Trouble Ahead for Airbus?

EADS' mainstay could get hammered by canceled orders

It was a wound to the Achilles' heel of Europe's biggest aerospace company. Only a few months ago, the giant European Aeronautic Defence & Space Co. (EADS) was chugging along, powered by the performance of its biggest unit, commercial jet maker Airbus Industrie. The pace began to slow in June as a slumping global economy forced Airbus to scale back sales forecasts. Then came the attack on the World Trade Center, followed by a steep drop in air travel and a cascade of bankruptcy warnings in the global airline industry. Analysts now foresee a wave of canceled and delayed aircraft orders that by 2003 could leave worldwide deliveries at as little as half of recent levels. On Sept. 18, Airbus rival Boeing Co. announced it would lay off up to 30,000 workers.

Now the heat is on EADS, which owns 80% of Airbus. Spooked investors have sent EADS shares plunging nearly 40% since the terrorist attacks, prompting the company on Sept. 19 to announce it would buy back 1.3% of its shares. EADS Co-Chief Executive Philippe Camus says Airbus is scaling back next year's production target to about 350 planes, above this year's figure of 320 but well below the 400 Airbus had been expecting only a few months ago. As production slows, Airbus will let go some temporary workers and reduce subcontracts. But it doesn't plan to lay off any of its 44,000 employees. And, as EADS prepared to release first-half results on Sept. 20, Camus said the company was sticking with projections of a 15% rise in pretax earnings this year, to $1.3 billion, on sales of $25 billion. "We are still growing," Camus says. "We do not have a need to reduce dramatically."

Still, Camus and his co-CEO, Rainer Hertrich, have plenty of reasons to worry. US Airways Group Inc., which is awaiting delivery of 43 Airbus planes, could declare bankruptcy. Lufthansa is shelving plans to order up to 15 Airbus A380s, and Britain's Virgin Atlantic Airways is reviewing its aircraft orders. To be sure, planes scheduled for delivery over the next few months won't be affected much because airlines would have to pay stiff penalties for last-minute cancellations. But those deliveries will only add to a glut of planes the depressed industry doesn't need now, making it even more likely future deliveries will slow sharply. That, in turn, would cut deeply into Airbus' cash flow, because 90% or more of an aircraft's purchase price is generally paid on delivery.

"MOST AT RISK." Suddenly, the high-powered salesmanship that boosted Airbus' share of the global commercial jet market to roughly 50% over the past decade looks like a mixed blessing for EADS. What frightens investors is that EADS gets 70% of its revenues and nearly all its profits from Airbus. Boeing, by contrast, has pushed to diversify and now gets less than 60% of revenues from the commercial jet business. EADS has a big defense business, making everything from helicopters to spy satellites, but it mostly loses money. "Of all the companies in the aerospace sector, EADS is the most at risk from the problems going on in this industry now," says analyst Howard Wheeldon of Prudential Bache in London.

How could EADS respond if the downturn spirals out of control? Layoffs at Airbus would be a last resort because of tough antilayoff laws and likely political opposition from European governments. More probable, EADS would push Airbus to delay the launch of its A380 superjumbo, which will require an estimated $11 billion in startup spending. Although EADS says the first planned delivery of the plane is on track for 2006, the deadline could slip if Airbus salesmen can't rustle up more than the 48 orders logged so far.

Growing financial pressure will complicate the task of managing EADS. The company was formed last year through the merger of leading French, German, and Spanish aerospace companies that are still regarded by their governments as national champions. EADS not only has two CEOs but two headquarters, in Paris and in Munich. And it shares ownership of Airbus with BAe Systems of Britain. Knitting together such a company would be tough in the best of times, let alone today. For EADS, that pain in the Achilles' heel may not go away soon.

By Carol Matlack in Paris, with Stanley Holmes in Seattle

    Before it's here, it's on the Bloomberg Terminal.