EADS beats forecasts despite A380 cracks charge

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Europe’s largest aerospace firm, EADS, beat forecasts with a jump in first quarter profit, boosted by commercial jet and helicopter activities, despite a big charge related to wing cracks on the A380 superjumbo.

The cost of dealing with the cracks more than doubled as EADS unit Airbus took a 158 million euro ($202 million) hit for the cost of redesigning and refitting a part and braced for a two-year drag on its flagship project.

The move reflects efforts by the world’s largest planemaker to draw a line under an episode that threatened friction with airlines, Reuters reports.

That and the buoyant results helped shares in EADS rise 2.8 percent to 29.84 euros, one of few climbers in Europe, where markets have been hit by political stalemate in Greece that could lead to its ejection from the euro zone.

EADS shares have outperformed all other members of France’s CAC40 blue-chip index in the last 12 months.
“It is clarity and it takes away uncertainty, and the market always hates uncertainty,” said London-based aerospace analyst Sandy Morris at Jefferies on Wednesday.
“The bulls have something to work with, but it is one quarter and there is a hell of a long way to go.”

EADS first-quarter operating profit before one-off items doubled to 480 million euros ($613 million) as revenue climbed 16 percent to 11.4 billion, with helicopter unit Eurocopter performing strongly.

Analysts were on average expecting operating profit of 371 million euros on revenue of 10.64 billion, according to a poll conducted on behalf of Reuters.

TURBULENCE

Airbus had a turbulent start to the year when cracks were discovered inside the wings of the A380, leading to weeks of negative publicity for the world’s largest passenger jet.

Authorities say the plane remains safe to fly.

In March, Airbus said the problem would cost an estimated 105 million euros and that this would be taken out of an existing provision for repairs carried out under warranty.

On Wednesday, Airbus said it had come up with a long-term engineering solution to the problem, but the retrofit would be more complicated than first thought, leading to the additional charge, bringing the total bill to 263 million euros.

There could be further charges as more aircraft work their way through the production line and hit delivery milestones.
“With each delivery we will have to take a charge. It will not be this year and will take long into next year until we can deliver a full solution,” EADS finance director Hans Peter Ring told reporters.

Applying the fix to aircraft still in production will also weigh on efforts to reduce A380 operating losses in 2012 and 2013, but EADS said this would not derail its target of breaking even on the plane by the beginning of 2015.

Airbus declined to give further details on the repairs pending talks with safety authorities and airlines.

The repair is likely to include changes in both the choice of materials and the manufacturing process on the wings which are made in Britain and joined to the rest of the aircraft in the final assembly plant in Toulouse, France.

Airbus is most likely to start applying the changes to the production of each 845 square metre wing from the fourth quarter, according to people familiar with the supply chain.

Industry experts say it takes a year for the world’s largest passenger wings to be built and pass through the construction system, so it is not until 2014 that Airbus is finally expected to be able to close the dossier marked “cracks” and move on.

The company also said it would stick to a target of delivering 30 A380s this year, but that this would be “more challenging” as deliveries are shunted towards the latter part of the year. It delivered four superjumbos in the first quarter.

Airbus said its A350 mid-sized airliner project, which began first assembly in April, remained “very challenging”.

SPAIN CONCERN

The headaches come as Airbus rides a wave of commercial orders for jets that have also boosted rival Boeing.

Despite concerns over the economy, commercial jet orders have been rising as Asian and Middle East carriers expand their fleets to keep pace with growth in emerging markets and carriers in the United States carry out long-delayed fleet modernisation.

EADS, however, struck a nervous note as the European financial crisis spreads towards one of its host nations, Spain.
“Clearly the political situation in the euro crisis around us is the biggest concern coming from the macro environment, and this together with execution of our (aerospace) programmes are probably the two big risks into the future,” Ring said.
“Now in Spain we also see upcoming real issues. This is an ongoing concern and something where we have to adapt ourselves as a company, which we are doing in terms of hedging and cash management,” Ring told reporters.
“This is one of our big headaches today because we have seen a lot of deterioration of counterparties, i.e. banks, over the last two years and it has become much more difficult to deal with such an environment.”

An emblem of European integration, EADS was forged from a merger of French, German and Spanish interests in 2000 and is partly regarded as an industrial counterpart to monetary union.

After a record year of orders for Airbus in 2011, rival Boeing is on course to win the annual order race this year.

Boeing last month posted stronger than expected first-quarter profits including a 30 percent rise in revenue as it ramped up production to meet commercial demand.