May 16, 2006

EADS hints it may seek loans for Airbus A350

By James Regan and Tim Hepher

BERLIN (Reuters) - Airbus's parent firm EADS said on
Tuesday it may go back to European governments for extra loans
if it decides to revamp the A350, but kept silent on what it
will do to help the slow-selling jet catch up with Boeing.

The prospect of extra launch aid risks inflaming a trade
dispute between the United States and Europe over subsidies,
and kept attention focused on the fate of the foundering Airbus
project even as EADS reported brighter than expected results.

The United States and European Union are at loggerheads
over repayable government loans provided in the development
phase of Airbus jets. Washington contends they are a subsidy
while the Brussels-based EU accuses Boeing of getting aid of
its own.

"If there is a solution soon, then we could think about
alternative financing. But in the other event, we may consider
applying for government loans," EADS Co-Chief Executive Noel
Forgeard said.

Washington protested when Airbus secured one-third of the
cost of its original 4.3 billion euro ($5.5 billion) A350
development budget in loans, and it dismissed the company's
offer not to touch the money for a year.

But in a reversal of fortunes, Airbus is now being forced
to think of upgrading the A350 after it performed poorly
against the Boeing 787 Dreamliner, which has outsold it by

The hint about loans at the Berlin air show came as EADS
posted a better-than-expected 19-percent rise in first-quarter
operating profit, with strong plane deliveries keeping
full-year forecasts on course.

Shares in Europe's largest aerospace group initially rose
on the market-beating result, but fell back after investors
digested details on capital gains embedded in the earnings as
well as a new proviso on exchange rates introduced into its
2006 profit guidance.


EADS reiterated a March statement that it was targeting
2006 earnings per share of 2.35 to 2.55 euros but added that
this assumed a closing 2006 euro-dollar rate similar to
end-2005. The euro stood at $1.2830 on Tuesday, up from $1.18
at end-2005.

EADS also reiterated targets of 3.2 billion to 3.4 billion
euros in operating income, up 12 to 19 pecent from last year,
and a 2006 sales forecast of more than 37 billion euros. It
also expects Airbus deliveries to rise more than 10 percent.

The outlook does not reflect the impact of UK Airbus
partner BAE Systems' plan to sell its 20 percent stake in the
planemaker, the company said. EADS currently owns 80 percent
and is expected to buy BAE's stake.

EADS shares were down 2.8 percent at 28.53 euros at 1420
GMT, while the French blue-chip index rose slightly.

First-quarter earnings before interest and tax (EBIT),
despite less favorable currency hedging rates, rose to 780
million euros ($999 million) from 657 million, topping a median
forecast of 694 million euros by 11 analysts polled by Reuters.

Net income rose 26 percent to 516 million euros, in line
with a 29 percent jump in net earnings reported by rival Boeing
Co. last month.

First-quarter revenues rose 30 percent to 9.1 billion
euros, boosted by higher Airbus volumes and a delayed 500
million-euro contribution from its A400M military transport
aircraft program.

Airbus delivered 101 aircraft, compared with 87 in the same
period a year ago, while Boeing delivered 98, up from 70.

EADS's order intake in the first three months of 2006 rose
to 10.5 billion euros from 8.9 billion. Its order book stood at
248.6 billion euros as of March 31.

"Airbus is performing very well because of higher volumes
and some cost cuts. What is really a surprise is the Defense &
Security Systems division. They had a very good start in the
defense business," said MM Warburg analyst Nils Machemehl.


"These first-quarter earnings highlight once again the
powerful momentum of EADS. However, we have plenty of ongoing
operational challenges, and management is focusing strongly on
the ramp-up of key programs," co-chief executives Noel Forgeard
and Tom Enders said.

Analysts said before Tuesday that the first-quarter results
were likely to be overshadowed by whatever EADS had to say
about its plans for the slow-selling A350 twin-jet aircraft.

But Forgeard said a definitive decision had not been made.

"We have listened to some customer feedback on our way to
making the final definition of the A350 aircraft. Do not expect
announcements now, but I think I can say that definitive
decisions should be made before the Farnborough air show in
July," Forgeard said at the Berlin air show.

"Whatever we do will be compatible with the financing
available," he added.

Markets are impatient for an update, however.

"They have to give some indication what might happen with
the A350. Airbus has a lot of development resources. A
completely new A350 would be manageable," MM Warburg's
Machemehl said.

Such a move, which could come alongside a new strategy for
the struggling A340 four-engine series, could as much as double
expected R&D spending. EADS said it expected 1.8 billion euros
in R&D this year and that this year's budget would not be
significantly altered by any changes to the product line.

EADS shares notionally have room to rise if it wins backing
for its long-haul strategy, as they trade at 12.5 times
estimated 2006 earnings, up to 20 percent shy of European aero
systems and defense groups, according to Reuters data.

But the group also faces headwinds from a weaker dollar as
its currency hedging rate declines compared with a year ago.

Airbus meanwhile announced a joint venture with MIG and
Irkut of Russia to convert A320 and A321 single-aisle passenger
planes into freight aircraft. The conversions will be done in
Russia starting from 2011.

An Airbus official said about 450 aircraft could be covered
by the project, with each conversion worth $4 million to $5

(Additional reporting by James Regaan, Jason Neely, Kerstin
Doerr, Gernot Heller)