MarketLine Blog

EADS: Life after BAE? Flying High after the Failed Merger despite Challenges in the Defense Sector

The much vaunted merger of BAE Systems and EADS failed to materialize in October 2012 because of political deadlock, generating uncertainty regarding the future of both companies. The full results for the financial year 2012 show that EADS seems to be doing just fine.

2012 saw a 15% increase in revenues for the company, driving it to €56.5bn ($78.6bn) against 2011’s €49.1bn ($68.3bn). Airbus, Eurocopter and Astrium provided the boost, with defense remaining flat. Net income was up 20% to €1.9bn ($2.6bn). Order books were also up 5%. Shares peaked at an all-time high in response to the news, with the dividend also raised.

The full results for EADS in 2012 demonstrate grounds for optimism. In the aftermath of the failed deal, EADS has now been allowed to exploit the civil aviation sector fully. If the BAE merger had proceeded, there would have been emphasis on equal allocation between defense and civilian to accommodate for BAE. Chief executive Tom Enders said he would be, “comfortable” with a 20-25% revenue contribution from defense. This infers that it will remain a hedge against any changes in the civilian industry cycles.

This reflects changing attitudes at the company in the face of economic conditions. Whereas defense budgets for the most part globally come under renewed pressure with austerity policies squeezing demand. It was partly the reason why the merger was recommended. Conversely, civil aviation is performing well in the face of adversity; many airliners are choosing to invest in more fuel efficient products to bring down costs in a tight margin industry. Emerging markets’ airlines are also a strong source of demand.

Challenges remain for the company. The A350 XWB program is a persistent problem, described as “remaining challenging”. A director suggested a second production line could be opened to compensate for the setbacks, but no official decision was yet made. Defense subsidiary Cassidian is another obstacle, with revenues declining 1% in the year. Although the state stakes of France, Germany and Spain are planned to be diluted, they will remain a constraint and the company will remain politically bound.

2013 is estimated for only moderate growth, as problems with Airbus A380 deliveries as it sought a permanent solution for its “ribbed feet” problem, leading to shortening of lifespan but not grounding; and further delays with the A350. The company is also seeking to substitute the lithium batteries for the A350 which have caused problems with the Boeing Dreamliner.

Nonetheless, the company looks in fairly good shape despite the challenging environment. The company is rejuvenated, and keen to play down rumors of a second attempt at a BAE merger.

Leave a comment

*Required fields. We will not publish your email address