EADS Struggles to Gauge Demand as Airbus Sales Slump (Update2)

May 12 (Bloomberg) -- European Aeronautic, Defence & Space Co. said it can’t gauge demand or earnings beyond the end of this year as airlines cancel or defer Airbus orders and costs from the delayed A400M military-transport plane escalate.

Airbus will struggle to win the 300 jetliner contracts it’s targeting this year and faces an earnings squeeze from falling prices, mounting inventories and a bias toward less-profitable single-aisle aircraft, EADS said in a statement today. The A400M may lead to a charge this half and further costs in the future.

EADS lost 3.3 percent in French trading after reporting a 40 percent drop in first-quarter net income to 170 million euros ($231 million). Sales at the company, which is based in Paris and Munich, fell 14 percent to 8.5 billion euros and earnings before interest and taxes slumped 70 percent.

“EADS’s statement makes our sell case for us,” said Nick Cunningham, an analyst at Evolution Securities in London. “Airbus will have an increasingly torrid time as volumes drop sharply following airline delivery deferrals. Forecasts are very vulnerable to trading conditions and A400M charges.”

EADS shares fell 37 cents to 10.98 euros in the French capital. The stock has declined 8.8 percent this year, compared with a 2.8 percent increase at Chicago-based Boeing Co., the second-biggest maker of commercial aircraft after Airbus SAS.

Profit Decline

EADS’s Ebit figure will decline this year while remaining positive, Chief Financial Officer Hans Peter Ring said on a conference call. Revenue will be little changed, and research and development costs will increase to about 3 billion euros from 2.7 billion euros in 2008.

The company faces “limited visibility towards the end of the year and beyond,” Ring said, adding that the 300-plane Airbus-order goal, excluding deferrals, “is becoming more challenging in the current market environment.”

Airline traffic fell 11 percent in March, continuing a retreat that began in September, while an outbreak of swine flu last month has worsened the short-term forecast for air travel, according to the International Air Transport Association.

Airbus, which contributes two-thirds of EADS’s revenue, handed over 116 planes in the quarter versus 123 a year earlier.

The unit delivered six fewer A330 and A340 widebody jetliners, which sell for as much as $250 million apiece according to advertised rates, or about three times the value of a single-aisle A320, though the prices Airbus actually got for the aircraft was lower than a year earlier, Ring said.

Pricing, set well in advance of delivery when a customer orders a plane, should improve for widebodies next year, he said. Single-aisle pricing was little changed.

Build Rate

Airbus has also scrapped plans to accelerate narrowbody output to 40 per month and will cut the rate to 34 by October from the current 36.

Working capital deteriorated in the quarter, mirroring a build-up of parts inventories at Airbus due to a mismatch between production and deliveries, EADS said.

Ring said the financing provided by Airbus to help airlines pay for planes will amount to about 1 billion euros this year compared with 327 million euros in 2008. European export credit agencies are also playing a bigger role in guaranteeing loans, backing one-third of all first-quarter deliveries, he said.

Delays to the A400M resulting from engine-design problems led EADS to record a 120-million-euro charge in the first quarter and the program remains the company’s greatest financial risk, with a “high level of uncertainty,” it said.

The transport plane is running at least three years behind a planned delivery schedule and EADS is negotiating with seven countries that ordered 180 planes in 2003 as it seeks a new contract in which governments would shoulder more of the risk.

To contact the reporter on this story: Andrea Rothman in Toulouse, France, at aerothman@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net