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18 Mar 02. European Aeronautic Defense & Space Co. (EADS),the parent company of Airbus, earned $1.19bn in 2001 but warned on Monday that higher research and development spending and lower demand for passenger aircraft would hurt revenue and profit this year. The market did not like the news and by 1105 GMT the shares were down 5.13 percent at 16.10 euros, underperforming the DJ Stoxx European industrials index (^SXNP – news), which was 0.27 percent lower.

“The stock has had a strong run on hopes for a recovery, but investors haven’t recognised how long the aerospace cycle really is,” said Nick Cunningham at Schroder Salomon Smith Barney.
“As it becomes clear that weakness will extend out to 2003 the market may begin to realise that it bought the stock too early. There will be a time to buy EADS but it is not now.”
EADS on Monday predicted sharply higher profits at its problem space and defence/civil systems divisions and stuck with a goal to deliver 300 Airbus jets this year.
But the outlook for 2003 remained cloudy. EADS said on Monday that financing offered to clients would be limited to €1.8bn this year and decline next year, meaning it might not be able to lure as many jet buyers as it heads into what experts believe could be the most difficult year ever for the industry.

EADS posted a net profit of €1.37bn in 2001, (2000: (€909m), due to a charge of €1.4bn for currency hedging operations.

EADS, said revenue rose 27 percent to €30.8bn in 2001, (2000: €24.2bn). EADS said efficiency gains helped boost operating profit by 21 percent to €1.69bn ($1.47bn) in 2001. The company, and most analysts, had forecast a 15 percent rise in operating profit. Excluding foreign exchange gains and accounting changes, operating profit rose 5 percent.

Airbus, generated the bulk of EADS’ 2001 operating profit with a contribution of €1.66bn($1.44bn), (2000: €1.41bn). EADS has decided to consolidate 100 percent of Airbus’ results in its 2001 accounts and beyond, even though it owns 80 percent of the aircraft maker.

The company said it expects revenue to slide 2 percent in 2002, mainly because
Airbus is caught in the aviation downturn. It will deliver just 300 aircraft
this year, compared with a record level of 325 in 2001.

A spike in research and development spending, as Airbus ploughs more cash into its proposed A380 555-seat double-decker, is likely to eat into operating profit.
The company posted large operating losses in two key divisions — space and defence/civil systems — although it forecast a return to breakeven in space this year and significant improvement in the systems unit amid restructuring at both divisions. The space division will be helped by the announcement of the award of the £2bn+ UK Skynet 5 contract

EADS has been searching for ways to boost the size of its defence business, and thereby compensate for the downturn in the civil aircraft market. But few acquisition opportunities exist and European defence budgets are under pressure, leaving crucial EADS programmes in doubt. At the Paris Air Show last year Dr Stefan Zoller said his aim wes the creation of a $3bn defence electronics segment. Thales’ current problems may offer an opportunity for EADS but the company said that a take-over of Thales was not on the agenda

EADS CEO Philippe Camus said that the company is not looking to buy any of the assets of U.S. aerospace to autos firm TRW Inc. (NYSE:TRW – news).
“No,” Camus responded, when asked if EADS was eyeing TRW activities. “These are ultra-classified activities,” he added, speaking to reporters after the release of EADS 2001 results.

Camus also downplayed the possibility of any big deals for EADS this year, saying the company was focusing on getting its existing businesses running smoothly.

“Acquisitions are not our priority in 2002,” he said.

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