Safran braces for 737 MAX fallout after beating 2019 forecasts

By Tim Hepher and Laurence Frost
The Safran logo is pictured at the company's logistic area in Colomiers, near Toulouse

By Tim Hepher and Laurence Frost

PARIS (Reuters) - France's Safran <SAF.PA> posted a stronger-than-expected rise in 2019 core profit led by jet engine spare parts, but warned of flat-to-lower 2020 revenue hit by Boeing's <BA.N> 737 MAX grounding crisis.

Safran co-produces the jet's engines with General Electric <GE.N> and makes the bulk of its cabling as well as equipment from oxygen masks to fuel systems, slides, lighting and cockpit doors after acquiring Zodiac Aerospace in 2018.

The plane's nearly 12-month grounding following two fatal crashes dominated a mixed outlook for 2020, with Safran predicting revenue flat or down by as much as 5% even as operating income is set to grow by around 5%.

To help reach that forecast, it said was targeting 300 million euros (253 million pounds) of cost savings and other belt-tightening measures to cope with the 737 MAX outage.

"2020 is a year of challenges but we have all the robustness ... to reach our objectives," CEO Philippe Petitcolin told reporters.

Safran's 737 MAX plan involves cost savings, a hiring freeze and lower R&D and capital spending for 2020.

It has also negotiated a new agreement with Boeing for new payments terms in 2020 on the 737 MAX, without giving details.

The world's third-largest aerospace supplier said its 2019 operating profit rose 24.6% on a like-for-like basis to 3.82 billion euros ($4.2 billion) on revenue up an underlying 9.3% to 24.64 billion.

Analysts had expected operating income of 3.75 billion euros on revenue of 24.48 billion, according to Refinitiv data.

The French company posted growth across the board, notably at its recently acquired and restructured interiors division.


However, some analysts said the outlook for 2020 was more conservative than expected and Safran cast doubt on its medium-term objectives, saying they would be reviewed after the MAX returns to service, which it expects in mid-2020.

Safran said its CFM joint venture with General Electric would produce 1,400 LEAP engines in 2020, down from an original forecast of 2,000.

The fuel-efficient engines are the sole source of power on the 737 MAX and compete with a Pratt & Whitney <UTX.N> alternative on the Airbus <AIR.PA> A320neo.

The spread of coronavirus, which has sharply hit air traffic that in turn drives parts revenue, is another wild card.

Widely watched civil aftermarket revenue rose 9.9% in dollar terms in 2019 and Safran predicted growth in the "high single digits" in 2020 "as long as disruption created by the coronavirus on air traffic does not extend beyond Q1".

Petitcolin said he expected traffic to resume progressively from April based on the SARS epidemic in 2003.

He said between 74% and 95% of the company's 2,000 Chinese staff had reported back to work by the beginning of this week as China's manufacturing sector gradually resumes production.

Some of Safran's own suppliers closest to Hubei province, the epicentre of the epidemic, are running at closer to 40%, but others are already at full-speed production, he said.

(Reporting by Tim Hepher; editing by Maju Samuel and Jason Neely)