- Airbus SE is exhibiting a strong financial performance, despite a challenging civil aerospace operating environment caused by the lingering effects of the pandemic.

- We expect that deliveries of Airbus' commercial aircraft will continue to rise, topline will grow, profitability and cash flows will remain robust and importantly, Airbus will return to an S&P Global Ratings-adjusted net cash position whilst continuing to exhibit exceptional liquidity.

- At the same time, we expect that the group's helicopters and defense and space divisions will exhibit topline growth and gradual margin improvement in 2022 and 2023.

- We are therefore revising our outlook to stable from negative and affirming the 'A/A-1' ratings. - The stable outlook on Airbus reflects our view that the group will continue to benefit from positive demand with increasing deliveries over the next two years. Our view is that the group will at the same time maintain considerable financial flexibility at the current rating level, as well as a credit-supportive financial policy. We regard adjusted leverage ratios of funds from operations (FFO) to debt above 60% and debt to EBITDA of less than 1.5x as consistent with the ratings.

LONDON (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.

A strong set of financial results in 2021 has laid the foundation for a brighter 2022 and 2023 for Airbus. The collapse in flying hours caused by the arrival of the pandemic in 2020 and subsequent swift reduction in demand for new aircraft resulted in original equipment manufacturers (OEMs)--including Airbus--lowering production rates and engaging in major restructuring and cost cutting programs. Many commercial aerospace manufacturers are about one-third smaller (by revenues, production capacity, or production rates) than they were pre-pandemic. Since then, flying hours have continued to recover. Demand for new narrow-body planes is rising, fueled by recovery in domestic and regional air travel, but demand for wide-bodied aircraft remains subdued as these aircraft service international routes where demand is not expected to recover as quickly as domestic or regional routes. Due to measures taken in 2020 and 2021, Airbus was well placed when the recovery began and delivered more aircraft than we expected in 2021 (611 in total for the year). Revenues grew and profitability improved significantly above our expectation, primarily thanks to a solid operating performance, supported by the full benefit of restructuring measures taken through the pandemic (including a 10,000 headcount reduction) and the release of provisions that the group booked in 2020. Demand for narrow-body aircraft will significantly outstrip demand for wide-body aircraft until at least 2024. We anticipate that deliveries of Airbus' commercial aircraft will continue to rise to comfortably more than 700 aircraft in 2022 and towards 850 aircraft in 2023. A ramp-up in the production of the group's popular and profitable A320 family will be the primary growth driver, with Airbus targeting a production rate of 64 per month by the summer of 2023. Production rates of the A220 will also rise, albeit at a slower pace (the current rate is about five per month and we envisage this gradually rising to about 10 per month by the middle of the decade) and Airbus will continue to work towards achieving breakeven profitability on this platform. We expect that rates of the A330 and A350 will remain relatively flat until international routes open and demand for wide-body planes starts to recover to pre-pandemic levels. Overall, we expect that total Airbus aircraft deliveries will return close to pre-COVID levels through 2023, albeit we expect the mix to be much more heavily weighted towards the A320 family than before the pandemic. Helicopter deliveries are already at pre-pandemic levels (338 in 2021 versus 332 in 2019) and we expect a continued good growth rate, at comfortably more than 350 per year but not quite reaching 400 over our two-year rating horizon.

Despite expected good growth and positive free operating cash flow (FOCF) generation, 2022 and 2023 are not without their challenges. Despite forecasting a strong operating performance, we expect that Airbus will exhibit some S&P Global Ratings-adjusted EBITDA margin pressure through 2022 and 2023 (versus a margin of 14.3% posted in 2021), cooling to around 13.0%-13.5% over this period. This is because Airbus still has several in-house challenges to navigate, regardless of wider industry conditions. Ramping up production on the A320 (to historically high rates) will be more expensive than steady state production. This is because operating leverage is typically curbed (during a swift manufacturing ramp up phase) by additional cost, headcount, raw material, and inevitable bottlenecks and delays up and down the supply chain. At the same time, Airbus will also need to absorb costs associated with the development, testing, certification, and successful entry into service of the A321XLR (scheduled for 2023) and A350 Freighter variant (2025).Airbus also outperformed our previous expectations with regard to FOCF generation, posting around 2.8 billion of FOCF in 2021. We had only forecast that Airbus would recover FOCF to this level by 2023. Given the improving deliveries, topline growth and profitability we now expect Airbus to maintain the same level of FOCF going forward, perhaps pressured slightly due to rising capex and also an expected swing in the group's working capital. Over the next two years, we expect capital expenditure to rise towards 2.4 billion per year. We also expect the group's overall working capital pattern to swing gradually from the strong cash inflow exhibited in 2021 to cash outflows of more than 1 billion in 2023 as operations normalize and production rates are ramped up, coupled with the push to bring the A321XLR and A350F into service. In terms of financial policy, we expect Airbus to pay a progressive dividend but do not expect any form of share buybacks over our two-year rating horizon. We have factored in small-scale mergers and acquisitions of up to 100 million per annum into our forecasts. Management will continue to manage the balance sheet towards a 10 billion reported net cash position. From 2024, production rates will be steadier, the A321XLR will have a higher share, the A220 will likely be breakeven, and the costs associated with developing the new A350F variant will be largely complete. Also, the provisions and cash out for fines related to delayed A400M deliveries, bribery charges, and business partner payments should also be complete by then. Although our forecasts do not incorporate this, demand for wide-body aircraft could also recover above expectations by 2024, adding to the positive momentum. We do not expect that the conflict between Russia and Ukraine will materially impact Airbus' production rates or supply chains. Airbus has no meaningful production capacity in either country and cross border labor flows from Russia and Ukraine to Airbus plants in Europe are negligible. In terms of critical raw materials, most notably titanium, Airbus is sitting on several months' worth of supply (mainly used on the A350). Many of the group's suppliers maintained their stocks of rare raw materials, including titanium, even though they rightsized by up to a third during the pandemic. As such, some suppliers have reported that they have on hand up to or more than a year's worth of inventory for production. Finally, Airbus has no direct exposure to aluminum supply from the region.

Management expects no meaningful impact on demand for aircraft or production rates because of the conflict or the threat by Russia to expropriate a large number of aircraft as a retaliation for Western sanctions. On the wide-body side, about a dozen existing orders relate directly to Russian airline Aeroflot. Two will be deferred or cancelled, three are currently at the stage of production where large parts can be recycled into other customer orders, and up to eight will need to be built, finished, and find new homes at current production rate levels. However, some customers are already looking for more wide-body capacity as international routes open and the Boeing 787 is currently not a competitive threat to finding a place for these eight wide-body planes.

On the narrow-body side, the exposure to Russia is entirely to lessor customers and comprises about 32-34 planes. However, narrow-body demand is robust across the globe and we assume that lessors will simply take delivery and find homes for these planes elsewhere, meaning that, orders and deliveries will be broadly unaffected. Despite some speculation, we do not foresee a completely new commercial aircraft platform being launched by Airbus or Boeing for at least a decade. We do not believe that Boeing will be able to materially halt gains of market share made by Airbus during the next few years, nor do we believe (despite some rumors in the press) that either OEM will launch a completely new aircraft platform in the coming years. Airbus considers its product range to be broadly complete and is focused on bringing the XLR and A350F variants into service. Boeing still has some challenges around getting platforms certified to fly, built, or delivered. Both remain focused on strengthening their balance sheets following the negative impact of the pandemic. Neither OEM therefore seems to have the desire or financial firepower to invest billions developing a new aircraft platform at this stage. Also, any future platform will need to be complemented by engine technology that sees a material efficiency gain over today's options.

Rolls-Royce is developing the Ultrafan which is being tested through 2023 but will likely enter service only at or after the end of the decade, PW's ultra-bypass technology could result in new engine technology but with a potential entry to service in 2033 and CFM's RISE concept is a completely new design. It is therefore hard to envisage a new aircraft platform entering service before 2035.

The stable outlook on Airbus reflects our view that the group will continue to benefit from positive demand with increasing deliveries over the next two years. Our view is that the group will at the same time maintain considerable financial flexibility at the current rating level, as well as a credit-supportive financial policy. We regard adjusted leverage ratios of FFO to debt above 60% and debt to EBITDA of less than 1.5x as consistent with the ratings. Ratings downside could materialize if Airbus underperformed our expectations in 2022 and 2023. This could be caused by a new COVID-19 variant materially impacting the industry again, if production ramp ups are not successfully executed as planned, or if the supply chain cannot keep pace with Airbus' ambitions. Pressured profitability, a return to an S&P Global Ratings-adjusted net debt position, or FFO to debt of less than 60% could result in a lower rating.

Ratings upside could materialize if we saw continued recovery in the wider commercial aerospace industry supporting higher demand for new planes, with Airbus smoothly ramping up production and deliveries beyond our current base case. We could upgrade Airbus if we expected less volatility in the group's absolute EBITDA, with management keeping a good grip on costs associated with the A321XLR and A350F and no new cost overruns or exceptional charges on existing platforms (such as the A400M), while the group continued to post a net cash position and exceptional liquidity.

Environmental, Social, And Governance E-2, S-3, G-2 We consider Airbus' exposure to ESG factors to be in line with that of its peers and the overall industry. Airbus is one of two global manufacturers of large jetliners; its commercial aircraft segment accounted for about 71% of sales in 2021 (followed by defense and space with 18% and helicopters at 11%). We are revising our Social indicator to S-3 from S-4, reflecting how Airbus is recovering from the pandemic and posting improved operating and financial results.

Social factors are a moderately negative consideration in our credit rating analysis for Airbus. The pandemic resulted in a material decline in demand for air travel and new aircraft, with Airbus cutting production rates in 2020 and exhibited an overall cash burn of about EUR7.2 billion in 2020, which included the EUR3.6 billion regulatory fine. Despite a challenging operating environment, the industry continues to recover, and Airbus exhibited a strong set of results in 2021 and is returning to financial net cash position. We assume air travel will not return to pre-pandemic levels until 2023 at least but note that Airbus is raising production rates to meet recovering demand, especially of its narrow-body aircraft that are used on domestic and regional routes (which are recovering more quickly than international routes that drive demand for wide-body aircraft). Product safety is a key risk for aircraft manufacturers. A serious design flaw or manufacturing defect, especially if it causes a fatal accident, can expose the company to significant legal liabilities, costs to rectify the problem, and possible order cancellations or the loss of future sales. This is especially true for Airbus and Boeing, which effectively form a duopoly in global civil aircraft manufacturing. Each Airbus division includes a dedicated product/aviation safety function that is independent of other corporate priorities and empowered to take action across each business to ensure the highest level of safety. Acts of terrorism or armed conflicts, especially those involving aircraft, can materially depress the volume of air travel and, therefore, aircraft demand. However, the impact from these events is generally short lived and aircraft demand tends to recover quickly.

The group faces long-term environmental risks related to the regulation of aircraft-induced greenhouse gases and nitrogen oxide emissions. However, these factors are a neutral consideration in our credit rating analysis. Airbus can meet current regulations with existing technology. Although there is a longer-term risk (15-20 years) that tighter emissions regulations may require increased investment, we believe that its engine manufacturers would bear the brunt of the financial cost. We do not currently forecast a slowdown in the growth of air travel due to environmental considerations. Rather, we believe that by replacing their existing fleets with newer-generation aircraft, the airlines will reduce their fuel consumption and emissions. For example, according to Airbus, its most sold aircraft, the A320neo, will offer up to 20% savings in fuel burn per seat compared with the previous A320.

We view Airbus' governance as satisfactory, which reflects its extensive planning process and ability to adapt to operational issues and changing market conditions.

Related Criteria

- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021

- General Criteria: Group Rating Methodology, July 1, 2019

- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

- General Criteria: Methodology For Linking Long

-Term And Short-Term Ratings, April 7, 2017

- General Criteria: Rating Government

-Related Entities: Methodology And Assumptions, March 25, 2015

- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

- General Criteria: Methodology: Industry Risk, Nov. 19, 2013

- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011 Related Research

- Leased Aircraft Stranded In Russia: The Focus Turns To Insurance, March 22, 2022

- Aircraft Lessors Hit By Western Sanctions On Russia, March 1, 2022

- Omicron Has Only Slowed European Airlines' Climb To Clearer Skies, Feb. 17, 2022

- Boeing Co. Reports 2021 Results, With Losses Including Large 787 Delays Charge, Jan. 27, 2022

- Industry Top Trends 2022: Aerospace & Defense, Jan. 25, 2022

- Airbus SE, May 10, 2021

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