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UPDATE 3-Worries over model switch overshadow Safran profit beat
July 29, 2016 / 5:10 AM / a year ago

UPDATE 3-Worries over model switch overshadow Safran profit beat

* H1 recurring op profit 1.31 bln euros vs f/cast 1.21 bln

* Concerns over transition from CFM56 to LEAP engines

* Shares fall 5 percent (Adds guidance on aftermarket revenues)

By Tim Hepher and Cyril Altmeyer

PARIS, July 29 (Reuters) - French aerospace group Safran found itself squeezed between two massive industrial projects on Friday when investors dumped its stock for relying too heavily on its historic CFM56 jet engine, even as it races to deliver the popular successor.

Worries over the risky transition from the world’s most-sold jet engine, which powers all Boeing and many Airbus short-haul planes, to the fuel-saving LEAP overshadowed stronger-than-expected first-half profit and sent Safran stock down 5 percent.

“Our main concern is that the good result may owe much to higher CFM56 deliveries - at satisfactory prices - that will now start to reduce,” Jefferies analyst Sandy Morris said in a note.

Safran co-developed the CFM56 and its LEAP successor with General Electric through their CFM International venture, one of the most durable transatlantic business partnerships.

But their alliance faces its biggest ever test with a steep ramp-up in production of the LEAP engine to meet higher output plans by the world’s largest planemakers, which are themselves wrestling with concerns that an order boom is losing momentum.

As it does so, Safran and GE must absorb losses on early LEAP engines and cope with reduced economies of scale on the CFM56 as production migrates to the new lines, Morris said.

Safran’s first-half recurring operating profit rose 11.8 percent to 1.31 billion euros as revenues grew 6.3 percent to 8.94 billion, led by aerospace services and security systems.

Analysts had on average been expecting recurring operating profit of 1.21 billion euros on revenues of 8.85 billion.

Overall profit was boosted by cost cuts and services on plane equipment like wheels and brakes. But aerospace propulsion profits were flat, due in part to losses on early LEAP engines and higher R&D spending, cushioned by higher CFM56 deliveries.

The widely watched civil aftermarket, or spares and repair revenues, rose 8.5 percent in dollar terms, driven mainly by overhauls of recent CFM56 engines and Safran’s stake in the GE90, the world’s largest jet engine used on the Boeing 777.

Adding to pressure on its shares, Safran said it saw aftermarket revenues for the full year growing at the lower end of its targeted range. Safran is targeting percentage growth in the high single digits, or 7 to 9 percent.

At 1316 GMT, Safran was down 4.7 percent at 61.23 euros.

Amid concerns the industry is vulnerable to production bottlenecks after record orders, Chief Executive Philippe Petitcolin said Safran would focus solely on meeting its target to raise LEAP production from 100 this year to 2,000 in 2020.

“It’s something that has never been done in aviation history. We have prepared for years ... but it remains an enormous operational challenge ahead of us,” Petitcolin said.

Despite concerns over the economy, he said the cycle in aerospace orders was holding up, with planemakers sold out well into the next decade for the size of jets mostly served by Safran.

“There is still a lot of demand, but more for the 5-6 years ahead of us. It’s true that for a 10-year horizon it is a bit more difficult (for airlines) to commit,” he told reporters.

The first LEAP-powered Airbus A320neo, whose engine competes with a model from Pratt & Whitney, was delivered to Turkey’s Pegasus Airlines last week, despite recent political turmoil in the country.

CFM has sold more than 11,000 LEAP and so far delivered 11.

Net profit fell 26 percent to 862 million euros compared with the first half of last year, when Safran’s numbers had been boosted by the sale of shares in payments system firm Ingenico.

Safran said an accounting change reflecting the completion of a space launcher venture with Airbus Group would crimp revenues by 400 million euros in 2016, but said it was reaffirming its financial targets on a comparable basis.

$1 = 0.9025 euros Editing by Victoria Bryan and Mark Potter

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