Can EADS cut enough?

This first appeared as a Comment in the 17 December issue of Flight International

 

EADS unveiled two surprises last week. One was the plan to cut 5,800 jobs from its defence and space divisions. The other was that A350 costs won’t dent profits as much as the market expected.
The job cuts surprise was that only 5,800 will go. Insiders, understandably worried since plans to combine Cassidian and Astrium into Airbus Defence and Space were unveiled back in July, expected to see 8,000 ­colleagues depart, about 20% of the two units’ total.
As for the A350, investors had priced in a heavier cost toll than EADS is now forecasting. A day after the job cuts were detailed, EADS shares jumped on management expectations of a 7-8% profit margin in 2015.
What does it all mean? EADS is certainly illustrating the civil-military split in aerospace. The airliner business is booming, the A350 programme looks to be on track and expectations are for more of the same.
Meanwhile, military businesses are suffering as Western governments cut back – and EADS is suffering more than most. Much of its defence business is rooted in a country, Germany, whose aversion to military operations and frugality deny it a strong home market. The flagship Eurofighter Typhoon programme is also not getting any help from its other home markets: ­Britain, Italy and Spain. Exports are Typhoon’s hope.
Eurofighter is more expensive than it could have been, in large part a legacy of EADS’s creation from highly protected national aerospace champions. The consortium has been a huge triumph for European integration, but with its four production lines, efficient it is not.
As a duopolist in a booming civil market EADS has been able to overcome, even overhaul, its cost base. In the low volume and highly competitive defence market, its structural shortcomings are increasingly debilitating. For sure, in military transports it is a solid player in a market with good demand, and the space and ­electronics portfolios are strong. But, like Eurofighter, these businesses are not really cost-competitive.
Management reckons it is doing enough with its new-found freedom as steward of a “normal” company to solve this problem, but warns of more cuts if needed.
The big question is, can EADS avoid deeper cuts in just a couple of years? And, can it cut enough to remain a viable player in the military aircraft business, especially fighters? If not, then European politicians sidelined by EADS’s year of governance revolution will have to step back in and face this question: should Europe have an independent defence industrial capability?

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