http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/08/ccairb08.xml&sSheet=/money/2006/04/08/ixcitytop.html

BAE: baling out before turbulence?

By Ambrose Evans-Pritchard and Christopher Hope (Filed: 08/04/2006)

The British defence giant is selling its stake in Airbus as doubts grow about the future strategy of the European aircraft maker

BAE Systems has ridden the rise of Airbus from upstart producer of passenger jets to global number one with near perfect timing, amassing a stake of at least £3bn from its 20pc share in the pan-European success story.


The giant Airbus A380 “whale bird”, which critics fear may be the wrong sort of aircraft for the future

Its decision yesterday to cash in the chips, raising between £3bn and £4bn, may mark the top of the roaring aerospace boom that netted Airbus record orders of 1,111 aircraft year, leaving it with a fat $200bn backlog that will keep factories humming into the end of the decade.

More ominously, it may also be alerting us that Airbus has made the wrong bet by staking $11bn and its corporate destiny on the A380 super-jumbo - big enough to carry 853 passengers, brimming with new technologies - while neglecting the bread-and-butter smaller jets advanced by Boeing.

DaimlerChrysler and the French media group Lagardere are both rushing for the exits, announcing this week that they will each sell 7.5pc of the total stock of the Airbus mother company, EADS.


A wing of the Airbus A380 being moved from the assembly site at Broughton, on its way to Toulouse

DaimlerChrysler denied German media reports that it is in talks with KfW bank to dispose of an even larger stake. EADS's share price slid to Eu32.95 yesterday, down almost 10pc since Tuesday.

Stephen Pope, global strategist at Cantor Fitzgerald, said: "There's no smoke without fire. When people see so many core holders selling the same week, they start asking, 'what's going on here?'"

Customers have not been kind to Airbus lately. Emirates Airlines has delayed a $4.2bn order for the sluggish-selling A340-600, demanding that it "comes back with clearer plans about an enhanced version of the aircraft".

"We've told Airbus that we don't want to take the A340-600, and then be leapfrogged by something that is a bit better," the company said.

The chief executive of the huge California leasing company ILFC, Steven Udvar-Hazy, has since damned the new A350 with faint praise, saying the blueprint merited a "silver medal" compared with the Boeing 787 Dreamliner, scheduled for 2008.

Calling it a "runner-up" plane, he predicted that it would win just a quarter of the global market for mid-sized jets, while a revitalised Boeing snatches the spoils.

The A350 (due in 2010) has its merits, chiefly lower fuel use, but has clocked up just 176 orders so far.

"Not that bad," Noel Forgeard, the joint boss of EADS, insists. But not that good either. The legions of critics, some within Airbus itself, may have been right in calling for investment in an entirely new aircraft that jumps to the next level of technology, rather than trying to playing catch-up with Boeing's 787 Dreamliner.

Corporate redemption now rests with the A380, the "whale bird" that has absorbed so much of the company's energy and money.

It is already in the air, flying flawless journeys across the globe, and managed to evacuate 853 people last Sunday in 78 seconds, with one broken leg, inside the 90-second rule.

But has Airbus made the right bet with a mega-jumbo that relies on big city hubs, when so much of global travel growth is in criss-cross flights linking regional centres?

Nor is the A380 yet certified. In February a British-built wing snapped in a stress test at 1.45 times the load it might normally meet in flight, below the mandatory 1.5 minimum set by EU and US authorities.

Airbus have played down the rupture, insisting that it was "intentional" and that there was no need to conduct a retest or modify the design. This claim pre-empts the verdict of the European Aviation Safety Agency, which has not yet reached any conclusion.

"The fixed rule is 1.50 until otherwise specified, and we have not specified otherwise," EASA spokesman Daniel Holtgen said. "This does not appear to be a catastrophe for the certification process, but we have to be very cautious," he told the Daily Telegraph.

If any changes are needed, they could delay the first delivery to Singapore Airlines in December, or entail extra wing weight, triggering penalty clauses if it means the A380 fails to meet its promised target of four litres of fuel per 100km per passenger.

Richard Abulafia, vice-president of Teal Group Corporation, said: "With aircraft, you get one or two shots a decade. Airbus's hubristic A380 launch is now starting to impact negatively their future. Couple the A350's weakness with the likely demise of the A340 and you have a potentially catastrophic situation."

The climate is already starting to darken. Airbus expects orders for big jets to fall to around 800 this year, against the 2,173 shared evenly between Airbus and Boeing in the record harvest of 2005.

The jet industry is fickle, highly leveraged to a credit cycle that is palpably nearing its peak, while there is the mounting threat of a human bird-flu pandemic that would shut down airline traffic for months, with dire consequences for weaker carriers.

The United States, Europe and Japan are all tightening monetary policy in unison for the first time since the early 1980s, draining the liquidity that has fuelled fizzing global growth for three years.

Morgan Stanley is calling the top, advising clients to off-load risky investments until the storm is over. "We may be a couple of months early, but with this level of leverage the sell-off can move quickly once it starts," the bank said.

Bearish growls have been getting louder at HSBC and Commerzbank, while the Canadian central bank is warning outright that global recession is on its way.

BAE Systems is coy about its motives for moving now to end a 37-year marriage to the Airbus project, saying only that its stronger affections lie westwards, where US defence interests beckon. "Our relations with Airbus have been very good, but we had limited management control," a spokes-man said.

This appears to be coded language for growing doubts over Airbus strategy in China, where plans are afoot to build a manufacturing plant that would in effect transfer technology to Beijing.

Nor does BAE like the look of the eye-watering development costs of the A400m military aircraft and the A350. In effect, the defence giant is calling the top in the cycle in demand for commercial jets.

One source said: "The market will get increasingly difficult for Airbus, especially with the Chinese and the unproven A380." Another source added: "There is a significant risk. We feel we can put our capital to better use elsewhere."

In truth, BAE's stake in Airbus has been for sale for the past two years. Notably, the sale was on the agenda at a board meeting in January last year when the company looked at selling the stake to raise capital for the $4bn acquisition of United Defense Industries of the US.

BAE's combative chief executive, Mike Turner, has always said he would only sell the Airbus stake when he had something better to spend the money on. The question now is: what?