By Howard Wheeldon, Senior Strategist at BGC Partners
13 May 11. Readying to increase production of commercial jets next year as the market for commercial aircraft grows ever stronger and already seeing decent benefit from three years of severe cost cutting action at Airbus EADS shows today through its first quarter result that it is in pretty spectacular form. Having received strong support for the proposed A320neo and with proposed A350 wide-body aircraft development seemingly on course, save for the pushing back of the first aircraft delivery to late 2013 and with the main defence activities holding their own, the company seems all but unstoppable. That the first quarter results was a net loss of EUR12m against a profit of EUR103m last year is of little consequence taking into consideration rising R&D costs related to the A350 XWB plus the ongoing impact of dollar related foreign exchange and unfavourable currency hedges. At long last this is actually a good news story however one looks at it and despite various clouds such as the WTO still hanging over Airbus head the forward outlook confirms positive market perceptions of EADS are not misplaced.
Neither are we particularly concerned that delivering slightly fewer aircraft during the quarter should be perceived with any undue concern. But if finding bad news in the EADS statement today is difficult the issue of the company sitting on EUR12.2bn of net cash is an issue of increasing concern. Clearly as EADS rightly says having a high level of cash is a strong asset for future development. But as we all know EADS main strategic ambitions are to increase the size of defence in relation to the overall business and to increase the scope of the business through international acquisition. To that end the company recently acquired Vector Aerospace in Canada and it has long held ambitions to make acquisitions in the US both in defence and general aerospace – the latter as a means to possibly offsetting some of the dollar impact that EADS suffers. But acquisitions have not generally proved quite so easy to find and despite the general consensus that defence cuts by various western governments mean the consolidation in the defence industry will now be the order of the day there are not that many decent companies to be had.
That EADS has ample funding for its current needs can hardly be questioned but my guess is that unless it ramps up on the acquisition front soon some of the larger shareholders such as Daimler AG, the French state and Lagardere may call for some of the cash funds to be dispersed. One hopes not – one hopes that EADS will be able to not only carefully manage its expansion based on the use of self generated cash but also continue to develop the existing businesses too.
In the meantime, whilst defence remains small in the overall equation of EADS, that there was no bad news on the A400M program and that helicopter and space are holding their own is another positive. As I say, the clouds of WTO continue to hang over both Boeing and Airbus and these are sadly unlikely to go away until some kind of negotiated agreement that binds both companies to an agreed future course on all form of subsidy is found. That EADS has come a long way over the past three very difficult years is commendable. Indeed, that Boeing has done the same is equally commendable as well. In a market and an industry that is continually changing and where we see a continual shift of economic power from west to east both companies will need to redouble their efforts to stay on top. A healthy civil aerospace industry is one that not only sees strong competition between Boeing and Airbus but also one that sees both companies succeed. In the years ahead increased competition from newer players on the bloc such as China and Russia will impact on both traditional aircraft makers particularly at the narrow body end of the market. Brazil, Canada and others are all attempting