Another U.S. Disappointment for EADS

Posted by: Carol Matlack on January 13

European Aeronautics Defence & Space, the parent company of Airbus, has suffered another setback in its quest to become a major player in the U.S. defense business. Speaking to a news conference in Wales on Jan. 13, EADS chief executive Louis Gallois said the company had backed away from a planned “significant” defense acquisition in the U.S., because it wanted to preserve cash in the global downturn.

The announcement follows a major disappointment for EADS in Washington last year, when it and partner Northrop Grumman were selected by the Air Force for a $35 billion refueling tanker aircraft contract—only to have the prize snatched away after the Government Accountability Office found flaws in the awards process. The Air Force is expected to seek new bids, again pitting EADS and Northrop against rival Boeing Co.

In the meantime, EADS had said it would keep scouting for U.S. defense acquisitions, especially in areas such as communications and sensors, to complement its existing helicopter and airplane businesses. Gallois said it had identified a potential acquisition, which he declined to identify, but that after reviewing the company's cash position at a meeting at the end of December, "the board decided not to send the check." EADS currently has about $12 billion in cash, he said.

It's not surprising that EADS wants to hang onto the money. Airbus has already promised to provide financing to some airlines, to help them take delivery of planes they've ordered. It may also provide some financing to cash-strapped suppliers. At the same time, it has frozen a planned rampup in production as aircraft orders slumped sharply in 2008.

Besides the weakness in its commercial jet business, Airbus is struggling with design production snafus on its A400M military transport plane. The cost of delays on the A400M--which has not yet flown a test flight--is above $2 billion, and still rising.