Bumpy switch to new models hits Airbus Group's Q3 profits

* Q3 core profit down bigger than expected 21 percent

* Says making progress in reducing A350 costs

* Drops target to regain access to export credits this year

* CFO says expects to deliver more than 670 jets this year

* CFO warns suppliers not to lose operational focus amid M&A (Adds CFO comments on ramp-up in A350 production in 2017)

By Tim Hepher and Cyril Altmeyer

PARIS, Oct (HKSE: 3366-OL.HK - news) 26 (Reuters) - Airbus Group (Swiss: AIR.SW - news) posted lower than expected third-quarter profits on Wednesday, led by a faltering performance in its core commercial jet division and continued weakness in the commercial helicopter market, but broadly maintained its full-year financial forecasts.

Europe's largest aerospace group, which includes the world's second-largest jetmaker behind Boeing (NYSE: BA - news) , said quarterly operating profit before one-off items fell 21 percent to 731 million euros ($796 million). Revenue fell 1 percent to 13.95 billion euros.

The commercial jets unit saw a 26 percent slump in its profits despite 4 percent higher revenue, with the company highlighting difficulties in the supply chain for the production of its new A350 and A320neo jets. Profits at Airbus Helicopters fell 29 percent.

The results were below average forecasts, though the company had earlier sought to dampen analyst expectations as it makes a tricky transition to producing new aircraft models, according to market sources.

Airbus shares were lower in initial trading on Wednesday but were trading 1.1 percent higher at 54 euros by 0847 GMT.

Analysts had on average forecast quarterly core operating earnings would be down 19.3 percent at 743 million euros on revenue up 1.9 percent, according to a Reuters survey.

But Finance Director Harald Wilhelm dismissed concerns over the aerospace business cycle, saying more airlines were trying to get planes earlier than those that wanted to cancel or defer orders.

"The commercial situation continues to be robust," he told reporters.

Airbus has struggled to switch to producing a new neo version of the A320 narrowbody airliners due to delayed deliveries of engines from Pratt & Whitney.

The company said it had now received "firm commitments" from engine makers that they would meet the A320neo schedule but the mix of higher-priced A320neos in total A320 deliveries was was weaker than expected.

Meanwhile deliveries of the new A350 widebody jets have also been held up, by problems with the supply of cabin equipment.

However, Airbus expressed greater confidence that it could bringing down costs for the A350 and said it was working towards meeting its target of more than 50 A350 deliveries in 2016, having delivered 29 so far, including three this month.

WARNING TO SUPPLIERS

Several analysts said after the report that the company had managed to squeeze out significant risk from the A350, Airbus's answer to the Boeing 787 Dreamliner and also a rival to the 777.

However, there are still questions over how quickly A350 production can be increased in 2017. Wilhelm told analysts suppliers were "not yet where they need to be".

"This is not the time to celebrate success. We need to be totally focused," he said.

Wilhelm also issued a warning to suppliers involved in mergers that they should not let dealmaking divert attention from executing on contracts to prevent new slip-ups.

He was responding to a $6.4 billion deal earlier this week for Rockwell Collins (NYSE: COL - news) to buy B/E Aerospace, one of the largest makers of aircraft seats and cabin equipment.

Nevertheless Airbus reaffirmed its full-year financial forecasts, including stable operating earnings and free cashflow before M&A activity, along with more than 650 jet deliveries. Wilhelm later told reporters Airbus now expected to beat this last target with over 670 deliveries.

However, it abandoned a previous target of regaining access to European export credit financing this quarter, which means it may have to step in with more financing to airlines. Its annual cashflow target now excludes any impact from this.

The system of export credits, which underpins 6 percent of deliveries, was suspended in April in a row over transparency on the use of middlemen which triggered a UK corruption probe. The delay confirms a Reuters report last month that the export credits were unlikely to reappear this year.

Airbus offered 545 million euros of financing to airlines to underwrite deliveries in the first nine months, up from 117 million a year earlier. Wilhelm said this could grow in the fourth quarter but would "not be double", adding Airbus was in "constructive talks" with export agencies.

Rival Boeing is expected to announce higher quarterly earnings on lower revenue later on Wednesday. ($1=0.9187 euros) (Additional reporting by Victoria Bryan, Editing by Susan Thomas, Greg Mahlich)