is how you've adjusted the net exposure requirements going forwards. You've revised down the 2023 from $11 billion to $10 billion. I assume, hopefully we get back to the $11 billion in 2024. Is this a good proxy for how you see the sales volumes in the civil business? In other words, from this, can I interpret that maybe we get back to the 2019 levels of sales volume by about 2024?
Okay. In fact, there are two questions. The first one is how we measure our exposure for our hedging policy, and the second one is when do we see the level of activity coming back to 2019 levels? I think we should deal with both questions and not trying to use our dollar exposure as a proxy for the business. Yes, we have revised down our exposure because of activity, but also because we don't want to be trapped by over-hedging. We need to be more conservative when we do our hedging policy than for just planning reasons. I don't know if we are too conservative when we look at 2023, but I prefer to have conservative views on that rather than still thinking that we have to hedge a lot of volumes that may not happen.
The question is when do we see our activity back to 2019 levels? I think that first we have to remind that 2019 was a record year for Safran in terms of everything, including in terms of organic sales. For example, for military services, for spare engines, 2019 was a very strong year. We see our activity back to 2019, I would say in 2024 or 2023 or 2025. It depends on which kind of activity. For example, for LEAP volumes, I think that in 2024, but it will depend on the ramp-up of the MAX. We could come back to the volumes that we delivered in 2019. For CFM56 aftermarket, we think that 2023 could be the year that we will recover 2019 levels. For other OE and equipment, that could be between 2024 and 2025. It's a mix of a lot of things, and you shouldn't take our exposure as a proxy for planning activity.
That's a very comprehensive answer. I really thank you for that. Could I please just ask a little simple one where I'm struggling slightly? The Rolls-Royce hedging, and because they've had to cut that from GBP 36 billion to GBP 26 billion is costing them GBP 1.4 billion in cash. How is your hedging different to the sort of thing that Rolls were doing? Is this revising downwards going to cost you very much, or is that already in the option prices when you bought the hedging?
In fact, the big difference between some players and ourselves are that we use options. By hedging through options, we have more flexibility, because when you get forward sales, you have to deliver.
Sure
the volume of hedging that you have bought within the transaction with the banks. With options, and it depends how it works, you have some flexibility to move an option from one year to another year. This is why I don't think we are exposed to the same kind of issues that you've just mentioned. This is not a reason to overshoot in terms of hedging, of course, but that's a big difference between some players and ourselves, options. It has some risk because of that we explain every quarter, but it has some merits because we don't pay for swap points, and we have some flexibility in terms of volumes of dollars, in our case, we have to deliver every year.
That's excellent. Thank you very much indeed.
Thank you, Zafar.
Thank you.
Thank you. Next question from Andrew Humphrey from Morgan Stanley. Sir, please go ahead.
Hello, and thank you. Just a couple from me. The first one is you've clearly made some very good progress on cost containment and cost reductions during the year. Could you quantify, to the extent it's relevant, what the numbers that you've given would have been, I guess, kind of X the government support you've received, just so we can have an idea of what the kind of underlying cost reductions have been? The second question is a broader question following up on something Nick asked. I wanted to ask if you could characterize current discussions with airlines. You've obviously said that most of the aftermarket value that you generate in spares comes in the first or second shop visits.
I wanted to ask, to what extent you're having discussions around those second shop visits at the moment, when and whether airlines might be thinking about what to do with engines when they get towards, I don't know, 15 years and a second D check, and whether you see a kind of significant increase in risk around early retirement of those engines.
Bernard, maybe you can take the first one.
The first one? Yeah. I don't want to break down our cost effort between what we self-help and what we get from the government, but I would say that the vast majority of the savings will come from self-help, and the target in terms of amount is roughly EUR 2 billion of cost out.
Yeah. When we look at what we do on the international side and what we do on our French side, of course, we are not using the same tools to bring this level of reduction. We are forced by some countries to lay off people, to close plants. In France, the support program coming from the government is very generous and let us keep the people. Even if they stay home, they are paid partially by the government. This is a system which at the end of the day, as we have about 50% of our staff workforce in France and 50% international, we come to the same kind of effort requested by the two sides. All in all, what we are doing in France and what we are doing abroad is similar in terms of cost reduction. As Bernard said, today we come to a total number of around EUR 2 billion.
Yeah. That's just 2019. Yeah.
The second question, Andrew, is related to airlines. In fact, to be totally honest with you, we don't have a lot of discussions with airlines. We talk with airlines when they have really a requirement, when they have a need, or when they want specific systems or conditions given to them, especially in terms of postponing some orders, asking for longer terms of payment. This is the kind of thing we discussed today with airlines. They are really looking at their capacity to remain alive in the next six months. Again, they don't spend really too much time looking at what they should be doing in a year or two years or five years from now. Sorry to give you this kind of answer, but this is the truth. We do not have a lot of long-term discussions on the future of airlines. They really, in my opinion, today are more in the survival mode than in a long-term investment mode. Last question?
Thank you.
Yes.
Yes, last question from Tristan Sanson from Exane. Please go ahead.
Yes, good morning, Cecilia, Philippe, Bernard. Thank you so much for taking my question to close the Q&A session. It's going to be two quick ones. The first one is on your full year trajectory. Your cost saving plan is a bit ahead of schedule. The aftermarket for this year is clearly ahead of schedule. If you have Q4 organic growth similar to Q3, you're more on a pace of -45, -46 and -50. There are only two months to go left to the end of the year. What are the key elements of uncertainty that prevent you today to be a bit more optimistic on your full year trajectory? That would be the first one. The second question would be on the R&D spending trajectory. You're aiming at a quite strong decrease in R&D spending this year. How sustainable is that R&D spending cut? How long can you fund your strategic development priorities with that? That would be my second question. Thank you.
Okay. [Non-English content], Tristan. I will take the first one. You have it right. The kind of Q4 that we are monitoring or looking at is not exactly the one that implies going to 50% decrease when you look at where we are at the end of Q3. We've not changed the guidance because there are two months to go now, and there are still some uncertainty. That's why refining the 50% for one or 200 basis points is not really what matters today. What is key is to know if some shops will anticipate 2021 for some purchasings in December. We don't know exactly. That's why keeping the same assumption, I think, was the right way to look at that. It could be better. That's true. The 50% is maybe too pessimistic, but we didn't change it. That's right.
It's not pessimistic, Bernard, it's conservative.
It's conservative. You're right. You get it right. That's how we see Q4.
Okay. The last part of your question, Tristan, regarding R&D. In fact, when you look at R&D, which is the R&D that is in our cost, we have not really touched any single element of our innovation picture and map for the future. We have delayed a little bit some things, but we have canceled nothing, especially regarding the climate change and what we have to do for the next generation of engine. We have kept absolutely nothing. We have, at the end of the day, when you look on our midterm plan, we have about three quarters delayed on average on everything we do, but we have canceled nothing. Do not forget that in addition to what you see in our numbers, there are a lot funding coming from government, especially from the French government.
As you know, they have doubled the spending for innovation, going from roughly EUR 150 million a year for the total industry, not only to us, but we usually take 30%-40% of that. They are going in 2020 from EUR 150 million to EUR 300 million, and for 2021 and 2022, they are already committed to EUR 600 million. We believe that with support of government, and in addition to that, we should get, I hope, we should get some funding also coming from Europe. As you know, the budget has not been negotiated, and we are still waiting, and we are not expecting really a lot of support from Europe before 2022. It's going to be also, I hope, quite massive. All in all, we keep our trajectory. We keep our map in terms of innovation. We are working on all the things, especially the decarbonation of our industry. At the end of the day, when you compare apple and apple, we lost basically three quarters.
Thank you. That's very clear. If I may, as I'm the last one, I think, Philippe, it's your last conference call as a CEO of Safran. I just wanted to take 30 seconds to thank you so much for your incredible contribution for that company and tell you best wishes for the future.
Thank you, Tristan. That's very nice of you. Thank you all for attending this session. I wish you good health and a good weekend if you are in a country where you are allowed to move. Thank you very much. See you.
Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.