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EADS Builds Hedge Book to $84 Billion After 2012 Euro Drop

EADS Builds Hedge Book to $84 Billion After Euro Decline in 2012
The vast majority of the 588 Airbus planes delivered last year were paid in dollars, and with more than 50 percent of costs incurred in euros, EADS needs to buy financial contracts to protect revenue translated back into euros. Photographer: Balint Porneczi/Bloomberg

Feb. 27 (Bloomberg) -- European Aeronautic, Defence & Space Co. said it secured more contracts last year that help it smooth out swings between the euro and the dollar, the currency of choice in the global aviation industry.

The parent company of Airbus SAS boosted its hedge book to $84 billion in 2012 from $75 billion a year earlier, EADS said. EADS bought $30 billion in new hedges throughout 2012, locking in an average rate of $1.30 to the euro to protect the future revenues for its large commercial aircraft, helicopters and satellites, Chief Financial Officer Harald Wilhelm said.

The vast majority of the 588 Airbus planes delivered last year were paid in dollars, and with more than 50 percent of costs incurred in euros, EADS needs to buy financial contracts to protect revenue translated back into euros. Every 10-cent drop in the value of the dollar against the euro costs the company about 1 billion euros in pretax profit, EADS has said.

“We’ve taken advantage of a more-favorable U.S. dollar environment, accelerating our hedging speed in 2012,” Wilhelm told analysts today on a call, after EADS reported earnings.

The euro gained 0.3 percent to $1.3087 at 12 p.m. in Frankfurt after falling to $1.3018 yesterday, the weakest since Jan. 7. EADS has based its financial guidance based on the expectation of $1.35 to the dollar.

Maturing Hedges

EADS has been seeking to increase the number and the quality of banks that can take the other side of its hedging transaction to limit risk, Wilhelm said.

“One of the strategic pillars of 2012 was to expand the number of banks to hedge risks,” Wilhelm told journalists. “We’re looking for diversification and quality of banks. We expanded our profile, going East, North and West.”

EADS has about 40 banks with which it engages in hedging transaction, Wilhelm said, without providing a comparison for earlier.

In 2012, hedges of $22.2 billion matured at an average hedge rate of $1.36 to the euro, Wilhelm said. In 2013, the average hedge rates will be $1.37 to the euro, declining to $1.36 billion and $1.35 in the two following years. By 2016, EADS will benefit from average hedge rates of an estimated $1.32 to the euro after having purchased dollar hedges at more favorable rates, partly in 2012, the company said.

The expected “exposure,” or amount of dollar sales that require coverage from hedges, will be about $23.1 billion in 2013. By 2016 it will be about $20.4 billion. The earlier EADS can move to lock in favorable currency translation rates, the more secure it can be about future revenues when they are brought back into the company in euros.

Wilhelm, who is CFO of both EADS and Airbus, said 2013 is already fully covered, and non-covered dollars for 2014 through 2016 “have been reduced at more attractive rates, which increase EADS’s resilience to currency fluctuations in the medium term,” he said.

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

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

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