EADS Shares Lose Altitude

As the shrinking dollar soaks up Airbus' profits, Deutsche Bank predicts a slowdown in the industry and downgrades shares of parent EADS

by Carol Matlack

The dark clouds over Airbus' parent company European Aeronautics Defence & Space (EAD.PA) just won't go away. EADS shares plunged nearly 8% on Jan. 7 after a Deutsche Bank (DB) analysts' report predicted slowing aircraft orders this year, along with a continued weak dollar that hurts the European company's competitiveness. "We have growing concerns over commercial aerospace cycle fundamentals through 2008," the analysts said in downgrading EADS shares to sell.

Airbus has just wrapped up what's likely to be a record year for aircraft sales. It had logged orders for more than 1,200 planes as of the end of November, and a flurry of late-year sales is expected to push the total beyond rival Boeing's (BA) 1,413 tally when Airbus announces final figures next week.

Airbus' problem is that planes are priced in dollars—but nearly all its manufacturing base is in euro-denominated Europe. So when the dollar sinks, profits dry up. EADS Chief Executive Louis Gallois recently told BusinessWeek that the rise of the euro against the dollar last year had cost the company at least €1 billion in operating profit (BusinessWeek.com, 11/16/07). That means Airbus will need to find more cost savings in addition to an aggressive cost-cutting program that includes selling off six of Airbus' European factories (BusinessWeek.com, 12/19/07).

A Perfect Storm?

All this is happening as the industry appears headed into a down cycle after several years of booming business. Airbus is sitting on a fat order book, but most of the planes in its backlog are narrowbody models with relatively thin profit margins. The European company has lagged Boeing recently in orders for more profitable widebodies. While Boeing has sold more than 800 of its new 787 Dreamliners, Airbus is just gearing up the marketing for its competing A350 model, with 127 on order as of the end of November.

Airbus also is trying to jump-start sales of its A380 megaplane, which has logged only 177 orders to date, compared with the more than 400 needed to break even after a series of production delays. And it's struggling with manufacturing snafus on its A400M military transport plane, though the company denies German press reports over the weekend that additional delays are expected.

The Deutsche Bank analysts say that EADS's cash flow will be severely crimped over the next three years by the cost of developing the new A350 at the same time the company has taken a profit hit of nearly $9 billion due to delays on the A380 and A400M. "The scale of risks and uncertainties and weak cash flow prospects do not make the shares appealing," the analysts say. On Jan. 7, investors agreed—and bailed out.

Matlack is BusinessWeek's Paris bureau chief.