TAIL SPIN

Airbus and its main parent EADS will not know for weeks, maybe months, the full cost and market implications from the latest A380 delays and ongoing product strategy uncertainty. The immediate hit is significant, though. It further complicates talks regarding BAE Systems selling its 20% stake in Airbus to EADS.

At stake are several billion euros on EADS's balance sheet, Airbus's relationship with some of its main customers, and potentially the fate of some high-level managers.

AIRBUS CEO GUSTAV Humbert, who made customer service his top priority, concedes that the announcement about A380 deliveries being drastically scaled back in the coming years "badly hurt" the company's reputation, and that airline executives "are not happy with Airbus, to say the least."

Customer discontent is clear. A day after Airbus announced that due to manufacturing problems it would deliver only one A380 to Singapore Airlines this year, rather than two, the carrier placed an order for 20 Boeing 787s, which the European aircraft maker was also competing for (see p. 25). Even Airbus's usually undaunted chief salesman, John Leahy, concedes the company will have to rebuild its credibility with airlines "one day at a time and one aircraft at a time."

But the problems at Airbus go beyond the 6-7-month A380 delay, and the reduction in 2007 deliveries of 16 aircraft. Airbus is basically conceding this year's order race to Boeing, the first time since 2000 that the U.S. aircraft maker will outsell its rival. Leahy, Airbus COO for Customers, says the company will "probably not" retain its order lead, and merely thinks it will fall no lower than 40% market share. It remains in the lead on deliveries. Moreover, Airbus could end the year with a net backlog reduction, another unwelcome trend, although the total backlog is still strong at more than 2,000 aircraft.

Is it really all bad news, particularly for EADS? Indeed, the company's share price took a nosedive after the revelation of the delay and the attendant news that the company expects earnings to be 500 million euros ($625 million) less than projected for the next four years. And cash-flow shortfalls will grow to 1 billion euros in 2008, but fall thereafter, although the extent of the carryover effect is not specified.

But, there may be a silver lining in the timing of the announcement. Some industry observers are suggesting the release of the news could be beneficial to EADS. It is in a battle over the sales price BAE Systems wants for its 20% stake in Airbus, which it is looking to unload. EADS's offer is two billion euros less than BAE Systems' management is asking, and banks have been called in to assess the real value--an estimate that may just have taken a significant hit. BAE Systems insists that the valuation should reflect Airbus's long-term worth, and not be affected by near-term turbulence.

"This disclosure clearly negatively impacts the value of Airbus," says Joseph B. Nadol, analyst at JP Morgan Securities. An Airbus official notes that EADS was a driving force in disclosing particular potential out-year delays, which are seen as still somewhat uncertain in their magnitude, although the aircraft maker also wanted to alert airlines to possible ramifications of the situation.

If BAE Systems doesn't like the valuation, it could urge shareholders to vote down the sale.