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Tue, Mar 10, 2009

Report: EADS Rebound May Collapse On A400M Problems

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.

FMI: www.eads.com, www.occar-ea.org/

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