EADS Flying Solo Leaves Enders Repairing Investors Faith in Jets

Tom Enders, chief executive officer of European Aeronautic, Defence & Space Co. Photographer: Balint Porneczi/Bloomberg

A month after European Aeronautic, Defence & Space Co. buried plans to merge with BAE Systems Plc, Chief Executive Officer Tom Enders gets a chance to assure investors he can ride out demand swings in civil aviation alone.

Enders will announce third-quarter earnings tomorrow that further tilt Europe’s largest aerospace company toward its Airbus civil aircraft business. Profit before interest and tax probably rose 52 percent to 490 million euros ($627 million) according to analysts surveyed by Bloomberg, as airliner deliveries rose. Airbus accounts for 70 percent of total sales.

Enders advertised the merger with BAE as the fast-track option to a balanced portfolio between civil and defense assets that would help EADS bridge declines in either segment. The idea never caught on with shareholders, who pummeled the stock in the wake of the announcement on concern they wouldn’t have enough say in the new group. The German government ultimately killed Enders’s aspirations with its veto.

“Given that he tried to do this deal, and failed, one big question out there is EADS management’s belief in the civil cycle,” said Zafar Khan, an analyst at Societe Generale in London. “Management will need to highlight the fact that they have lots of confidence in the civil business for growth potential, and that the big aircraft programs are on track.”

Working Investors

For four weeks, from the first announcement of the plan on Sept. 12 to the companies ending talks on Oct. 10, Enders and his counterpart at London-based BAE, Ian King, sought to win stakeholders’ backing for a combination. EADS has lost 7.4 percent in value since mid September, slumping as much as 10 percent the day after the companies disclosed their talks.

The combination was designed to build a European equal to Boeing Co., whose business is more balanced between civil and defense assets. Boeing has boosted its 2012 profit forecast three times as commercial and military aircraft sales rose.

Enders has emerged unscathed from the episode for now, partly protected by a shareholder agreement that balances representation between German and French executives in top management. By contrast, Invesco Ltd., which holds 13.4 percent of BAE shares, called for the resignation of Chairman Dick Olver and of independent director Peter Mason after breakdown.

Still, Enders will need to map out a future for EADS’s defense assets, which ranks as an also-ran in the U.S., the world’s biggest weapons market, and lacks critical mass even in Europe, where it has been cutting jobs as governments reduce budgets. Enders said the Cassidian defense unit would come under particular strategic scrutiny in the wake of the failed merger, as he reconsiders the structure.


“We have reached a bit of an impasse at Cassidian,” said Sandy Morris, a London-based analyst at Jefferies International, with Germany unwilling to boost defense spending and not allowing the business to be merged. Near-term, it may simply be necessary to “let the dust settle,” he said.

With the focus back on the civil-aviation assets, Enders and Fabrice Bregier, his successor at the helm of Toulouse, France-based Airbus, must assure customers and investors that programs are progressing. Airbus has commenced final assembly of the A350 aircraft, a complex procedure given that the wide-body jet is largely made from lightweight composite materials. First flight is slated for the middle of next year.

On the A380 double-decker aircraft, Airbus is working to fix cracks in wing components that emerged this year and have already cost Airbus more than 270 million euros. Airbus had planned to win 30 new orders this year for the A380, which has been in service for half a decade, and has failed to come close to that goal so far. It wants to deliver 30 units in 2012.

Delivery Goal

Overall, Airbus is set to hand over 580 planes this year, from 530 in 2011. While the planemaker still has a six-year backlog, it may be approaching peak delivery before shipments decline, said Nick Cunningham, an analyst at Agency Partners in London. EADS’s defense, helicopter and space businesses aren’t sufficiently large to offset a decline.

Airbus’s book-to-bill ratio, or the relationship between new orders won and planes delivered, will fall below 1 some time next year, from a peak of 2.8 in February, Cunningham said. Historically, deliveries decline within two years of the book-to-bill falling below 1, he said.

“A delivery downturn could be only a couple of years away,” Cunningham said. As an investor, “you can’t make money from buying and holding companies like this. You make money from timing the cycle.”

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