Still more Airbus woes (2)

EADS Shares Plummet
On Airbus Delivery Delays
By BRIAN LAGROTTERIA
June 14, 2006 9:56 a.m.

PARIS -- European Aeronautic Defence & Space Co.'s management and
strategy were in question Wednesday after the company said delays in the
delivery of its Airbus A380 super-jumbo jets would shave ¤2 billion in
profit through 2010.
EADS shares plummeted, with stock down as much as 34% in Paris trading.
EADS has lost half its market value since March. The selloff came after
Emirates Airlines Wednesday said it is reconsidering its order of Airbus
A380s, the world's largest passenger aircraft, exacerbating an already
delicate situation for EADS and Airbus. Emirates is so far the biggest
customer for the A380, with 43 planes on order.
Singapore Airlines and Qantas Airways, which also have large orders for
the plane, said they are seeking talks with Airbus over the delays and
want compensation. Airbus will likely have to pay its clients
compensation fees and could in theory cause a cancellation of orders.
(See related article1.)
Adding to the blow, Singapore Airlines ordered up to 40 787-9 Dreamliner
aircraft from Airbus rival Boeing Co. with a sticker price of $9
billion. The 20 aircraft on firm order will be delivered between early
2011 and mid-2013, the world's second-biggest carrier by market
capitalization said in a statement Wednesday. The carrier has an option
to buy another 20 of the 787-9s.
Singapore Airlines didn't reveal the price of the aircraft, but said the
outlay would be funded from operating cash flow. Analysts have said
discounts of up to 25% on sticker prices are possible because of stiff
competition between the major aircraft makers and because airlines are
driving harder bargains due to higher fuel costs.
"This is in our view very damaging both to the credibility of EADS
management, and also to Airbus' reputation for program management,"
Goldman Sachs analyst Sash Tusa said in a note to investors, referring
to the delays. "Our concern is that this could both damage Airbus'
chance of a successful re-launch of the A350 aircraft." Separately,
Boeing was upgraded to in line from underperform on Wednesday by Goldman
Sachs, with the investment bank citing an increased outlook for aircraft
deliveries.
The news is a blow to EADS Co-CEO Noel Forgeard, who in 2000 oversaw the
launch of the A380 as the head of Airbus. Charles Champion is currently
in charge of the program. On a conference call Wednesday with analysts,
Mr. Forgeard deflected suggestions that the setbacks could cost him his
job.
"We have now to find the right ways forward rather than finger pointing
the responsibilities of the past," Mr. Forgeard said. "We are working on
managerial measures inside Airbus."
Airbus is 80% owned by EADS and 20% owned by BAE Systems PLC. BAE
Systems is currently trying to sell its stake and EADS has said it is
interested in taking full control of the plane maker. Some analysts said
BAE Systems' position could be weakened by Tuesday's announcement of
further delays to the A380 and it may get a lower price for its stake.
However, a spokesman for BAE Systems said the delays to the A380
shouldn't hit the valuation of its stake in Airbus because it is based
on the long-term prospects of the airline maker's overall business. "The
long-term prospects don't change because of the delay," said the
spokeswoman.
Even so, BAE Systems' shares fell 4.5% in London, the biggest decliner
on the FTSE 100 Index.
The A380, which costs around $300 million, has underscored Airbus'
strategic vision of global passenger travel. Airbus wagered that the
airline industry would increasingly offer large flights to international
hubs. So it built a double-decker plane that can carry 555 people. The
plane's size alone though has induced a slew of production and
regulatory complications.
Arch-rival Boeing, on the other hand, bet that air travel would be
marked by the need for fuel efficiency and long-haul flights. It built
the 787 aircraft, which can carry as many as 330 passengers nonstop from
Europe to Hawaii at lower cost to airlines.
The Airbus difficulties come amid a spate of negative news for the
group. EADS has to finance the acquisition of the remaining 20% of
Airbus it does not already own. It must finance the relaunch of its
low-cost, fuel efficient A350 program. Core EADS shareholders are
disposing of their stakes. Four, senior EADS management has resigned
after it was exposed at the heart of political scandals. And the global
demand for new aircraft is set to decline after a record year in 2005 --
posing the biggest risk to the company's growth.
The problems with the A380, coupled with the need for Airbus to redesign
its A350 model under criticism from customers, is not only exposing
execution flaws, but also strategic ones, investors said.
"EADS made a strategic error by opting for a jumbo sized jet rather than
a fuel efficient model, especially if the price of oil increases
further," said Matthieu Raimbault of French brokerage Viel Tradition.
"It's been a while since Airbus has given ground to Boeing -- even if
[Airbus] has a lot of orders for its A380, they could be canceled."
--Jocelyn Jovene and Mimosa Spencer contributed to this article.
Write to Brian Lagrotteria at