With consolidated revenues of €39.4 billion in 2006, EADS is Europe’s premier aerospace and defence company and the second largest aerospace and defence company in the world. In terms of market share, EADS is among the top two manufacturers of commercial aircraft, civil helicopters, commercial space launch vehicles and missiles, and a leading supplier of military aircraft, satellites and defence electronics. In 2006, it generated approximately 75% of its total revenues in the civil sector (compared to 77% in 2005) and 25% in the defence sector (compared to 23% in 2005). As of 31^st December 2006, EADS’ active headcount was 116,805.

EADS organises its businesses into the following five operating divisions:

• Airbus: Development, manufacturing, marketing and sale of commercial jet aircraft of more than 100 seats and the development and manufacturing of aircraft for military use;
• Military Transport Aircraft: Development, manufacturing, marketing and sale of military transport aircraft and special mission aircraft;
• Eurocopter: Development, manufacturing, marketing and sale of civil and military helicopters, and provision of maintenance services;
• Defence & Security: Development, manufacturing, marketing and sale of missile systems, military combat aircraft and training aircraft; provision of defence electronics and defence-related telecommunications solutions and logistics, training, testing, engineering and other related services; and
• Astrium: Development, manufacturing, marketing and sale of satellites, orbital infrastructures and launchers, and provision of space-based services.

In addition, EADS has four business units (“BUs”) — ATR, EFW (Elbe Flugzeugwerke GmbH), EADS Socata and EADS Sogerma — which are allocated to “Other Businesses” for purposes of segment reporting. Their activities comprise the development, manufacturing, marketing and sale of regional turboprop aircraft, light commercial aircraft and aircraft components, as well as civil and military aircraft conversion and maintenance services.

Significant Programme and Restructuring Developments in 2006

A380 programme. During 2006, Airbus twice revised its delivery schedule for the A380 after having encountered difficulties in the industrialisation of the programme, in particular in the area of electrical engineering. Currently, the first Airbus A380 series aircraft is scheduled to be delivered in the fourth quarter of 2007. In 2008, Airbus plans to deliver 13 A380 series aircraft, followed by 25 in 2009 and 45 in 2010.

A380-related delivery delays and other items have affected earnings before interest and taxes, pre-goodwill impairment and exceptionals (“EBIT*”) at Airbus by a negative €2.5 billion in 2006. These net charges relate to the following items:

• excess costs above the initially expected learning curve, as difficulties in the production process have caused Airbus to fall short of the expected improvements in production efficiency over time;
• the recording of onerous contract provisions, related to contractual penalties to be paid to customers as a result of the delivery delays;
• impairment of inventory, where necessary to align book value with net realisable value;
• all other settlement obligations as a result of the delivery delays and accrued for in 2006. Together with the three preceding charges, this accounts for approximately €2.0 billion of the €2.5 billion decrease in EBIT*;
• impairment of assets and provision charges recorded following the freezing of development on the freighter version of the A380 (€0.3 billion); and
• ongoing production support for the programme, representing recurring expenses unallocated to unit production costs (€0.2 billion).

On 2^nd March 2007, UPS announced its intent to cancel its order for 10 A380 freighters. In connection with this announcement, Airbus decided to reschedule development of the freighter version of the A380 and redeploy existing resources towards production of the passenger version of the aircraft.

Despite the A380-related delivery delays and resulting aircraft cancellations, EADS believes that its competitive position in the very large aircraft market remains sound. While the delivery delays are expected to result in lower cash flows in 2007 and up to 2010 than would otherwise have been recorded, EADS will invest substantially in seeking to ensure that the initial wave of A380 aircraft delivered to customers are of the highest maturity possible, and strive to reinstate the highest level of customer confidence.

A400M programme. At the end of 2006, EADS conducted an internal technical assessment of the A400M programme in order to verify programme status. This review indicated that the programme was contractually on schedule with respect to past and current industrial milestones. However, the review also indicated that the programme might lag behind plan by up to three months as aircraft enter the final assembly line, with significant challenges lying ahead prior to the first delivery.

In connection with the technical assessment above, Airbus also performed a financial review of the A400M programme. Based on the programme’s risks and complexities, Airbus decided to record a loss-at-completion provision of €352 million in 2006 for its workshare on the programme, with a corresponding negative impact on its EBIT* for the year.

However, as the other divisions of EADS foresee a positive contribution from the A400M programme, the provision at Airbus has been reversed at the EADS group level in 2006. Due to the overall cost increase for the programme, a negative catch-up of €(66) million has been recorded at the EADS group level in 2006 in order to adjust EBIT* recognised on the programme for the years 2003 to 2006.

Discontinuation of the A350 programme and launch of the A350XWB (Xtra Wide Body) programme. In October 2005, the EADS Board of Directors authorised Airbus to launch the industrial programme for a new medium-sized long-range aircraft, the A350 aircraft family. Airbus commenced marketing of the A350 aircraft family at this time.

In July 2006, in response to customers’ recommendations, Airbus presented technical specifications for a revised aircraft family, the A350XWB, and placed the original A350 programme on hold. In December 2006, Airbus formally launched the A350XWB series and discontinued the original A350 programme.

The launch of the A350XWB triggered the accrual of a provision related to the anticipated buy-out of delivery commitments under firm orders for the original A350 aircraft, which can no longer be fulfilled. This provision has been recorded in 2006 for an amount of €505 million.

At the end of 2006, Airbus had 100 firm orders and 82 commitments for the original A350 aircraft remaining to be bought out, as well as 2 firm orders and 40 commitments for the new A350XWB.

EADS Sogerma sale. On 10^th January 2007, EADS Sogerma completed the sale of three of its subsidiaries dedicated to global support and maintenance — Sogerma Services, Sogerma Tunisia and Barfield — to the TAT Group. Prior to their sale, EADS recorded an asset impairment totalling €117 million — including €33 million relating to its retained subsidiaries, Seca and Revima — as well as restructuring provisions of €42 million. Combined with an underlying operational loss of €(96) million, EADS Sogerma recorded EBIT* of €(351) million in 2006, a deterioration of €(114) million compared to 2005.

Power8 programme. In order to address the challenges posed by U.S. Dollar weakness, increased competitive pressure and the financial burden related to the A380 delays, and to meet its other future investment needs, Airbus has announced the implementation of the Power 8 programme. As part of Power8, Airbus management will implement cost reduction and cash generating efforts with the goal of achieving EBIT* contributions of €2.1 billion from 2010 onwards and an additional €5 billion of cumulative cash flow from 2007 to 2010. A significant portion of the cost savings is expected to be realised through the reduction of Airbus’ headcount by 10,000 employees (with temporary and on-site subcontractors accounting for approximately 50% of such reduction).

Power8 consists of several measures for enhancing profitability: Reduction of Airbus Overhead Costs, Faster Development, Lean Manufacturing, Smart Buying, Maximising Cash, Focusing on the Core Business/Restructuring the Industrial Set-Up, Streamlining the Final Assembly Lines and Putting the Customer First. Together, these measures seek to transform Airbus’ business model into one that allows it to devote its resources to core activities, while eliminating inefficiencies within its current structure. The transformation will occur progressively over several years and will be accompanied by the further expansion of Airbus’ global footprint. Integration with the rest of EADS will also be facilitated through the purchase of BAE Systems’ 20% share in Airbus in October 2006, as described below.

For further information related to the Power8 programme, see “Recent Developments”.

Outlook

In connection with the planned measures to reduce overhead costs, and specifically headcount, as part of the implementation of Power 8, EADS expects to record a provision of approximately €680 million in the first quarter of 2007, along with charges to be incurred in 2007 for A350XWB onerous contracts and other A380 charges, though it has not yet finalised its accounts. In addition, while the prices of delivered aircraft remained stable at Airbus during 2006, EADS expects — based on its experience in the first quarter of 2007 and until the date of this document — that some deterioration in the price of delivered aircraft will occur in the future as a result of strong past competition, particularly on long-range aircraft. Its experience in the first quarter of 2007 and until the date of this document also leads it to expect that its consolidated research and development expenses will increase in connection with the ramp-up of new programmes, in particular development on the A350XWB.