Weak Euro helps Airbus vs. Boeing

The weak Euro at its present level could help Airbus lower the cost (mostly in Euros) and therefore the price (entirely in dollars) by as much as 10%, according to Charles Armitage, an aerospace consultant based in London.

Check out this story in Aviation Week.

This is bad news for Boeing generally and for the KC-X competition specifically. This could put pressure on Boeing Commercial Airplane prices.

4 Comments on “Weak Euro helps Airbus vs. Boeing

  1. There are two things to keep in mind about the KC-X contract. The first is that the contract runs through about 2029, so in bidding the advantage of a lower Euro today is offset by the fact that EADS must put far more stock in estimating what the Euro is in 2015 when deliveries kick into gear than what the Euro is valued at today.

    Secondly the EADS KC-X entry would have the highest dollar denominated content of any Airbus Aircraft so the fact that much of the aircraft, around 55-60 percent according to NG is priced in dollars the KC-45 would have the least to gain from a drop in the value of the Euro of any Airbus product.

    Given the risk of factoring in the value of the Euro over the next two decades for the KC-X bid and the much lower European content of the aircraft a 10 percent price reduction seems far too generous of an amount to apply to the KC-X bid. EADS should gain some advantage due to the lower Euro, but the KC-X contract is really not comparable to a customer ordering ten A320s for deliver in 2014, in which case EADS might be able to give a 10 percent discount when compared with what the customer would have payed a year ago.

    • I’ve been wondering all the time how the exchange rate issue would have
      been converted into a manageable risk.
      And that does not only apply to Airbus and the KC45 bit similarly for
      Boeings 787 that more or less is just “assembled in the US”.
      ( Was Boeing able to shift the currency risk to its partners? )

      An Airbus Production site in the US is in all essence a hedging proposition on
      a different level.
      On first blush and looking at profits now less attractive than last years,
      it still would provide risk reduction via hedging.

  2. Boeing should just not bid. I think they would be better off without the contract. Would it be possible that the company that does not get awarded the contract come out like a winner in the end?

  3. The contract price will be based on the offers submitted on 9 July 2010, and the exchange rate on that date. The Euro should still be some 18%-20% higher than the USD at that time. Then the USAF will add in its calulations on MilCon, LCC, fuel, and other costs estimates, which will still be in USD.

    The red harring in all of this is not the devaluing of the Euro, it is will the Euro survive? If it does not, and right now that is a 50-50 possibility because of the PIIGS problems, and others that will creep up soon, then the conversion will shift to French Francs. Who knows what that exchange rate will be against the USD? I say France because they are the biggest of the government owned shares of EADS. Germany is also a big share holder and the DM would also effect the exchange rates. Both France and Germany, if they abandon the Euro can set the initial exchange rate against the USD almost anywhere they want to. France and Germany can limit their “losses” in the Euro/USD exchange rates simply by not fulfilling the promised amount of FAL work in MOB. Currently they are not under any contract to do work in the US for building or assembling the A-330MRTT. The USAF will not be able to tell EADS where they can assemble it.

    The other factor to be considered is this will be a US Government contract, funded with US Dollars. Like all US Government contracts, it will be funded in union wage scales, even though EADS is planning to open its FAL in a right to work state. The contract will still need to use union wages for the labor.

    Boeing is still at a price disadvantage, but I doubt it is anywhere near 10%, I think it is closer to 2%-4%. This puts it clearly into an area where Boeing can lower their profit margins significantly from the up to 12% allowed by the RFP. They could increase profits by higher prices paid for in future airplane blocks, as can EADS.

    If the Euro does survive, what will be the future exchange rates? It will go up and down over the next 20 or so years. It is likely the contract will be a sires of annual contracts, or blocks, like most are. There could be a few multi years contracts to lock in prices. But the threats from Congress over funding, should EADS win, are still there.

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