"$1.60 is unbearable. With a euro at $1.60, some players could go bankrupt." That remark, made on 18 March by Dassault Aviation boss Charles Edelstenne in his guise as chairman of Gifas, the French aerospace industry federation, was in reference to the plight of small and medium-size enterprises in France. But was Edelstenne just the latest in the line of European industry bosses bemoaning the financial pain of being based in the eurozone while being paid for much of its work in seemingly ever-depreciating US dollars? Or, is the dollar/euro exchange rate - which flirted with the $1.60 mark as Edelstenne was presenting an otherwise encouraging set of collective 2007 results for Gifas's members - really pushing European aerospace into crisis?
Comments made a week earlier by EADS chief financial officer Hans Peter Ring detailed the difficulties. Revenue for 2007 was only slightly down on 2006, despite a euro 1.1 billion ($1.7 billion) negative dollar rate impact. EADS, he said, is 95% hedged for 2008 and thus largely protected, though forecast pre-tax profits of euro 1.8 billion for 2008 are at risk from short-term currency movements - and EADS's assumptions are based on a euro at $1.45. Continued dollar weakness, he said, would demand "protective measures" but added: "It will be painful not only for EADS to find measures against such a weak dollar. And macro-economically I think we will go into big trouble, huge problems in Europe in the export industry if we continue to be neutral in Europe, the only region in the world which is neutral towards the development of its currency."
His boss, Louis Gallois, said at the same 2007 results presentation that politicians could not help so the company had only two means of protecting itself: cut costs or increase the dollar-based content of its products: "There is no third escape way."
But can EADS and other European firms escape? According to Hetal Mehta, economic advisor to Ernst & Young's independent economics group the Item Club, an exchange rate in today's range could be withstood for a while by the French and Germans. Firms in Spain and Italy have been less profitable and would feel more pain sooner. But, she says, it would be "bad" if a rate around $1.60 persisted for a long time, say five years.
Firms face real difficulties, she says, because a typical strategy when margins are squeezed would be to lower prices and push for volume. But that is risky now as demand, in a downturn, will be inelastic. Another proposed strategy, reportedly being considered by EADS and its Airbus subsidiary, is to press suppliers to shift to dollar invoicing. But, says Mehta, there are huge disadvantages for all but the biggest suppliers in that approach.
Washington, DC-based consultant Richard Aboulafia of the Teal Group, agrees that European SMEs are "really squeezed" by the exchange rate, which is hurting their long-term competitiveness. But, he adds, big, prime contractors are "making a killing" on the US-made content in their product mixes.
And, he notes, while the weak dollar is generally good for US firms, they are ultimately at risk in this environment. European companies like EADS are pushing to buy presence in the US market, and in doing so will eventually win their way into lucrative US defence contracts. AgustaWestland and Eurocopter are two examples of current success on that front, with the huge example to follow of EADS's plan to build Airbus A330 freighters in Mobile, Alabama on the back of its KC-45 tanker contract win with Northrop Grumman.
Or, as Gallois noted earlier this year, the buying power of the euro is so strong now that EADS' goal of making acquisitions in the USA to build its dollar content is at least affordable: "It is the right time to buy."
Whether anybody wins in this currency and economic environment remains to be seen. Mehta points out that the main reason the dollar is falling is that the US economy is weak, so US interest rates are low and so is demand for dollars. In that context it may ultimately be academic whether Europeans are feeling the squeeze because they are getting paid in low-value dollars, or because their US customers are short of buying power.
Source: Flight International