Tanker Deal Adds To Airbus' Challenges

March 10th, 2008  
Team Infidel

Topic: Tanker Deal Adds To Airbus' Challenges

Seattle Post-Intelligencer
March 10, 2008 Falling U.S. dollar overshadows win
By Andrea Rothman, Bloomberg News
Two years ago, Airbus sent 1,000 workers from Germany to Toulouse, France, to help build the A380 superjumbo because local employees couldn't read the manuals, which were printed in German. They're still there.
The manuals show why the euphoria over a $35 billion U.S. Air Force tanker contract may be fleeting for investors in European Aeronautic Defense and Space Co., Airbus' parent.
EADS is still struggling to manage a company made up of former rivals from France, Germany, the U.K. and Spain. The aircraft maker hasn't solved currency, program-management and work force-integration issues that sliced 41 percent off its share price in the past two years. The Boeing Co., which EADS beat for the tanker deal, gained 10 percent in the period.
"The tanker contract isn't transformational," said Nick Cunningham, an analyst at Evolution Securities in London who has covered the aviation industry for 22 years. "Look at the scale of the challenges they face."
EADS won the Air Force contract with Los Angeles-based Northrop Grumman Corp., which will supply military equipment. The European company, with headquarters in Paris and Munich, has gained 6.2 percent since the deal was announced Feb. 29. The shares slumped after rising 9.2 percent March 3 in Paris.
Airbus, which accounts for two-thirds of EADS revenue, has said it will report its second consecutive annual loss this week after a two-year delay on the A380 led to cost overruns of $6.8 billion. EADS expects to break even before interest and taxes following charges of $2.13 billion on another delayed program, the A400M military transport.
Still, the dollar's plunge against the euro is EADS' biggest challenge, said Zafar Khan, an analyst at SG Securities in London who has a "hold" rating on the company.
The dollar is the currency for commercial aircraft purchases worldwide, so its decline cuts revenue at EADS, which pays most of its bills in euros. While the company has been protected by hedging contracts purchased before the dollar's slide, those will run out by the end of the decade.
The U.S. currency has fallen 43 percent against the euro in the past six years. Every 10 percent drop in the dollar costs Airbus 1 billion euros in revenue, Chief Executive Tom Enders said in a March 2 interview.
The dollar isn't EADS' only concern.
The A380 was delayed because incompatible design software at the company's French and German units led to problems in connecting the 300 miles of wiring in each plane. To speed up assembly, Airbus shipped unfinished sections of the aircraft to France, where workers couldn't read manuals for processes that were supposed to be carried out in Germany, Enders said.
While the superjumbo is back on track, the A400M is also late. The six- to 12-month delay predicted by the company may turn out to be longer. Francois Lureau, head of France's military procurement agency, told journalists on Feb. 26 that he didn't expect the first test flight until October -- three months after CEO Louis Gallois promised.

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