EADS records small Q1 loss; 2011 a bright year for Airbus

Parent of European plane-maker Airbus, Paris and Munich-based European Aerospace, Defence & Space Co. (EADS) last Friday reported a € 12 million 2011 first-quarter loss, primarily owing to the dollar accounting revaluation and logged an unprecedented €12.2 billion net cash position despite lower first-quarter commercial airliner deliveries.

Revenues at the largest European aerospace group rose by 10% from €9.0 billion in the year-ago period to €9.9 billion, whereas earnings before interest and tax (EBIT) before non-recurring items drastically improved by 53.3% over the prior year from €150 million to €230 million. EBIT including non-recurring items soared by 131% from €83 million in the year-ago’s period to €192 million.

Free cash flow after customer financing improved significantly from €-1.12 billion to €309 million, citing “better operational performance” due to higher pre-delivery payments received from airlines to Airbus. Order intake for EADS during the quarter, however, deteriorated by 56% from €14.4 billion in the same period last year to €6.3 billion. The value of the order book of the largest European aerospace group was €422.4 billion as of March 31, a 6% decrease from €448.5 billion at the end of 2010. Airbus’ backlog of commercial airplanes, in particular, has been reduced by €22 billion due to the dollar’s depreciation.

Airbus contributed €7.0 billion of revenues, or 71% of EADS’s total 2011 first-quarter revenue, to the group, an increase of 12% from €6.3 billion in the same period last year, which, in spite of EADS’s stated goal of reducing Airbus’ share of the group’s total revenue, surged marginally from a 70% share in the first-quarter of 2010.

Airbus’ EBIT of €115 million was a staggering 1543% increase over 2010 first-quarter’s €7 million despite fewer aircraft deliveries from last year’s 122 to 119, including 4 A380 superjumbos. Gross order during the quarter totals 69, including 10 A380s – 6 A380s from South Korea’s Asiana Airlines and a groundbreaking order from Japanese low-cost carrier (LCC) Skymark Airlines for 4 A380s. However, 68 cancellations, including those from Dubai Aerospace Enterprise (DAE) for 12 A350-900 and 18 A320s, Kuwait’s Jazeera Airways for 25 A320s, India’s Flyington for 12 A330-200F freighters, virtually wipes out the airframer’s net order to only 1.

Notwithstanding the order cancellations, Virgin America ordered 60 A320 family aircraft, including a launch order for 30 A320 neo (new engine option) during the quarter.

“Our first-quarter financial results reflect a good start to 2011. The early market success of the A320neo validates the significant prospects we envisage for this programme and the acquisition of Vector Aerospace in Canada is a major step forward in expanding our services offering. We also signed the A400M contract amendment, which provides a solid base to further advance this key programme”, EADS chief executive Louis Gallois said.

Meanwhile, EADS chief financial officer (CFO) Hans Peter Ring revealed at the earnings call that the largest aircraft manufacturer in the world is mulling to increase the monthly A320 production rate to 42 from 40 and even possibly 44 with an announcement “expected in a few days”.

“On single aisle as you rightly said, we were struggling with that question [production rate beyond 40 per month] for some time and that’s based on the strong backlog, the overbooking and the commercial momentum we used to see for the years 2013, 14 and 15. So, we’re struggling with the question of supply chain and we are maturing on that topic finally we think. So, we’ll see likely an announcement in probably a few days,” EADS chief financial officer (CFO) Hans Peter Ring revealed.

Understandably, the ability of the A320′s supply chain holds the key in determining whether Airbus can ramp up the A320 production beyond the 40 per month mark and Airbus is now more confident that it can handle such a production rate increase. More importantly, Airbus is not seeing any parts of its supply chain having being the issue which prevents it from implementing further production rate increase.

“Not particular. It was across, I would say, a lot of different system suppliers aerostructures, particularly our aerostructure suppliers, et cetera, where we were looking at, we have to fix some quality issues which are there with the suppliers. So, all of this I would say what’s now converging in the last two to three months to something where we can take a decision now,” Ring commented.

Such an A320 production rate increase beyond the currently planned 40, Aspire Aviation believes, not only increase the revenue stream for Airbus in the next few years but also strengthen the business case of the A320 neo (new engine option).

Although several key Airbus executives have commented that Airbus will continue to produce the existing A320 family aircraft alongside the A320 neo as long as the market demands it, the skyrocketing oil prices, despite having recently dropped which are likely to remain high, if not rise further, coupled with a 15% reduction in fuel burning, makes the case for the A320 neo more compelling.

And a production rate increase for the existing A320 family aircraft could possibly help reduce the strong backlog and make the future A320 production line more standardised with a minimum production of existing A320 family aircraft while producing a majority of A320 neo, A319 neo and A321 neo, which helps reduce production cost and maximise the benefits gained from economies of scale.

With the A320 neo already racking up significant sales with Virgin America ordering 30 A320 neos, International Lease Finance Corporation (ILFC) ordering 100 examples, and an A320 neo order bonanza being anticipated at this June’s Paris Air Show with AirAsia potentially ordering up to 150 A320 neos, the A320 neo is undoubtedly going to be the highlight of this year for Airbus.

Airbus nevertheless faces challenges on its A350 XWB and A380 programmes, however.

The A380 programme continues to be in a loss position in the first-quarter, as cost overruns for the A380 production ramp-up persist and engineering changes continue to be made due to the ongoing weight reduction programme and Airbus does not expect the financial burden brought by the A380 programme to reduce anytime soon.

“We will have to make big improvement steps between 2012 and 2014 in order to reach breakeven by 2014,” EADS chief financial officer (CFO) Hans Peter Ring acknowledged.

Ring said Airbus’ A380 deliveries are going to be in the “mid-20s” this year. However, Airbus has only delivered 5 A380s for the first 4 months of this year, equating to an average monthly production rate of 1.25 example and Airbus will have to further ramp up the A380 production considerably in order to match the “mid-20s” target.

Furthermore, while the A380 may reach a breakeven point on an airframe basis by 2014, in light of the niche very large airplane (VLA) market in which sales are unlikely to reach Airbus’ projection of 1,740 aircraft in the foreseeable future, achieving profitability on a program basis for the US$20 billion superjumbo programme remains extremely challenging, if not impossible.

Image Courtesy of A380spotter

Meanwhile, research and development (R&D) on the A350 XWB programme is expected to significantly increase over the next several years as the first A350-900 test aircraft takes shape.

“While advancing with the A350 XWB through achieving several critical milestones, this decisive programme continues to require our closest attention,” EADS chief executive Louis Gallois cautioned.

Critically, Airbus notes that the margin on the A350 XWB’s schedule is running extraordinarily thin.

“On A350 as we said we are progressing along the timeline I would say problems are being solved and at the same time, obviously issues remain and they have to be solved, as you know, buffers are, I mean, very, very little and literally no longer existing,” EADS chief financial officer (CFO) Hans Peter Ring commented.

According to Aspire Aviation‘s source at the European airframer, the A350-900′s composite wingbox needs further strengthening amid overweight composite fuselage which is around 7 tonnes overweight, with the worst overweight issue at the -800 variant, coupled with other unforeseen issues, leading to Aspire Aviation‘s forecast of a 2-year delay in A350-900′s entry into service (EIS) from late 2013 to 2015.

Make no mistake, the A350 XWB nonetheless delivers a significant fuel burn saving when compared to the 777 when it ultimately enters service which will eventually prompt a response from its arch-rival Chicago-based Boeing. For the time being, however, Boeing has ample time to leverage and decide what to do with its lucrative 777 as Airbus’ refusal to bring the specifications of the A350-1000 in line with 777-300ER’s leaves more room for Boeing to leverage and as the sales of the 777-300ER continue to stay strong, with additional orders from Cathay Pacific, American Airlines (AA), Emirates being eyed.

On the other hand, EADS’s record €12.2 billion cash pile, questions have emerged over whether the European governments should have bailed the beleaguered A400M airlifter programme out with a €3.5 billion deal signed in April.

“It doesn’t match up. On one side EADS insists on a bailout, arguing that the company would face the end otherwise. But their balance sheet speaks a completely different language,” questioned Omid Nouripour, a member of the German parliament.

Last but not least, with the European Union (EU)’s appeal of the World Trade Organisation (WTO) case DS316 against launch aid provided by European governments to Airbus due in the coming days, the cash rich EADS could very well repay the US$4 billion launch aid on the A380 programme and resolve the transatlantic dispute once and for all and instead focus on developing the A350 XWB aircraft. After all, the A350 XWB will be a highly successful, winning aircraft in a lucrative long-range, twin-aisle aircraft market.