A380 delays push EADS into the red

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EADS, the leading European aerospace and defence group, fell heavily into loss in its third quarter under the burden of the rising costs for the long delays in deliveries of the A380 and the weakness of the US dollar.

It suffered an operating loss of €239m compared with a profit of €559m a year ago and said that it was still unable to give guidance on its outlook for the full year.

The group issued last month a €4.8bn profits warning for the years to 2010 and announced that delays in the A380 programme had increased to at least two years.

The group suffered a further blow this week, when FedEx, the world’s largest express delivery group, scrapped its order for 10 freighter versions of the A380 in favour of Boeing, the first cancellation since the series of disclosures of damaging production delays, which has cast doubts on the whole future of the cargo version.

UPS, FedEx’s rival, also has orders for 10 aircraft and ILFC, the leasing group, has orders for five freighters, but Hans Peter Ring, chief financial officer said these were “all in the cancellation zone” given the delays.

In the third quarter EADS fell to a net loss of €195m from a net profit of €279m a year ago.

Airbus, which is 100 per cent owned by EADS since last month’s acquisition of the remaining 20 per cent stake from BAE Systems of the UK, suffered a fall to an operating loss of €350m from a profit of €410m a year ago.

EADS turnover rose by 14 per cent to €8.48bn in the third quarter supported by record deliveries of Airbus aircraft, which are forecast to reach 430 this year, up from 378 in the whole of 2005.

Airbus orders have fallen sharply during 2006, however, as the group struggles to re-establish credibility with its customers, with the value of Airbus orders in the first nine months dropping by 49 per cent to €14.7bn from €28.6bn a year ago.

In a joint statement Tom Enders and Louis Gallois, the German and French co-chief executives, said “the struggle to reverse the A380 problems imposes a severe burden on our financial performance. This together with the dollar devaluation requires drastic measures to remain competitive.”

In the first nine months operating profits fell by 34 per cent from €2.1bn to €1.4bn. Net income declined from €1.3bn to €848m with earnings per share falling from €1.60 to €1.06. Turnover rose by 17 per cent to €27.5bn.

In addition to the extra costs from the A380 programme with charges of €1bn in the nine months EADS is being hit by the unwinding of its protective currency hedges, a €750m deterioration in the nine months, as it becomes more exposed to the weakness of the US dollar against the euro.

It is also being hit by rising research and technology costs, as it prepares the future technologies needed to support the development of a new generation single aisle aircraft to replace the current highly successful A320 family in the next decade. The group had to undertake extensive retraining of its engineers to prepare the switch from metal to composites in manufacturing.

EADS is facing too heavy losses and charges, probably amounting to at least €350m in the full year from the restructuring, including partial disposal and closure of its Sogerma aircraft maintenance and repair business. Losses at Sogerma totalled €227m in the first nine months.

Mr Ring said that the EADS board was expected to make a decision “in the weeks to come” on the future of the Airbus A350XWB programme to develop a new generation family of long range, medium capacity jets urgently needed to compete against the highly successful Boeing 787 and 777 aircraft.

He said the “major headaches” for the board in deciding whether to go ahead with the industrial launch of the A350 concerned the financing and engineering resources.

He said the planned Power8 restructuring programme at Airbus aimed at cutting costs by €2bn a year by 2010 was “a pre-condition” and was “crucial” to the group’s ability to generate the cashflow to help fund the A350 development costs, which are expected to exceed $12bn.

The board also had to be satisfied whether Airbus had the engineering resources to develop the A350 without undermining the delivery of its other programmes.

In other areas of the EADS group Eurocopter, the world’s leading helicopter maker, won new orders for 471 aircraft in the first nine months, more than it has ever sold before in a full year, while the space division doubled its order intake.

The impact of the problems at Airbus is overshadowing the improvement in profitability in other sectors of EADS including defence, helicopters, space and military transport aircraft.

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