Welcome to the conference call on MTU Aero Engines' First Quarterly Results 2020. For your information, the management presentation, including the Q&A session, will be audio-taped and streamed live or made available on demand on the internet. By attending in the conference call, you grant permission for audio recordings intended for publication on the internet to be taken. The speakers of today's conference are Mr. Reiner Winkler, Chief Executive Officer. Mr. Peter Kameritsch, Chief Financial Officer.
Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words. Thank you. Please go ahead.
To our conference call for the Q1 2020 results. We will start with a business review of the first quarter presented by Reiner. Peter will give you a view on the financial highlights as well as more details on our OEM and MRO segment. Following that, Reiner will give some information about our view on the current situation. After that, we will open the call for questions. Let me now hand over to Reiner for the review.
Yeah, thank you, Thomas, and welcome also from my side. The aviation industry benefited from a strong market environment in 2019, with passenger traffic being up by more than 4%. This positive trend was expected to continue in 2020, and in January, there were no signs of a contraction. In February, following the virus outbreak in China, passenger traffic in the region declined sharply. In March, the crisis spread globally, resulting in a steep worldwide decline in passenger traffic. In April, IATA updated its traffic outlook for 2020 and now expects worldwide passenger traffic to decline by nearly 50%. At MTU, we immediately implemented organizational and technical measures to minimize the infection risk for our employees.
To slow down the spread of the virus and to respond to an unstable supply chain, we temporarily suspended a large proportion of the operations at our sites in Germany and Poland for three weeks. Currently, we restart our operations gradually in Germany, but we use the instrument of short-time work. The level of activity in our plants will be adjusted on a weekly basis depending on customer demand, supply chain reliability, as well as the current situation of the coronavirus infections. Our international MRO locations are currently operating at a decent level, and we saw a remarkable contract win in the first quarter. The U.S. Air Force assigned the maintenance of the F138 engine to MTU Canada. In the middle of March, we decided to postpone our AGM and to suspend our dividend proposal due to the coronavirus crisis.
The AGM will be held later in the year, and we will provide details as soon as possible. On March 26, we withdrew our guidance for 2020 due to the uncertainties in our markets. A top priority in these uncertain times is to increase our liquidity headroom. We are in the final stages for an additional EUR 100 million promissory note to bolster liquidity, and in the second step, also to increase our revolving credit facility. For the first quarter of 2020, our business was broadly unaffected by the current situation. We expect a significant hit on demand from Q2 onwards. Please be ensured that we do everything which is necessary and possible to work through this crisis and to minimize the consequences on our financial performance.
Let me now hand over to Peter to give you a view on the Q1 results.
Yes, thank you, Reiner, and hello to everybody also from my side. Let's have a look on the financial highlights for the first quarter. Revenue increased by 13% to almost EUR 1.3 billion, driven by a strong MRO business. EBIT adjusted at EUR 182 million was more or less stable, resulting in an EBIT adjusted margin of 14.3%. The income adjusted of EUR 128 million was also more or less at the same level as Q1 2019. Free cash flow of EUR 69 million in the quarter was a more normal level compared to Q1 2019 with EUR 140 million, which was an exceptionally strong quarter. So turning to our business segments, I start with the OEM division. Total OEM revenues were stable at around EUR 500 million. Military revenues were down slightly to EUR 98 million, showing a typical quarterly fluctuation. So there's nothing behind that.
Commercial business was up 4% to EUR 400 million , and within that, organic OE sales were up high single digit, mainly driven by our GTF engine platforms and business jet engine programs. Organic spare parts were roughly stable. This business mix led to a decrease of EBIT adjusted to EUR 160 million with a margin of 23%. So let's switch to the commercial MRO segment. Reported MRO revenues increased 21% to almost EUR 800 million . Organically in US dollar, that means 19% increase. And this increase was mainly driven by more PW1100 warranty work. EBIT adjusted increased 16% to EUR 66 million , resulting in an EBIT adjusted margin of 8.3%. The lower EUR EBIT adjusted margin results from a higher share of GTF warranty work, as mentioned before. So thanks for your attention.
At this point, I hand back to Reiner for some views on the current situation.
Yeah, thank you, Peter. As everybody knows, there's a lot of uncertainty in the current market environment. We are constantly monitoring the situation, and we are in close contact with our customers, partners, and suppliers, and we want to share some of these thoughts with you. Our outlook to the market follows the IATA scenario published in mid-April. After the current standstill of the majority of aircraft around the globe, we expect a recovery beginning in domestic markets in the third quarter of this year. International travel should restart in Q4, and we expect air traffic demand to be back to 2019 levels by end of 2022. There are various developments in the markets that could accelerate or set back these expectations. One major issue is for sure the availability of an effective medicine or vaccine and the development of global trade following the current developments.
Based on this, we worked on different scenarios and actions to address the situation. Let's conclude our current view on the situation with a quick walk through these business segments. Military business should be largely unaffected. Commercial OE and aftermarket business will see a significant demand reduction from the current grounding of the majority of the fleet, the very limited visibility on air traffic development, and all airlines worldwide being in cash conservation mode. The MRO segment will also see a significant reduction in demand from passenger airlines, but we expect more business from freight operators, especially for CF6-80 overhauls. Further, we see the opportunity to fill part of the available slots with more warranty work on PW1100 engines.
To partly offset the negative impacts from the reduced volumes on our financials, we have identified a wide range of measures, including reducing payroll costs through short-time working and an overall salary freeze for all employees in 2020. We significantly cut general expenses, worked on our CapEx plans, and will have a strong focus on working capital. These costs and cash savings will be executed in all segments. On the other side, we decided to secure additional liquidity by EUR 100 million promissory note and to increase our yet undrawn EUR 600 million RCF credit line. Given this high degree of uncertainty at the current stage, it's too early to provide an updated financial guidance, but we will keep the market informed as appropriate.
And all in all, we feel well prepared to weather the situation. So thank you very much, and we are now open for your questions.
Thank you very much. We will now begin the question and answer session. If you would like to ask a question, please press star and one on your touch-tone telephone. The operator will announce your name when it is your turn to ask your question. In case you wish to cancel your question, please press the hash key. Thank you. Your first question comes from the line of Mr. Robert Stallard of Vertical Research. Please ask your question.
Thanks so much. Good morning.
Morning.
I hope you're all well and getting through these challenging times. A couple of questions from me. First of all, in terms of engine shop visits, I was wondering if you could give us an update on how the situation is evolving. What sort of level of deferral or cancellation are you seeing at the moment and how this is impacting the scope of work that the airlines are asking for? And then secondly, on CapEx in 2020, can you give us an idea of how much that number could come down given the cash preservation moves you're taking? Thank you.
I mean, starting with PPE investment, I would say we have identified roughly 50% of our budget, which we can cancel or defer into the outer years. So roughly 50%. But I mean, that is not a stable number. You're going to review that on a monthly basis and adjust that to the demand situation.
Yep.
On the MRO shop visits, yes, we saw some deferrals and cancellations, but on the other side, we saw additional shop visits, especially for freighter engines, so mainly the CF6-80. But it's the same as with the PPE. We have to monitor that on a weekly or monthly basis. But I think that's the same situation as in every company in these times.
If I could quickly follow up, presumably the freighter activity is much smaller than the passenger activity, though, right?
Yeah, sure.
Okay. Thank you.
Thank you. Your next question comes from the line of Andrew Gollan of Berenberg. Please ask your question.
Hi, James. Yeah. So my question, I'm just trying to ask a bigger picture question, actually. Just trying to square your comments around the broad assumptions you're making on recovery. You talk about assuming an extended global recession beyond 2021. I don't really contest that. But the aviation markets recovered in 2022. Can you just give us a little bit more color around your thinking here? So in absolute terms, are you telling us you think air traffic will be back to the 2019 levels? In which case, does that mean the global flying fleet in terms of capacity will be the same size? Just trying to pin these comments down a bit because a lot of companies are talking in these terms. Just a bit more color from your perspective, please.
I mean, it's a difficult question. I mean, what we do, we work with different scenarios, with, let's say, a base scenario and then maybe some upside and downside scenarios. But we have really to adjust that or to monitor that and do this every week, every month, or every quarter. Our current assumption is that we have air traffic being on the 2019 level, maybe end of 2022 in this range. Is it then beginning of 2023? I don't know, but within that range. And if you follow the last two months, I think IATA every two weeks revised their forecast, starting with - 25%, - 38%, then - 48%. I think that's the actual number, and that's what we have also used now for our current forecast. But it's today very difficult to say, is it back in end of 2021, 2022, beginning of 2023? But I think--
Yeah, a big step forward will be when once a vaccine is available and it's available for a broad percentage of the worldwide population. I think then we can see a quick increase in travel demand. But before that, definitely will be a slow recovery. And I mean, the starting point will be the domestic traffic. So I mean, you have maybe heard the announcement of Lufthansa increasing the schedule from mid-May on. You see the first signs also in Asia, in Vietnam, for example, that flight activity starts coming back on a low level. But it will be slow until a vaccine will be available. That's for sure.
Thank you. And just one second question. Your comments on the MRO business, I think, Reiner, you said that the international sites are operating fully currently. Can you just explain what happened or what was experienced in China in Zhuhai through February and March?
I think they closed the facility also for a couple of weeks. They extended the Chinese New Year, and there are no backlog work, but this also reduced capacity. I think they're working now seven days a week, but with one shift.
The demand level, sorry, within the business is really what I meant.
Demand?
Yeah, shop visits. Are we operating at 100% today? I mean, I just find that hard to believe.
In Zhuhai, we are--
I don't want to put a figure out, but something like 20% reduced demand.
Thank you very much.
Thank you. And your next question comes from Mr. George Zhao of Bernstein. Please ask your question.
Hi, good morning. First, could you share the organic spare growth for your first three main engine programs? And then secondly, you talked about traffic getting back to 2019 levels by 2022. If that's the case, can the commercial aftermarket revenues also get back to 2019 levels by 2022? And why, especially if you think about the fleet retirement coming in this downturn, how much of the passenger aircraft from the PW2000 and CF6 do you think will not come back into service? And how would that affect the aftermarket recovery? Thanks.
I mean, regarding spares in Q1, organically, I mean, the major platforms obviously are V25, PW2000, and the CF6-80. And the V2500 was roughly flattish Q1 versus Q1. PW2000 was even slightly up. So we saw quite healthy demand from the military side of the fleet, which is roughly 60% of the fleet. And also a share of the fleet on the PW2000 is also on the freighter, so the 757 freighter. So slightly up on the PW2000 and also slightly up on the CF6-80. And so the rest was slightly down. So it was business jet engines and spare parts for business jet engines and spares on the GP7000. So the rest of the portfolio was slightly down. And if you add that all up, it was roughly stable.
I think it's regarding your question on can the aftermarket really come back by 2022 to the levels we have seen in 2019? I think that is definitely far too early to have a view on that. I mean, you don't even know exactly how many shop visits you're going to have in Q2. So I'm now speculating what 2022 will be. I think it's far too early. I mean, you obviously have a lot of drivers. So how does demand develop? Then you have, I mean, new engines delivery is tied obviously to new aircraft. Are really airlines available to get the financing for new aircraft? On the other side, you have a very low oil price, so around $20, making an old fleet attractive to fly. So these are all the dynamics in the market and how that will exactly play out.
I think it's far too early to say that.
Thank you.
Thank you. Thank you. Your next question comes from the line of Mr. Andrew Humphrey of Morgan Stanley. Please ask your question.
Hi, thank you very much, and I hope you're all well. Just a couple from me. Firstly, on retrofit and how that plays into some of the margin dynamics, and I know you've highlighted that effectively that is dilutive to overall margin mix because you're reporting it at cost, but I wanted to ask, in a time of significantly lower utilization of your facilities, does that help you out to some extent on stranded costs, and if you could kind of expand on that and talk more broadly about your expectations for operating leverage in your various businesses this year, that would be helpful. Secondly, you've talked about freight and the exposure you've seen to that. There's an implication there that that remains more robust than commercial passenger traffic, which I don't think is particularly controversial.
But could you maybe talk about the specific dynamics you're seeing there in the short term, say, with some of your legacy spares businesses? I mean, you mentioned CF6 as well. And finally, just coming back on cost reduction plans this year, you've mentioned CapEx. Could you talk more broadly or more specifically, rather, about other overhead reduction plans this year, if you have a percentage figure in mind?
I mean, kind of start with operating leverage. I would say on average, I mean, roughly 70% of our cost basis are variable costs and 30% fixed costs, I would say. So that is the rough split. A little bit different in the segments. So obviously, MRO business, I mean, we mentioned that, I mean, frequently regarding the revenues in the MRO, that roughly 80% is the passing through of spare parts and outside vendor services. And that is a rough estimate of the cost base in the MRO. So 70% new spare parts, 10% outside services, outside repairs, and so on. So 20% in the MRO is fixed. So then the major portion, obviously, are salaries for the workers and depreciation for the assets in the MRO. And on the OEM side, it's different. There are, rather, you have maybe 60% variables and 40% is fixed.
So, I mean, also salaries and depreciation and so on. So that is the operating leverage. And yes, the PW1100 shop visits are at zero or very limited margins. This is MRO work, but obviously, it helps absorb fixed costs in the MRO segment as well. And we can accelerate the retrofit program. And so in the future, we're going to have a fleet of more upgraded PW1100 and avoid a lot of AOG situations. So that will help us in the future. A cost reduction plan, I mean, we spoke about CapEx. We have also identified, I mean, other operating expenses. So the general expenses like travel, obviously, consultancy costs, maintaining of machines, energy.
R&D.
R&D, obviously, also, and that we're going to cut at a first step around 20%-30%. I mean, especially on the R&D side, we have to align it, obviously, also with the R&D activities of our partners with Pratt and GE, but I mean, that is the magnitude of cost reductions, and regarding personnel costs, I mean, we are under this short-term working scheme in Germany where the working agency pays the salary gap up to 60% or 67%, and we use that for all German locations, and there are similar schemes in Canada as well, and Zhuhai has different measures for workforce flexibility, so we are quite flexible there on the cost side, so freighter versus commercial, I mean, I touched on that before in the spare parts.
I mean, we have two engine programs where we have a quite big footprint in the freighter market. So the PW2000 on the 757 freighter. The major operators are FedEx and UPS in the U.S. and the CF6-80 on the 767 freighters. Also the big U.S. freighters like Amazon, FedEx, Atlas Air, and so on operate these engines. And there, I mean, we see up to now even more demand for additional shop visits on the CF6-80, especially. How long that dynamic will be, it's a quite volatile situation, honestly. But for now, we are quite optimistic for the freighter business.
Great. Thank you. That's extremely helpful.
Thank you. Mr. Ben Heelen of Bank of America, may we have your question, please?
Yeah. Morning, gentlemen. Thank you for taking my question. We heard from a couple of your peers yesterday. In particular, GE highlighted the shop visits for them are run rating down about 60% towards the end of April. I was wondering if you had any color that you could share with us about how April is run rating for you so far. And then my second question would be one on working capital. Obviously, a lot of pieces to juggle with airlines and inventories and receivables, etc. But just wondering if there was any color that you could give us on how we should be thinking about working capital this year. Thank you.
Please bear in mind that we don't talk about April. We don't give Q2 numbers because, I mean, even before the corona situation, shop visits were rather volatile. It's more volatile even now. Regarding working capital, I mean, the first thing is on the one side of the working capital, so inventories. I mean, the task is to adjust our supply chain to a lower output demand, obviously. I mean, you saw Airbus cutting production rates of 60%-40%. That will also be reflected, obviously, in our engine deliveries accordingly. We have to adjust our supply chain downwards quite quickly so that we don't get all that raw materials, semi-finished goods flowing to our facilities. We have then to pay all these parts and have it on stock here without use for a long time. That is the first thing.
The second thing, obviously, we have to monitor the situation on the receivable side. Sure, I mean, up till now, we haven't seen a big impact, but that has to be monitored. I mean, overall, I think it's fair to assume that inventories will decrease in the year 2020 from end of 2019's level. That's for sure. I mean, the OEM segment and also the MRO segment has to adjust to the lower expected output level.
Okay. Great. And just to come back on that first one, if the shop visits are too volatile to infer anything, is there anything that you can infer from spares from the last four weeks or not either?
No, no. I wouldn't give a number out there because that is a quite volatile number. I think a good stage when we try to give a new financial guidance is the middle of the year. I think then we have a stabilization of the situation also on the airline side. And it makes really sense to talk about the outlook now.
Okay. Great. Thank you.
Thank you. Ms. Chloe Lemarie of Exane, please ask your question.
Yes. Good morning, everyone. I hope everyone is staying safe. I have two questions, please. The first one is you've mentioned, obviously, you'll be looking to expand your liquidity level. So could you help us understand how you're looking at free cash flow development given all the comments you've made on cost savings and working capital management? I mean, is there a case where it could turn negative in Q2? Would you still hope to remain a break-even? So any thought on that would be helpful.
The second question is a bit of a technical one, but on the V25 royalty payment you make, can you remind us whether they're effectively linked to the flight hours performed during the year, or is it now fully set and you can only marginally limit those payments? Thank you.
First thing is, yes, the payment to Rolls-Royce is tied, 100% tied to the flying hours of the V2500 fleet, which was in the air at the closing of the deal mid-2012. So that is the mechanics. Regarding liquidity, I mean, I wouldn't give a cash flow guidance for Q2, honestly. But I think the target is definitely to have a positive free cash flow in 2020.
Okay. Thank you very much.
Thank you. Mr. Harry Breach. Sorry, from MainFirst. May we take your question, please?
Yes. Thank you very much for taking my question. And hello, Reiner, Peter, Thomas. Hope you're well. And I hope same for the whole of the MTU team. Can I just touch on maybe three issues? Just to help us to understand a little better the installed base for commercial OEM, obviously, the GTF has made a significant difference numerically. But if we think about the installed base excluding GTF, okay, if I look back at my notes from the past, this is a while ago, but I think around nine years ago, it was about 11.5 year average age. Are you able to give us the average age of the installed base today excluding the GTF? That's question one. Question two, maybe just moving over to commercial MRO. Again, just trying to look at or think about work scope.
Just because I'm a bit of a simple guy, when I look back at my model and I look back at the sort of 2009, 2010 period, it looks as if when I look at sort of the rough sort of revenues per shop visit or shop load unit, they came down by sort of around 10%. Is that a reasonable assumption for us to make in terms of the value per shop visit and how that can change in this kind of environment? Or could it be maybe significantly more than 10%?
And then sort of just following on from your answers earlier on, particularly to Andrew's question, when we're thinking about commercial MRO and shop visit scheduling, sort of are you able to share with us sort of your idea of how much of the deferral and cancellation you think you might be able to offset by accelerated GTF warranty shop visits and incremental freighter demand?
I mean, I'll start with the average age of our platforms. I mean, the average age of our fleet, it makes no sense because we have different program shares and so on. I mean, the V25, I mean, we have stressed it a lot. I mean, the V25 average age is something like 9 to 10 years. The CF6 and the PW2000, both in commercial operations, rather in the range of 20 years, 20 years of age. The PW2000, which is on the military side, which is 60% of the fleet, is quite young, 11, 12 years or so. So that is for a military application, it's a baby, so to say. So these are our major main techniques, obviously. That is quite young. Also the GP7000 and the A380 is rather young. I think here's rather the questions, how Emirates' fleet plans are before the crisis.
Obviously, they plan to fly the A380 until 2030 and so on. But we haven't heard anything about new fleet plans in Emirates yet, so.
Peter, sorry--
I think we have never experienced that the value for a shop visit itself is reduced. So rather the value goes down when we have different mixes of first or second shop visits. So when you have more LLP exchange or not. I think that is rather the mix between the different types of shop visits rather than an airline. I mean, it's a big thing for an airline to send an engine out to an MRO shop. You have to lease in a lease engine and so on. You don't reduce the work scope of a shop visit by 5% or 10%, risking another shop visit maybe some two, three years later and so on. We never experienced that, honestly. And then you had a I couldn't quantify how many shop visits can really replace the gap we have from the commercial shop visit.
I mean, I think it's too early to say how many shop visits we're going to lose in 2020 compared to our initial plans. But what we see is we see a stronger demand than usual from freighter operators, from the big U.S. operators. But how many that will be in 2020, it's too early to say. And with the PW1100 GTF retrofit shop visits, we have to align it, obviously, on the one hand side with the airlines and also with Pratt & Whitney. But I think our plan is to do as many as possible in 2020.
I would say what we can do now is we can accelerate the retrofit program. So we can do shop visits which were planned for, let's say, end of the year or beginning of next year. We can do now in the course of this year already. So we use the capacity to accelerate the retrofit program.
Great. Thank you. Thank you very much, guys.
Thank you. Once again, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your question, please press the hash key. That is star and one if you wish to ask a question and the hash key to cancel. Thank you. Mr. Joachim Kotze from Morningstar, may we take your question, please?
Hi. Good morning. And thank you very much for taking my question. I hope everyone's well and healthy over there. I've got just three questions. The first one relates to the rate of flight hour contracts. Can you give us an indication of what percentage of the fleet is on rate of flight hour contracts? And then just elaborate on the dynamics with that in terms of airline behavior, airlines that have both flight hour contracts and time and material contracts, and then the cash flow dynamics because the one is a cash outflow for the airline and the one is a cash outflow for you because you've already received the payments in advance. Can you talk about that? Then secondly, maybe looking longer term in terms of MRO work, do you see scope and an opportunity?
Secondly, are you in a position to take market share in that market as a result of the crisis, perhaps from smaller, weaker independent players? Then thirdly, I'll ask my third question after the first two answers.
Yeah. I mean, I think our major platforms, obviously, in the aftermarket is V25 and the GTF. And on the V25, roughly, I'd say half of the fleet is under flight hour agreement, the half is time and material. And on the PW1100, I mean, on the GTF, I mean, a very high share of the fleet is in flight hour agreements. But I mean, also on flight hour agreements, there are different styles, I would say, on flight hour agreements. So there are the so-called pay-as-you-go flight hour agreements where really an airline pays on a monthly basis. And there are also pay-per-event flight hour agreements where the airline pays when the shop visit really happens. So from a cash flow perspective, very similar to a typical time and material contract.
Regarding MRO and then yeah, sorry.
Yeah. Just on the retrofit side, so you're not seeing, obviously, because the payments are tied to flight hours, so you're not seeing airlines with engines that are very close to shop visits now demanding a retrofit because, I mean, most of the cash outflow would be your burden because they've already paid the flight hour in advance. You're not seeing a risk of that?
I think it's too early to answer that. I mean, we are now end of April. I mean, it's now two months where we have this situation. I think it's too early really to say something about that. And second question was, I think, regarding the market share in that crisis. I mean, it's a good question. I mean, at the end of the day, I would say it's like in other industries, the strong will survive or will get a better position. And the one who has, let's say, a poor position already before that crisis, they will have more trouble. But again, we think we have a quite good market position, and maybe we can benefit from that, yes. But again, it's too early now to really to judge on that.
Do you see any clear opportunities in pockets where you would like to be represented? And are you actually in a position to take market share from a liquidity perspective? Gentlemen, can you hear me?
Yeah, sure. I mean, we wouldn't. I mean, the answer is, I mean, obviously, we have facilities worldwide for MRO shop visits. And I mean, sure, I mean, we can take additional shop visits. Would we in today's situation invest into a brand new facility? Rather not. But I mean, we have a good track record over the last years. I mean, several years ago, we had a market share in the worldwide MRO market from, let's say, 6% to 7%. Now we are at roughly 10%. And I think our broad portfolio and our broad service offerings, including lease engine support and so on, sets us in a good position to take also in the future further market share. So that is my general answer to your question.
Okay. Thank you very much, and just one quick final question is just relating to sorry, I know this question has been asked twice about the fleet retirement risk. Maybe just can you give us an indication of what percentage of your fleet is older than 18 years?
Older than what? 18 years?
Yes.
Yeah, I mean--
Or assuming that the--
I just answered your question before. So I mean, I would say the whole CF6, the whole CF6 fleet, so the magnitude is roughly 3,000 engines. And the whole PW2000 fleet in commercial operations, which is 500 engines.
Okay. And of the V2500, nothing over 18 years?
Very tiny portion.
Okay. Thank you very much for your answers.
Thank you. Mr. Achal Kumar of HSBC, may we have your question, please?
Yes, good morning. That's [audio distortion] Achal Kumar from HSBC. In fact, I have a question concerning your backlog, which still looks pretty good, and I assume that about EUR 13 billion or so are belonging to the MRO side, so in light of the discussions about insolvencies from airlines, how safe would you consider this backlog, which at first glance looks, of course, very good and solid, but it might immediately change if one or the other of your customers drops out here? So I'm sure that you have made a kind of risk assessment to your customers. Could you give us an indication what portion of these contracts you would think are at risk in the current situation? That would be my first question.
Second, coming back to these remarks you made on the freighter business in MRO, can you just give us an indication what percentage of your business is attributable to this? It's not a big portion, you signaled, but is it somewhere around 10%, 15%, or is it more? Thanks.
I mean, the freighter business, so a rough number is, let's say, 10%-15% of our MRO sales. That is a rough number. And this is tied to CF6-80 and PW2000 MRO services for different customers. The major customers are coming from the U.S.
At the moment, it should be then more towards the 15% or even a bit higher when SAR -- the business, declines.
Yeah.
Okay. Thanks. And what about your backlog? How solid should we consider this at the moment?
I mean, I can't exclude that one or the other smaller airline in our backlog will not survive. The major part of our backlog is obviously with large flag carriers, U.S., Europe, and so on. I wouldn't see a big risk of a large portion of our backlog.
So you think you are protected against quite, let's say, unexpected cancellations in this respect?
I mean, the one question is cancellations. That cancellation is rather tied to the, I would say, rather to the OEM backlog. I mean, we have that EUR 19 billion - EUR 20 billion backlog, as you mentioned, EUR 13 billion or so coming from the MRO, EUR 6 billion or so from the OEM segment. But in the OEM segment, we have only firm orders in our backlog, so no options and so on. So the cancellation is rather tied then to the OEM backlog. So should airlines decide to cancel the one or the other order? Currently, so what we hear is we are rather talking about postponements into the outer years. I mean, not to forget, I mean, the backlog which we show stretches until 2026 or 2027 or so deliveries. It's not only tied to 2020 deliveries.
Okay. Thank you.
Thank you. Mr. Sean Stewart from JP Morgan, may we take your question, please?
Hi. Good morning, Reiner, Peter, and Thomas. Thanks for taking my question. I have two questions, please. On slide 10 of the presentation this morning, it looks like you have made no changes to your 2020 and 2021 FX hedges. And given that you could be overhedged, how easy is it for you to move your hedges, and are there any costs involved? And then secondly, is the German government covering salaries of workers on short-time work? And how long, if so, how long will they do that for, please? Thank you.
I mean, starting with the hedge book, yes, we have stopped hedging activity, obviously, for 2020 and 2021, and doing really so once, I mean, that is a little bit tied to our new planning for 2020 and then 2021, where we are not finished yet, obviously. We have to the 75% you see is still linked to the exposure we had from our internal planning, but obviously, we're going to see a falling U.S. dollar exposure, and should we be, I mean, should we be overhedged that then we're going to close some of the forwards? But I mean, there might be some cost involved, but that is obviously quite tiny, so that is not a big risk, I would say. On the other hand, we have currently a situation where you get quite attractive hedge rates in the outer years.
So you might have seen that we have increased our hedging levels for 2023 and starting already adding hedges for 2024, where we had hedges like 113. So the interest differential between the U.S. and the euro has come down significantly. And so are the markup which you pay for hedges for 2024 have come down by roughly 60%-70%.
Regarding the short-time work in Germany, normally it's maximum for 12 months. How is it working? Let's say, quite simple example, if you work only 50%, then the government pays for the remaining 50%, 60% of that. And as I said, for a maximum of 12 months, they are actually discussing to extend that to maybe 15 or 18 months, but that's not yet decided, but it's in discussion. And what is also, especially for 2020, the case, normally if you have this short-time work as a company, you have to pay the insurance costs for health, for unemployment, and things like that. And that is in this time also covered by the government. So that you really, if the people work only 50% as a company, you really also pay only 50%.
Okay. Thank you very much.
Thank you. Ms. Chloe Lemarie from Exane, please ask your question.
I think we should go to the next question. Or are we doing that?
Sorry. Can you hear me?
Now we can hear you.
Oh, sorry, sorry. So I just wanted to go back to the GTF warranty shop visit comments you've made. And if you could tell us how many sales were recorded in Q1 and if there were really zero margin, as you indicated in your initial guidance. And given that you're accelerating the pace of the shop visit, should we still include EUR 400 million in sales for the year, or could it be even a bit more in MRO? Thank you.
But I think we don't give shop visit numbers. But regarding PW1100, it should be, I mean, as Reiner and myself commented, I mean, we are in negotiations with the airlines and partners, but I think we can do more for PW1100 in 2020 compared to initial plans.
Okay. So we should definitely take more than the EUR 400 million sales you initially indicated in your guidance.
For the PW1100, you mean?
Yes, yes, yes, absolutely.
Yeah, sure. But I cannot tell you how much more.
Fair enough. Thank you.
So next question. Is there one question remaining, or?
I think the operator lost a connection there. I'll open up the Q&A box myself and have a look for you.
Chris, are you there?
Yeah, I'm online if you can hear me.
Yeah, now we can hear you. I learned again.
There's quite a lot of pressure to ask a good question now, but I just had two questions on military revenues. So first, can you give any indication on the phasing of revenues through the rest of 2020? And secondly, can you comment on whether you expect to receive any major prepayments this year in military in relation to the potential German Eurofighter order and how important those prepayments could be in achieving positive free cash flow this year?
Chris, first of all, I think military business, as we said, will be not affected by this crisis. I would say it's more or less what we guided for the full year, so no change in that. We expect the decision on, or I think we will see two issues in Germany. One is the replacement of the Tranche 1, and the other one is the replacement of the Tornado, where the final decision will be made, I guess, in two years. But the principal agreement may be this year on that again. But we do not expect significant prepayments for both of these orders.
Great. Thanks very much.
So I think this was the last question. Thank you for joining us in this call. Thank you, Reiner. Thank you, Peter. And yeah, the IR team is there for questions if there are some outstanding. So stay safe. Bye-bye.
That does conclude your conference for this morning. Thank you for participating, and you may all disconnect.