Costs Cloud EADS Profit Forecast Despite A320neo Boost

Despite a strong rebound in orders and deliveries, and despite being flush with cash reserves, the new year's forecast for Europe's EADS aerospace and defense group remains sorely lacking in one respect: it still can't turn a decent profit.

EADS chief executive Louis Gallois said at a January 12 press conference that the company still faces a battle to control costs and that it likely won't achieve "satisfactory" levels of profitability until 2012. Specifically, he indicated the need to streamline the cost structure for production of the A380 widebody transport, as Airbus continues to pay the price for design and engineering errors at the development phase of the program.

Nonetheless, Gallois said that when EADS's flagship subsidiary, Airbus, holds its annual press conference on January 17, it will likely report that both new aircraft orders and deliveries topped the 500-unit mark in 2010. He said the January 11 announcement of an epic order from Indian carrier IndiGo for 180 A320 narrowbodies validated optimistic expectations of rising demand for airliners. At catalogue prices the value of the deal, which would include 150 A320neos, could reach $15.6 billion.

The other main challenge that EADS has set for itself this year involves putting down far stronger roots in the key emerging markets of Asia and South America. Rather than trying to compete head-on with indigenous airframers in countries like China, India and Brazil, EADS will pursue more extensive partnerships, said Gallois, in a bid to become "local citizens in major emerging countries." With approximately $13 billion in cash reserves, EADS appears well equipped to fund such an expansion plan. Chief financial officer Hans Peter Ring has indicated that the group could close two or three significant acquisitions during 2011.

EADS has faced criticism in the financial community for sitting on large cash reserves, rather than using the money to fund expansion or return it to shareholders through dividends. Gallois conceded some procrastination on the acquisition front, arguing that the financial crisis and the severe cost-overrun problems with the A380 program had made the company "afraid to spend money."

�