Company Returns To Profit In 2008, But That Probably Won't
Last
On
another day -- and in nearly any other global economic climate --
the news shared Tuesday with investors in European Aeronautic
Defense and Space Corp. (EADS) would be cause for celebration:
after posting massive losses in FY 2007, EADS turned things around
in 2008 with a net profit of nearly $2 billion US. Analysts
believe, however, the future holds a far gloomier picture for the
aerospace consortium.
EADS added that profit,
fueled by record deliveries for planemaker
Airbus, came despite some $894 million in losses in
2008 tied to the stillborn A400M military transport program. But as
the market for commercial airliners continues to evaporate in the
current economy -- and the threat of massive cancellations against
the current order backlog looms overhead -- EADS will find it
increasingly difficult to absorb such losses, Bloomberg
reports.
Indeed, EADS admits the future looks rather bleak. The company
expects pre-tax earnings will drop precipitously from last year's
$3.6 billion figure, as the market for Airbus planes continues to
shrink.
"The order book is challenged by the deterioration of the
macroeconomic and traffic indicators," EADS Chief Executive Officer
Louis Gallois (shown at center) said in Tuesday's announcement.
"EADS is carefully monitoring the market, its customer base and its
suppliers."
In 2007, EADS recorded an annual loss of $680 million US, tied
primarily to production delays with the A380 superjumbo. This time
around, the "X" factor for EADS lies not on the commercial side,
but rather with the Airbus Military A400M.
As ANN has reported, countries and
corporations supporting the turboprop airlifter program recently
expressed doubts whether they would continue support for the
oft-delayed cargo aircraft, particularly since EADS announced in
January it would be another four years before the first planes were
delivered to member nations in the Organisation Conjointe de
Coopération en matière d'ARmement (OCCAR)
agreement.
Despite rumblings from the governments of Britain and Germany,
and French electronics manufacturer Thales, that they might pull
further support for the embattled program... on Tuesday EADS
expressed measured confidence the program would go forward.
However, as EADS will miss a key contractual milestone with the
A400M -- first flight of the aircraft by the end of this month --
customers have the option of killing their orders for the
plane.
Should that happen, EADS would be required to repay over $7
billion in deposits... an amount that "would break EADS," in the
words of Mike Turner, chairman of the UK Defense Industry Council
and CEO of BAE Systems Plc. Turner added he doesn't expect that to
occur, though.
Evolution Securities analyst Nick Cunningham expects EADS will
incur over $3 billion in new losses tied to the A400M in 2009, even
if not a single order is cancelled... and perhaps most
disturbingly, the company doesn't seem to have a solution in hand
to fix problems with the program.
"The report is positive about 2008, but that ended two months
ago," he said. "The key takeaway is that they don’t have
visibility beyond summer, plus they've said nothing to resolve the
A400M issue."
Cunningham has a "sell" rating on EADS stock.
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