EADS Earnings Preview

EADS, parent of Airbus, announces its 2Q09-1H09 earnings July 28. Here are some topics that ought to be covered and questions analysts and reporters should ask:

A400M: This troubled program, now four years late and nearly $3bn over budget, got another six month reprieve from its European customers last week. With this development, don’t expect much of an update on this troubled program that is costing EADS/Airbus $100m a month. While the technical specifications and goals are admirable, this politically-driven project is such a mess that only a wholesale rewriting of the contract can save it. Unless and until this is done, all EADS and Airbus can say is there is no real news to report.

A350/WTO: With a decision by the WTO on the US (Boeing) complaint against Airbus’ “illegal” subsidies apparently weeks away (see separate item), and news from the Paris Air Show that the UK, France and Germany (Spain is a question mark) are ready to step up to help fund the launch of the A350, questions undoubtedly will come up about this. The UK, sensibly, seems to be willing to do a standard loan. Spain, apparently pissed that the Airbus Military program was removed from Spain and given to Toulouse, skipped a couple of funding meetings. EADS CEO Louis Gallois and Airbus CEO Tom Enders defended the launch aid at the EADS media day immediately preceding the Paris Air Show, and again at the Air Show, saying among other things that the Boeing 787 is “the most heavily subsidized commercial aircraft” in aviation. Whether it is or it isn’t, the EU (Airbus) did not challenge billions of dollars in government aid provided by Japan and Italy to its aerospace industrial partners on the 787 program. Any other “subsidies” on the 787 are, in our view, offset by similar “subsidies” to Airbus. These include tax breaks, state incentives, etc.

We believe that while the A350 can legally tap government loans and launch aid, we also believe that Airbus should use the commercial markets or, as apparently suggested by the UK, government loans on traditional terms. Gallois, Enders and other officials at EADS and Airbus like to point out Airbus has repaid loans on all its airplanes and sometimes complain that royalties (particularly on the A320 family) far exceed what the repayments would be on straight commercial terms. Fine. To avoid these royalty payments, fund the A350 commercially or on commercial terms.

A350/Progress Report: Airbus skeptics already predict this program will be two years late on EIS and “U-Turn” Al, the CEO of Qatar, suggests a six month delay might be expected. Airbus and EADS will undoubtedly say this program is on time. While Airbus performance on the A380 and A400M, and Boeing’s performance on the 787 and 747-8, are solid cause for skepticism that neither manufacturer knows how to deliver on time any more, we think four years out is too soon to be calling delays on the A350 EIS. It wasn’t until shortly before roll-out on the A380 and 787 that it was clear to all but executives at both companies and blindly, uncritical boosters that delays were inevitable. (The 747-8 delays were also obvious to all but the blinkered boosters, since this airplane is a casualty of the 787 debacle.)

But we will hear that all is well with the A350 program. Time will tell.

A330F: With the collapse of the global cargo market, questions arise over the future of the A330. Some lessor customers switched F versions to P models. We know of one airline customer that wants to cancel its order. The first A330F entered production this year. We should get a program update on the earnings call.

Deferrals and cutting or ramping up production: There should be an update on these topics. Airbus has a riskier backlog on the A320 family than Boeing does on the 737, and cancellations due to bankrupt airlines demonstrate this. Furthermore, the A320 rate was headed toward an unprecedented 40/mo when Airbus put the brakes on and announced a reduction from 36/mo to 34/mo. (Bear in mind Airbus runs on what amounts to an 11-month year.) But Airbus is already talking about going back to 40 a month. This astounding news came at the Airbus Innovation Days in May, and this was before production had even been reduced to 34 a  month. We were stunned at the statement then and remain puzzled by this now. Airbus aerospace analysts ought to drill down on this one.

A380 deferrals: We should get a discussion on this–along with a reaffirmation in the belief that the Very Large Aircraft (VLA) market remains the 1,200 passenger and 300 freighters projected by Airbus through 2026. (Boeing’s VLA forecast is just over 900, including freighters.) We’ve never bought into the 20-year number, given that it took Boeing something like 35 years to hit 1,400 747 sales. But Airbus never wavers. Don’t look for any backtracking now.

KC-30 tanker: This falls into the yada-yada category. Until the US Defense Department issues its RFP (now supposedly coming in September instead of this month), there’s really nothing more to add. EADS and Northrop will bid. So what else is new?

1 Comments on “EADS Earnings Preview

  1. Personally, I’m looking for Boeing to recieve a consolation prize at best on the WTO case. A small and meaningless one.

    Nowhere near a slam dunk and a net negative for U.S. based corperations as a whole.

    Given the prevailing european attitude that cost plus defense programs and government funded
    defense related R+D constitutes subsidy, I can’t see it going Boeing’s way at all.

    Boeing blew this case years ago, by pushing for the WTO, and not filing a complaint with the state department over Airbus subsdies. The let the camel’s nose under the tent. Now they have the whole stinky, spitting camel, the camel driver and the cargo of salt to deal with.

    And as you supose, I expect Boeing’s ‘risk sharing partnerships’ to be viewed as subsidy.
    But instead of penalizing both Boeing and Airbus, the WTO will adopt the doctrine of unclean hands, and be dismissive of Boeing’s complaint as a result.

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