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Turbulence Ahead

Weak Dollar, Weak Airbus Profits

By Carol Matlack

The feeble greenback will cut earnings at the planemaker's parent by more than $1 billion this year, CEO Gallois says

From costly production snafus to cross-border political tensions, Louis Gallois has had his hands full since being named chief executive of Airbus' parent European Aerospace Defence & Space in July. But now another problem -- the relentless fall of the dollar -- threatens to eclipse even those troubles.

"The main threat we have before us is the US dollar," Gallois told BusinessWeek in an interview on Nov. 16. The dollar's relative weakness against the euro is sapping EADS' financial health, he said, because nearly all its manufacturing is in the euro zone, while 60 percent of sales are outside of that area, he said. "When the euro rises 10 cents [against the dollar], we lose 1 billion euros" in operating profit. And that's what has happened this year, with the euro climbing from about $1.35 to more than $1.46 since last spring.

The dollar's slide is lending new urgency to Gallois' efforts to reshape EADS. Last week, after the company posted a $1.15 billion loss for the third quarter, he called for an additional $1.5 billion in cost cuts. Those would come on top of an already ambitious restructuring plan in which the company hopes to eliminate 10,000 jobs and sell six factories. Adding to the financial pressure, EADS disclosed this month that production delays on a new military transport plane, the A400M, could cut $2 billion from its bottom line.

Going Shopping

At the same time, Gallois is redoubling efforts to expand EADS operations outside Europe, especially in the rich U.S. defense sector. The company has already teamed up with Northrop Grumman to bid on a multibillion-dollar US Air Force refueling tanker contract that could be decided early next year. If EADS wins, the tankers are likely to be built and outfitted in US factories -- which means costs would be in dollars rather than euros.

Going even further, Gallois and Ralph Crosby, EADS' North American chief, say they are actively scouting U.S. defense acquisitions. Rather than creating a "stand-alone" US defense business, they're looking for companies in areas such as engineering and services that could complement existing EADS defense businesses, Crosby says.

How can EADS be shopping for acquisitions when its finances are so strained? In fact, Gallois says, the company's cash flow will reach roughly $1.4 billion this year, thanks to successful programs such as the Airbus narrowbody A320 program.

Smoother Management

EADS' order backlog is near a record $82 billion, fueled by major purchases of Airbus' new A350 XWB midsize widebody jet announced at this week's Dubai air show. Gallois says for the next few years, EADS has sufficient cash to pour billions into developing the A350 without seeking financing from capital markets or controversial government loans -- though he wouldn't rule out tapping those sources in the future.

Gallois says EADS management is operating more smoothly since a reorganization in July. That shift eliminated a seven-year-old arrangement in which the company had two CEOs and two board chairmen, one each from France and Germany. "We can create a more serene environment and get back to business," Gallois says.

But the serenity will be short-lived unless the dollar strengthens -- or EADS finds a way to offset its decline through cost cuts and expansion outside the euro zone.

Carol Matlack is BusinessWeek's Paris bureau chief.