Airbus Bankruptcy Looms Near?
Falling Dollar Jeopardizes Future of European Aircraft Manufacturer
Nov 23, 2007
The problem for Airbus is twofold; one that impacts the company immediately and one with long-term ramifications. Aircraft orders are contracts made between the airline and the manufacturer. While drawn up by lawyers, they reflect a real-time environment (weeks to a few months.) This has an immediate effect for Airbus since the value of the currency (the Euro-Dollar exchange rate) is defined by the markets at the time and specified in the contract, which determines the actual price. These measures were considered loosing propositions in the recent sales to Emirates Airlines and other carriers in the Dubai Air Show.
Yet the long-term problem facing Airbus is that once the sale is completed the product may take years to be delivered. Employees are paid at the higher Euro rate: as long as the dollar continues to fall that rate continues to consume corporate profits. It is speculated that the very fact Airbus received such a disproportionate number of orders in Dubai was this Euro-Dollar exchange rate.
Another problem the dollar’s fall creates for Airbus is that of jobs. The complications with the A-380 required Airbus to cut some 10,000 jobs when the Dollar - Euro ratio was $1.35 to €1. That highly controversial move caused internal struggles, corporate replacements, political discord and national retaliation threats by not only France but also Germany and Spain. Now Louis Gallois, chief executive of Airbus' parent EADS, has stated that the company would be required to remove yet even more jobs. Gallois said the sinking U.S. currency was the "sword of Damocles" hanging over the company's future.
The original Airbus restructuring plan announced in February was called Power8. It aimed at cutting € 5.0 billion ($7.4 billion) by 2010 through job eliminations and the selling of 7 of its 16 European factories. However, with the additional losses on the A400M program (€1.4 billion overruns) and the Euro-Dollar exchange rate of €1 - $1.49 Gallois said, "We have to react; we must find additional savings of roughly €1 billion [$1.47 billion] by 2010…." Airbus Chief Tom Enders said in Dubai: "As you know, if the dollar decreases by 10 cents, we are challenged to save another 1 billion euros.” Gallois said, “Nothing is excluded," without giving a timetable for additional job cuts.
It appears that Airbus will have to cut far more than €1 billion based upon Mr. Enders’ own estimates. The currency has fallen 14 cents since the first restructuring announcement and according to a November 21st 2007 Bloomberg article the dollar will “continue to fall to $1.50 by mid December.” With the Housing and Credit Crisis in the USA along with the America’s Fed Bank lowering interest rates further a “…continued down turn is forecast.”
Leader’s attempts to refrain from saying the “B” word do little to change the evidence. The net worth of the company is decreasing as the billion euro losses continue daily. BAE Systems' 20% stake was worth €3.5 billion ($4.17 billion) in March. In its attempt to sell its shares BAE Systems must agreed with the investment bank NM Rothschild's arbitration values of €2.6 billion (£1.8 billion) – a substantial difference in half a year. Can Airbus continue along this path ad infinitum? Will the financial community, the nations and the company itself overcome the denial? Will Airbus eventually apply for protection under the ultimate restructuring plan, bankruptcy?
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