PARIS, 5 October 2006 — Airbus, a beacon of European technology, is in crisis and a fog of uncertainty following admission of new delays to its A380 superjumbo airliner and huge extra costs.
The price of shares in Airbus parent company EADS slumped to show a mid-day loss of 6.71 percent to 21.13 euros hours before management was to outline a restructuring plan to staff.
EADS announced a third-round of delivery delays, a doubling of expected losses, a total cash-flow reduction of 6.3 billion euros ($8.0 billion), and a drastic plan to cut costs, in a long-awaited statement late on Tuesday. But it provided few specific details publicly to investors and customers who were first informed of problems, essentially over complex cabling and wiring, in June 2005.
They were then hit by a shock announcement of further delays in June 2006 and have since been waiting for details of the bottlenecks and of a recovery plan for the group. And last week it emerged that flight turbulence caused by the A380 will delay the flow of following airline traffic in the air and at airports.
Some airlines voiced disappointment with the latest delivery delays, saying they were disrupting business planning. The A380 can carry up to 840 passengers. Analysts at J.P. Morgan and Morgan Stanley said the share price now covered the latest risk factors and could recover.
However, Deutsche Bank analysts commented that “the (restructuring) plan is only at an initial stage and will not be fully detailed until the end of the year” and that “even if it appears to be very ambitious, questions risk being asked about its credibility”.
Brokers at UBS bank said they were concerned that the group might yet announce an increase in costs for its A350 medium-range airliner and for the A400M military aircraft programs.
The crisis also coincides with the beginning of campaigning for a French presidential election in which any plans by big industrial groups to shed jobs is likely to cause controversy.
The company has already warned of cuts in the 55,000-strong worldwide work force.
In response to the delays, Australian airline Qantas said it had begun to review its needs for airliner capacity, and the Chief Executive of Emirates airline, Tim Clark, said: “This is a very serious issue for Emirates and the company is now reviewing all its options.”
Virgin Atlantic said in London that the delays had “serious implications” and that it would review its order for six planes. However, Singapore Airlines SIA said it would receive compensation from Airbus and would still take delivery of the first four of the airliners to be the first airline to operate them.
Since June 2005 there has been uncertainty over the scale and impact of problems in assembling the huge airliner in Toulouse, southern France, from parts built by partners across Europe. Yesterday, credit rating agency Standard and Poor’s placed long-term and short-term debt carried by EADS under negative monitoring.
EADS said that the further delivery delays would average 12 months, putting the program about two years behind schedule. The production problems would double expected losses for 2006-2010 from 2.0 billion euros forecast in June to 4.8 billion euros.
The company was working on a recovery plan to be launched in 2010 to save at least 2.0 billion euros per year and cut overhead by 30 percent. The financial projections broke down as follows: A shortfall in expected earnings before interest and tax of 4.8 billion euros compared to the initial estimate for 2006-2010, of which about 2.0 billion euros was in the form of earnings which would now be delayed until after 2010. Cost overruns and late delivery payments would cut expected EBIT in 2006-2010 by 2.8 billion euros.
In total “EADS anticipates the A380 program will suffer a cumulative free-cash flow reduction of 6.3 billion euros” from the expected figure for the four-year period.
The surprise announcement in June of this year had hit EADS shares hard and focused attention on the way the group communicated internally and externally, caused a top management shake-up and led to an internal audit. The results of this audit were presented to the EADS board on Friday which ended without a clear statement, reportedly because of disagreement on the extent of proposed restructuring.