EADS Defense Unit Marginalized by Airbus Must Cut to Survive

European Aeronautic, Defence & Space Co. (EAD)’s steepest job cuts in half a decade reflect unfulfilled defense ambitions that have become a sideshow to its dominant Airbus civil aircraft business.

The company will eliminate 5,800 posts, equal to 15 percent of its workforce in defense and space, and shutter facilities in Germany, France, Spain and the U.K., EADS said yesterday. Underlining the divergent fortunes within the group, some positions will shift to Airbus to support rising output.

Chief Executive Officer Tom Enders called the reductions normal business practice in a mature company confronted with shrinking demand, and said EADS may be forced to deepen cuts in a few years should the Eurofighter Typhoon combat plane fail to win exports or if unions reject the measures.

“If we can’t realize the synergies inherent in the new combination of space and defense then certainly this will not have been the last restructuring,” Enders said today. “Everybody in defense is adapting. We’re a very normal company, we’re doing the same.”

No Choice

EADS, based in Toulouse, France, fell as much as 68 cents, or 1.4 percent, to 49.81 euros, and traded at 49.83 euros as of 12:01 p.m. The stock has advanced 69 percent this year, putting it on track for its second-best annual performance since it first traded in 2000.

Created in 2000 from disparate European assets, the company was supposed to give the region an aerospace and defense powerhouse to match U.S. competitor Boeing Co. (BA) While Airbus pulled even with its arch-rival in commercial jet sales, defense activities have languished amid slack government support.

“It’s an admission that market realities have left them no choice but to drastically scale back,” said Richard Aboulafia, vice president at the Teal Group in Fairfax, Virginia. “Their home defense markets have collapsed.”

The measures should not be seen as a prelude to exiting defense altogether, said Enders, a German national who at one time ran the defense unit.

“Our traditional markets in Europe in particular are down,” he said. “If we want to gain business in export markets, we have to cut costs, we have to create operational and market synergies.”

Export Competition

EADS faces tougher competition in export markets from U.S. manufacturers looking to offset spending declines at home through foreign sales, said Bernhard Gerwert, who will run the new Airbus Defence & Space unit starting next month. The company is still reviewing which activities to exit, he said.

Costs are too high in the space business, with the Space Exploration Technologies Corp. Falcon rockets 30 percent cheaper than an Ariane 5, he said.

EADS said it will put 1,000 to 1,450 people out of work, depending on how many employees accept voluntary redundancy packages that remain to be spelled out. Costs associated with the cuts are still under review as EADS, which employees 140,405 staff, enters negotiations with workers.

The planned cuts come as EADS seeks to meet a 10 percent operating margin by 2015, before including costs associated with A350 jetliner and assuming dollar-euro exchange rate of $1.30.

Fewer Sites

The reductions will lead to “substantial” consolidation of sites in Germany, France, Spain and the U.K., EADS said, following an announcement in July that it would merge the two divisions to reduce expenses. The measures will be implemented through the end of 2016, with the aim of offering about 1,500 workers other jobs at Airbus and Eurocopter.

Enders had sought to address the imbalance between commercial aircraft and defense operations through a merger with BAE Systems Plc (BA/) in 2012, a plan that broke down after objections from the German government and some shareholders. EADS had sales of about 56 billion euros in 2012, with Airbus contributing more two thirds.

EADS, in which the French and German government hold direct stakes, informed governments of the job losses ahead of yesterday’s announcement, Enders said. Germany’s Economy Ministry said it wants EADS to implement the cuts as “cautiously” as possible and said it regrets the move.

In slashing jobs, EADS is catching up with announcements by other defense companies. Lockheed Martin Corp. (LMT), the world’s largest, plans to eliminate 4,000 jobs and close four sites by mid-2015, the company said last month. BAE Systems also has undertaken a series of reductions and said last month it would eliminate 1,775 positions as it ceases ship construction at the historic Portsmouth shipyard in England.

“Even if European defense recovers in the long term, the industrial base will look profoundly different by then,” Henrik Heidenkamp, a research fellow at the Royal United Services Institute said. “The cuts taken by EADS are a clear indication that the European defense market has entered a period of fundamental change.”

To contact the reporters on this story: Andrea Rothman in Toulouse at aerothman@bloomberg.net; Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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