Global Economics

Another A380 Delay Rocks Airbus


Airbus still can't get its wires untangled. On Sept. 21, the plane maker's parent, European Aeronautic Defence & Space confirmed what had been rumored for weeks: The A380 megaplane faces yet another round of production delays. While Singapore Airlines will probably get the first of the double-decker airliners as promised by the end of this year, carriers such as Emirates and Qantas that were expecting already-postponed deliveries in 2007 and 2008 will have to wait even longer.

The announcement pushed EADS' share price down 2%, to a cumulative loss of 30% this year, as investors worried about a fresh hit to earnings. EADS already forecast $2.5 billion in lost profits over the next four years when it disclosed in June that electrical-wiring problems on the assembly line would trim expected deliveries from 25 to only nine during 2007.

Airbus' new chief executive, Christian Streiff, had promised a progress report by the end of September, but now that deadline has slipped, too. "EADS and Airbus will provide more detailed information within four weeks," an EADS spokesman said on Sept. 21. Spokesmen for Emirates and Singapore say Airbus has given them no details about the additional delays. (Emirates also would not confirm earlier press reports that its $13.5 billion order for 45 A380s was in doubt, saying only that the airline "has taken no position with regard to cancellation.")

CASH SQUEEZE. Such uncertainty further weakens airlines' confidence in Airbus' ability to meet production timetables. That's a vital concern, as the European plane maker prepares to launch the planned A350 widebody to counter archrival Boeing's (BA) 787 Dreamliner. Development of the A350 is already at least two years behind the Dreamliner, which is set to enter service in 2008 (see BusinessWeek.com, 6/14/06, "Airbus Eats Humble Pie at Farnborough").

That gives a big sales advantage to Boeing—as underscored on Sept. 20 when Russian carrier Aeroflot said it would award half of a $6 billion aircraft order to Boeing, in part because of its head start against the A350.

These and other problems are creating a big cash squeeze on EADS, Europe's biggest aerospace group. Because of production delays, the A380 won't start producing substantial revenue for Airbus until 2008 or even later. At the same time, Airbus must come up with $12 billion to develop the A350, while expanding production capacity to build other planes already in the order pipeline.

VERY RISKY. Low-interest European government loans, a key source of financing for the A380 and earlier Airbus planes, may not be available for the A350 because of a dispute pending before the World Trade Organization over aircraft subsidies. Moreover, the recent acquisition of a 5% stake in the company by a Kremlin-backed Russian bank could derail EADS' efforts to secure big U.S. defense contracts.

The bottom line: EADS' cash flow at best will be "neutral" for the next several years—and at worst, the company could pile up more than $6 billion in added debt, says Sandy Morris, a London-based aerospace analyst at ABN Amro who has a "sell" recommendation on the stock. EADS may be unable to pay dividends and might even resort to a capital increase, Morris says. The company also might feel pressure to divest assets, such as its stake in France's Dassault Aviation. "I can't see any rewards for shareholders, and I see massive risk," he says.

Rumors of additional delays on the A380 had been circulating since Sept. 13. That's when Mike Turner, CEO of British aerospace group BAE Systems, which owns 20% of Airbus, said he "wouldn't be surprised" by more delays. Airbus and EADS dismissed the comment as speculation. But in deciding subsequently to confirm the delays, EADS was clearly eager to avoid a repeat of the firestorm in June, when the company acknowledged it had been warned of serious production problems weeks before disclosing them publicly.

BOEING ON THE WING. EADS co-CEO Noël Forgeard, Airbus boss Gustav Humbert, and Airbus chief operating officer Charles Champion, who oversaw the A380 program, all lost their jobs in the ensuing uproar. Forgeard, Airbus' former CEO, is being investigated by stock market regulators because his family sold millions in shares two months before the disclosure (see BusinessWeek.com, 6/30/06, "Major Screwup at Airbus").

While Airbus struggles to get the A380 airborne, Boeing is roaring ahead on aircraft sales. The Chicago-based company booked 496 orders during the first half, compared to only 117 for Airbus. That's a big reversal for the European company, which had taken in more orders than Boeing every year from 2001 to 2005. Because of its fat order book, Airbus is having to expand production capacity, contributing to a $2 billion increase in capital expenditure during the first half of this year that adds to the cash squeeze on EADS, ABN Amro's Morris says.

EADS is extremely vulnerable to Airbus' shifting fortunes, because the parent company draws two-thirds of its $43 billion annual revenues and almost all its profits from Airbus. Boeing, by contrast, has a $31 billion-a-year defense business that outstrips its commercial-jet division's $22.5 billion annual sales.

KREMLIN ON DEFENSE. That's why EADS, almost from the moment it was created by a cross-border merger six years ago, has been trying to break into the $500 billion U.S. defense market. But now, with a big Pentagon deal almost within reach, that effort could be dashed, thanks to Russia President Vladimir Putin.

Vneshtorgbank, a Russian bank with close Kremlin ties, has acquired 5.02% of EADS shares in recent weeks on the open market. On Sept. 12, Putin aide Sergei Prikhodkho said Russia might increase that stake even further, with an eye toward giving Russia "a role in [EADS] management."

The announcement came just as EADS, in partnership with Northrop Grumman, is preparing to go up against Boeing in a bid to supply billions of dollars worth of tanker aircraft to the U.S. Air Force (see BusinessWeek.com, 9/1/06, "Russia Jumps Into the Aerospace Race").

The prospect of such a plum going to a partly Russian-owned company is almost certain to raise alarms on Capitol Hill, where foreign ownership of strategic industries is a politically explosive issue. Only a few months ago, Congress helped deep-six the Dubai Ports World deal and a planned Chinese bid for U.S. oil independent Unocal.

Still, the Russians, no matter how many shares they buy, can't control EADS or even obtain a board seat. The corporate charter keeps control firmly in the hands of key German and French shareholders, including DaimlerChrysler (DCX) and France's Groupe Lagardère, who hold a combined 51% stake. "Once people understand that there's no material impact, this issue will quickly become a non-issue," says Ralph Crosby, a former Northrop executive who heads EADS' North American operations.

So far, Russia's involvement has drawn little attention in Congress, perhaps because legislators are distracted by upcoming elections. The current 5.02% ownership "is not a show-stopper," says Seto Bagdoyan, an expert on homeland security at the Washington-based Eurasia Group think tank. But if Russia substantially increases that stake, "It could get messy."

A troubled megaplane, a tightening cash squeeze—and now a Russian invasion. EADS looks set for a rough ride the next few years.


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