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16 Jun 06. Seasoned BATTLESPACE readers will not be surprised by the news announced on Wednesday that EADS has postponed the full production of its giant A380 aircraft. We have been following developments of this programme and its sister A350 and A400M military variant. (See: BATTLESPACE UPDATE Vol.8 ISSUE 14 06 April 2006, EADS SHAREHOLDERS SELL OUT)

We first detected problems last year when Rolls-Royce issued an urgent need for engineers to solve reputed thrust problems on its engines due to the 1% gain in weight.

The desire by shareholders Lagardere, DaimlerChrylser and BAE to sell their shares under the original agreement came as no surprise but the level of problems on the projects were larger than expected.

The delays in deliveries will create a huge problem for cash flow to fund defence projects, earnings per share which will hit the share price and profits. It has already created problems in trust in the company’s ability to deliver. EADS has five major defence projects that may well be affected by this announcement, A400M that is already late and may incur a profits warning,
AirTanker which had relied on balance sheet funding for the U.K. FSTA project that may now not be possible, Eurofighter which has conflicts in final numbers and deliveries, NH90 that is facing delays and Long Range Trigat, for which the German Government is the last remaining customer in a project that may not be viable at that rate.

The other defence programmes have a smaller but growing range of products, particularly in the Homeland security area, have smaller margins and need the big cash flow of A3980m in particular to sustain EPS and profitability. At v$300m a copy, the loss of four aircraft in the first year is worth a whopping $1.2bn in cash flow. This story is reminiscent of the launch of the 747 by Boeing in 1969. Boeing gambled the company on that launch, but survived, the A380 with the high stakes is a larger gamble for EADS. Emirates, the launch customer, may use customary Arab business style to take a stake in EADS to fulfil its requirements to build and aerospace business in the Gulf as previous Arab dealers have done in the hotel, Disneyland and Citicorp deals. In addition the Company is facing liquidated damages from Singapore Airlines and Qantas in particular as well as possible performance claims when the aircraft enters service. Although Singapore is slated to receive one aircraft in December, it is unlikely to put this into service given the logistical problems in utilising one aircraft type for over a year. The airline’s decision to buy the Boeing 787 may signify the way forward. In addition forecasts suggest that airlines may cut as many as 1000 orders over the next few years and this may be an excuse to cut A380, A350 and the ageing and reputedly unreliable 4 engined A340 in favour of the now ETOPS-approve Boeing 777.

Today, Reuters reported that EADS co-chief executive Noel Forgeard said he first knew in April of potential production problems on the Airbus A380 but ruled out resigning over the issue which triggered an EADS stock collapse this week. He said at the CBI Dinner in October that he would employ Rover engineers in the Company!

Under fire over what Airbus parent EADS told investors and his own decision to sell in stock in March, shortly before the group veered into what its chairman has called a “major crisis,” Forgeard said the scale of problems had not been clear at first.

“The problems of delays were put on the table during April and at the end of May many people still thought it was possible to resolve them,” Forgeard said on Europe 1 radio.

“The detailed work reached its conclusions on June 13 and we published them on the same day.”

Investors stripped a quarter of the value off EADS, Europe’s biggest aerospace group which owns 80 percent of Airbus, on Wednesday after the planemaker said wiring problems had pushed back deliveries of its A380 superjumbo by another

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