Airbus 2015 Annual Report Download - page 42

AIRBUS GROUP REGISTRATION DOCUMENT 2015 l 10 l
Risk Factors
1 Financial Market Risks
of operation and financial condition. In addition, the portion of
the Company’s USdollar-denominated revenues that is not
hedged in accordance with the Company’s hedging strategy
will be exposed to changes in exchange rates, which may be
significant.
When effectively hedged, the Company recognises fair value
changes of the derivative portfolio in equity until instruments’
maturity. If the US dollar appreciates against the euro compared
to the rate at which the Company has hedged its future
USdollar-denominated revenues the mark to market of the
derivative portfolio becomes negative. Hence, the Company’s
equity is accordingly reduced which could eventually result into
restrictions of equity otherwise available for dividend distribution
or share buy-backs. Currency exchange rate fluctuations in those
currencies other than the USdollar in which the Company incurs
its principal manufacturing expenses (mainly the euro) may affect
the ability of the Company to compete with competitors whose
costs are incurred in other currencies. This is particularly true
with respect to fluctuations relative to the USdollar, as many of
the Company’s products and those of its competitors (e.g., in the
defence export market) are priced inUSdollars. The Company’s
ability to compete with competitors may be eroded to the extent
that any of the Company’s principal currencies appreciates
in value against the principal currencies of such competitors.
The Company’s consolidated revenues, costs, assets and
liabilities denominated in currencies other than the euro are
translated into the euro for the purposes of compiling its financial
statements. Changes in the value of these currencies relative
to the euro will therefore have an effect on the euro value of the
Company’s reported revenues, costs, earnings before interest
and taxes, pre-goodwill impairment and exceptionals (“EBIT*”),
other financial result, assets and liabilities.
See “—Management’s Discussion and Analysis of Financial
Condition and Results of Operations — 2.1.7 Hedging Activities”
for a discussion of the Company’s foreign currency hedging
strategy. See “—Management’s Discussion and Analysis
of Financial Condition and Results of Operations — 2.1.2.3
Accounting for Hedged Foreign Exchange Transactions in
the Financial Statements” for a summary of the Company’s
accounting treatment of foreign currency hedging transactions.
* Unless otherwise indicated, EBIT* figures presented in this report are Earning before Interest and Taxes, pre-goodwill impairment and exceptionals.
Sales Financing Arrangements
In support of sales, the Company may agree to participate in
the financing of selected customers. As a result, the Company
has a portfolio of leases and other financing arrangements
with airlines and other customers. The risks arising from the
Company’s sales financing activities may be classified into two
categories: (i)credit risk, which concerns the customer’s ability
to perform its obligations under a financing arrangement, and
(ii)aircraft value risk, which primarily relates to unexpected
decreases in the future value of aircraft. Measures taken by
the Company to mitigate these risks include optimised financing
and legal structures, diversification over a number of aircraft
and customers, credit analysis of financing counterparties,
provisioning for the credit and asset value exposure, and
transfers of exposure to third parties. No assurances may
be given that these measures will protect the Company from
defaults by its customers or significant decreases in the value
of the financed aircraft in the resale market.
The Company’s sales financing arrangements expose it to
aircraft value risk, because it generally retains security interests
in aircraft for the purpose of securing customers’ performance
of their financial obligations to the Company, and/or because it
may guarantee a portion of the value of certain aircraft at certain
anniversaries from their delivery to customers. Under adverse
market conditions, the market for used aircraft could become
illiquid and the market value of used aircraft could significantly
decrease below projected amounts. In the event of a financing
customer default at a time when the market value for a used
aircraft has unexpectedly decreased, the Company would be
exposed to the difference between the outstanding loan amount
and the market value of the aircraft, net of ancillary costs (such
as maintenance and remarketing costs, etc.). Similarly, if an
unexpected decrease in the market value of a given aircraft
coincided with the exercise window date of an asset value
guarantee with respect to that aircraft, the Company would be
exposed to losing as much as the difference between the market
value of such aircraft and the guaranteed amount, though such
amounts are usually capped. The Company regularly reviews
its exposure to asset values and adapts its provisioning policy
in accordance with market findings and its own experience.
However, no assurances may be given that the provisions
taken by the Company will be sufficient to cover these potential
shortfalls. Through the Airbus Asset Management department
or as a result of past financing transactions, the Company is
the owner of used aircraft, exposing it directly to fluctuations in
the market value of these used aircraft.
In addition, the Company has outstanding backstop
commitments to provide financing related to orders on Airbus’
and ATR’s backlog. While past experience suggests it is unlikely
that all such proposed financing actually will be implemented,
the Company’s sales financing exposure could rise in line with
Financial Statements 2015
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QRegistration Document 2015
Annual Report 2015 Financial Statements 2015