EADS Seeks Simpler Life as Latest Airbus Planes Start to Pay Off

Dec. 12 (Bloomberg) -- European Aeronautic, Defence & Space Co. proclaimed the dawning of an era of corporate simplicity featuring a slimmer company structure, steady dividends, less program risk -- and a new name short enough to fit on a T-shirt.

Chief Executive Officer Tom Enders presented investors with plans for rising payouts equal to as much as 40 percent of net income, a 10 percent operating margin and positive cash flow from 2014 at a meeting in London yesterday. They responded by pushing EADS shares to their biggest gain in a year.

“We’ll continue to focus on improving our profitability, our earnings, as well as our cash situation,” Enders said, mapping out a future for the company built on receipts from the new A350 jetliner, stable production of the A380 superjumbo and a boost from the revamped A320neo toward the end of the decade.

EADS will abandon its clunky name next month after more than a decade, taking on the identity of the globally recognized Airbus brand just as the commercial-jet unit’s dominance is confirmed by plans to shrink ailing defense and space businesses. Lessons learned at the planemaker in satisfying customer demand through less-costly products will be applied throughout the group, Enders told investors.

Photographer: Andrew Harrer/Bloomberg

European Aeronautic, Defence & Space Co. said Dec. 9 it would eliminate 5,800 posts as part of a merger of ailing defense and space businesses. Close

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Photographer: Andrew Harrer/Bloomberg

European Aeronautic, Defence & Space Co. said Dec. 9 it would eliminate 5,800 posts as part of a merger of ailing defense and space businesses.

An integrated defense and space unit to be introduced Jan. 1 will be heavily reliant on executives who cut their teeth at Airbus, while a restructuring plan unveiled this week requiring the elimination of 5,800 posts is modeled on a savings drive Enders oversaw when he ran the planemaker, he said.

‘Incremental Improvements’

To get the remaining employees excited about their new company, EADS said it ordered hundreds of T-shirts emblazoned with the new corporate name, as it aims to build grass-root support for the new structure even as it shutters sites across Europe.

“What we intend to do for the entire troop is to work with the same passion on our products and our challenges as we used to do in the Airbus commercial group,” Enders said.

The slimmed down business won’t repeat past mistakes, the CEO said. When EADS was formed through a merger of French, German and Spanish assets, the space-launcher business was so unprofitable the board considered a sale; as Europe embarks on a new rocket program, the Ariane 6, “we have to look for a different industrial setup than we currently have,” he said.

Enders also wants to curb cash-hungry development efforts in favor of milking existing products for higher returns. At Airbus, he backed the re-engining of the A320 narrow-body over building a new plane. No new jets are planned at Airbus beyond the A350, which is due to commence deliveries late next year.

Frugal Approach

“Why should we spend large amounts of money when we can make significant incremental improvements?” he said. “This principle can be applied outside of just civil aircraft.”

Reaching the financial targets detailed in London won’t be easy, with challenges in all three of its divisions spanning Airbus, defense and space and the Eurocopter helicopter unit.

For Airbus, the most immediate hurdle is bringing the A350 to market. Flight testing began in June and now features two jets that have logged more than 700 hours, with a third -- out of a slated five -- due to join the trials before March.

Airbus has booked 814 orders for the long-haul plane, with pricing that should deliver healthy margins, Chief Financial Officer Harald Wilhelm told investors. The program, heavily cash-consuming during the development phase, will become less burdensome from 2017 and break even by 2020, he said.

A380 Slots

Wilhelm said the goal of generating cash company-wide in 2014 and 2015 will be tough due to A350 development costs and spending linked to a ramp-up in production of the A400M military airlifter. Cash flow should improve after 2015, though the rate of profit improvement will slow, he added.

EADS shares rose 7.5 percent yesterday, the most since Dec. 6 last year, after the company said it’s targeting earnings before interest and tax equaling 7 to 8 percent of sales in 2015 even including A350-related expenses, and that one-time charges for job cuts will have been absorbed by then.

The stock has advanced 79 percent this year, valuing the Toulouse-based company at 41 billion euros ($57 billion).

“What we have here is a significant de-risking,” said Charles Armitage, an analyst at UBS in London. “There was very high uncertainty as to what the losses on the A350 might be. Now we know.”

The integrated Airbus Defence & Space unit will reach an ebit margin of about 8 percent in 2015, and a 10 percent goal thereafter, Wilhelm said.

The A380 should reach break-even in 2015, with almost all of the 30 production slots for the year filled after a top-up order from Dubai-based Emirates, the CFO said, adding that the double-decker should then stay in the black. Build costs are coming down “very nicely,” according to Enders.

“They’re doing all the right things but there are considerable risks, so they’ll do very well to reach their targets,” said Nick Cunningham, an analyst at Agency Partners in London.

To contact the reporters on this story: Andrea Rothman in London 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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