EADS Earnings Hit by Currency Effect as Dollar Hedging ExpandsRobert Wall
European Aeronautic, Defence & Space Co. said first-half earnings suffered from a 170 million euro ($225 million) currency revaluation as the company expanded its hedging policy to lock in low euro rates.
Commercial airplane unit Airbus, which will now lend its name to the entire group, had a 108 million-euro charge in the first six months to reflect the revaluation and a dollar mismatch on so called pre-delivery payments that customers make before receiving their jet, the Toulouse-based company said.
EADS is exposed to swings in the exchange rate between the dollar and euro since most of its costs are in the European currency, with planes sold by Airbus priced in dollars. The company needs to buy financial contracts to protect revenue translated back into euros since every 10-cent drop in the value of the dollar against the euro costs the company about 1 billion euros in pretax profit.
EADS secured $10.3 billion worth of new hedge contracts in the first six months, adding $5.3 billion in the second quarter, according to a presentation to analysts. The average rate for the hedges was $1.32, compared with the $1.33 average rate at the end of March.
EADS has hedged costs for this year, covering about 23.4 billion euros, at an average rate of $1.37, trailing the $1.36 rate it saw last year. The hedge rate for next year should be $1.35, one cent above the figure locked in six months ago.
The $82.1 billion hedgebook EADS has ammased to lock in costs on future Airbus deliveries has an average rate of $1.34 per euro compared to $1.35 at the end of last year. The total has a negative 1.1 billion euro mark-to-market value with a closing rate at mid-year of $1.31.
The euro was little changed today in Frankfurt and traded at $1.3265 as of 9:47 a.m.
The strength of Airbus orderbookings has increased the amount of “exposure,” or amount of dollar sales that require coverage from hedges in the coming years.