EADS Second-Quarter Profit Falls on A380, A350 Costs

European Aeronautic Defence & Space Co., parent of planemaker Airbus SAS, said second-quarter profit fell 85 percent because of delays in the A380 superjumbo jet and a redesign of the A350.

Net income dropped to 81 million euros ($111 million), or 10 cents a share, from 534 million euros, or 67 cents, a year earlier, Munich- and Paris-based EADS said in a statement today. Sales fell 4 percent to 9.5 billion euros.

Setbacks at Airbus, the world's biggest maker of commercial planes, contrast with gains at Boeing Co., which yesterday reported profit that beat analysts' estimates. Boeing stock is up 21 percent so far this year, while EADS has fallen 12 percent as the European company struggled to deliver the 555-seat A380 and develop the smaller A350. EADS also said today delays on a military transport plane may reduce profit.

"We haven't seen the end of the bad news," said Olivier Esnou, an analyst at Exane BNP Paribas in Paris who has an "underperform" rating on EADS shares. "The second half will continue to be hit by one-off charges for areas including the A400M, and A350, and the costs of implementing Power8," a cost- cutting program.

Shares of EADS fell as much as 60 cents, or 2.6 percent, to 22.47 euros, and were down 0.9 percent at 2:31 p.m. in Paris.

Today's report is the last under the dual leadership of Louis Gallois, a French national, and Co-CEO Tom Enders, a German. EADS, which has had two Co-CEOs and two co-chairmen since its creation in 2000, announced July 16 that Gallois will be the sole chief executive and Enders head of Airbus, effective Aug. 27. Enders will be Airbus's fifth CEO in two years.

Decision-Making

The change is intended to speed up decision-making as EADS considers selling shares or bonds to fund the A350's 11.5 billion-euro development to challenge Boeing's 787 Dreamliner.

The company reiterated today that full-year sales are expected to fall by a "low single-digit percentage" on the basis of the euro exchanging for $1.35. The euro today is at $1.37. Earnings before interest and tax will remain "roughly stable" at last year's level, based on an expected 440 to 450 aircraft deliveries at Airbus, EADS said.

"The mix of opportunities and risks underlying the guidance is evolving," EADS said. "The risk level on certain key programs would make it imprudent to change guidance in the present context."

A400M Delay

The A400M military transport plane is running behind schedule, Chief Financial Officer Hans Peter Ring said on a conference call with analysts. He said the engine is "critically late," and there's "material risk on the overall time schedule."

The engine is being built by Europrop International, a group that includes Safran SA's Snecma unit, Rolls-Royce Plc, MTU Aero Engines Holding AG and Spain's Group ITP, a unit of Industria de Turbo Propulsores SA.

"We expect to deliver the engine on time," Rolls-Royce Chief Executive John Rose said today on the company's earnings conference call.

Boeing yesterday reported second-quarter profit and sales that topped analysts' estimates and raised its earnings forecast for the year on record aircraft orders. Net income at the world's second-largest maker of commercial airplanes was $1.05 billion versus a loss of $160 million a year earlier, when the company paid a $615 million government fine.

Airbus overtook Chicago-based Boeing on new orders in the first half following the Paris Air Show in June, after trailing by a 2-to-1 margin in the first five months of the year.

Air Show Orders

The Toulouse, France-based planemaker won 425 orders at the show, including contracts for 132 A350s. Customers have been favoring Boeing's 787, which enters fleets next year. The A350 is scheduled to begin commercial service in 2013.

The orders, which are accompanied by down payments, boosted cash flow in the first half and will result in positive cash flow for the full year, Ring said on the call.

Airbus won 680 firm orders in the first half compared with 544 at Boeing. Airbus's deliveries in the second quarter declined 1.7 percent to 116 planes.

EADS's order book grew to 308.2 billion euros by June 30 compared with 262.8 billion euros, the company said, even after the value was cut by 5.4 billion euros because of a weaker dollar relative to the euro.

"The question now is whether this large backlog at the company can be translated into greater profitability," said Pierre Boucheny, an analyst at Kepler Securities in Paris, in an interview.

Average Pricing

Ring said Airbus sales would suffer in the second half from lower average aircraft prices, the result of discounting when the contracts were signed. He didn't quantify the impact.

Airliners account for about two-thirds of revenue at EADS, which also makes helicopters, rocket launchers, satellites and missiles. Gallois, 63, is seeking to slash spending to cope with a decline in the dollar while increasing cash to help Airbus resolve the A380 delays and fund A350 development.

Airbus is seeking 2.1 billion euros in annual savings from 2010 following cash savings of 5 billion euros between 2006 and 2010. Plans include eliminating 10,000 jobs over four years and selling or finding partners for six factories.

The planemaker delivered 231 aircraft in the first six months compared with 219 the year earlier though sales for the period fell to 12.9 billion euros from 13.2 billion euros primarily because of the dollar's decline against the euro.

EADS Debt

Credit-default swaps based on 10 million euros of EADS debt are trading at 23,000 euros today, according to Deutsche Bank AG. That's up from 15,000 euros on June 18, matching an overall rise in European investment grade corporate credit spreads.

The contracts, based on bonds and loans, are used to speculate on a company's ability to repay debt and a decrease in cost indicates improving perceptions of credit quality.

Earnings before interest and tax at Airbus were 19 million euro compared with 1.5 billion euros a year ago. Ebit was hurt by 500 million euros in charges related to redesign of the A350 and by a structuring charge of 688 million euros on the Power8 cost-cut program. Airbus also had higher costs of 300 million euros on the A380.

— With reporting by Simon Kennedy and Rose Claverie in Paris. Editor: Stets (lhs/djr)

To contact the reporter on this story: Andrea Rothman in Paris at +33-1-5365-5062 or aerothman@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at +44-20-7673-2515 or dstets@bloomberg.net.