Summary
EADS has about $11.5bn in cash reserves, the company's only asset (and EADS isn't GE), but daren't risk German and French shareholders' nixing the use of these funds. The A350XWB could cost another $15bn+ from here on in based on today's Airbus projections and not taking into account widely-anticipated service-entry delays of a further two years. European taxpayers are potentially on the block for one-third of this cost, ie $5bn+. But no capital increase is needed, right?
Analysis
Has Airbus taken disingenuousness to new extremes with this latest piece of léger-de-balance-sheet voodoo accounting, or has EADS in fact discovered a magical new Harry Potter-type financial formula that will allow it NOT to spend its cash reserves, NOT to increase working capital, STILL obtain taxpayer launch aid AND also be able to fork out the balance of the $15bn+ which it claims is the current cost estimate for the delayed and many-times-relaunched A350 (although precedent dictates it'll clearly cost $bns more, with $16.5bn being already a more objective starting-point)?
How is Airbus going to achieve this remarkable financial feat? Half the A380 customer order-book has already this year delayed deliveries of the ill-fitting aircraft, so progress and final payments over the next four years, a period which unfortunately for Airbus should coincide with peak R&D expenditure on the A350XWB, have also disappeared from near-term EADS balance-sheets.
Added to this unprecedented market rejection is the fact that despite some of the most unbelievable gibberish from the French authorities on July 3rd (got to love that objective, independent oversight) about the flight profile of the crashed Air France A330 (“The airplane hit the water almost level, it didn’t break up in mid-air, honest, please don’t ask us how we know this, and remember too, there’s nothing wrong with Airbus aircraft even although another model just went into the sea too last week, plus the A330’s tail-plane didn’t fail at 35,000ft, no commercial factors were taken into account in the making of this advertisement, all the evidence points elsewhere”), et-blooming-cetera, it has become increasingly clear in recent months to those who are capable of seeing that EADS’ funding options for the A350XWB are narrowing, not widening.
The mistaken decision to build the A380 plus ongoing EADS and Airbus mismanagement of the program (and of the hopeless A400M) have permanently hamstrung the EADS share price, now in its fourth year of steady decline and currently languishing at only 63% of the issue price a full nine years ago this week, while, even more ignominiously, it remains shrivelled rasher-of-bacon-style at less than 33% of its March 2006 peak. Before the cat escaped from the A380 bag, that is…
With such a compromised financial record over the past decade, any prospects of a market-based capital increase to fund the next decade’s fiascos fall into the same category as Joe Public saying, “You know, I’m not going to bother dating Claudia Schiffer tonight”.
Wasn’t ever going to happen, mon cher Joseph.
As things stand today, Airbus cannot finance the A350XWB without a combination of external assistance such as WTO-problematic government funding or direct (as opposed to start-up) taxpayer subsidy, which the French government of course favors (but will be hard-pushed financially to achieve) but which the German government abhors.
Nonetheless, since the A330 is now unfortunately compromised (with near-cardiac ancillary implications for the USAF tanker contract, the Airbus contender being just a customized A330), no matter how much spin is put on the safety issue by the French Bureau d’Enquêtes et d’Analyses (BEA), the case for the A350XWB is stronger than ever before at Airbus. The only option looks like state intervention, with nationalization being the only viable long-term strategy which has any chance of keeping Airbus insulated from the operational bankruptcy it has effectively been in since 2006.
The latest Harry Potter movie is due for release July 15th. Mr Potter, like Airbus' financial future, is an incredible fantasy.
