With consolidated revenues of €39.1 billion in 2007, 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 2007, it generated approximately 77% of its total revenues in the civil sector (compared to 75% in 2006) and 23% in the defence sector (compared to 25% in 2006). As of 31^st December 2007, EADS’ active headcount was 116,493.

EADS organises its businesses into the following five operating divisions:

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 and 2007
 

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. As a result, earnings before interest and taxes, pre-goodwill impairment and exceptionals (“EBIT*”) at Airbus were negatively affected by a net charge of €(2.5) billion in 2006 compared to 2005. This net charge related to the following items:

• Excess costs above the initially expected learning curve, as difficulties in the production process caused Airbus to fall short of the expected improvements in production efficiency over time;
• The recording of loss-making contract provisions, related to contractual penalties to be paid to customers as a result of the delivery delays;
• Write-down 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 accounted for approximately €(2.0) billion of the €(2.5) billion decrease in EBIT* in 2006;
• 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).

Following a difficult year in 2006, the year 2007 marked the beginning of Airbus’ industrial recovery, although the industrial ramp-up remains challenging. The highlight was the first delivery of the A380 to Singapore Airlines in October 2007, followed by a smooth entry into commercial service between Singapore and Sydney. At the same time, Airbus continued to incur significant costs in respect of the A380 programme in 2007, due primarily to excess costs above the initially expected learning curve and ongoing fleet support. Nevertheless, the impact on EBIT* represented a €1.5 billion improvement over 2006.

A400M programme. At the end of 2006, Airbus performed a financial review of the A400M programme. Based on the programme’s risks and complexities, Airbus recorded a loss-making contract 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 foresaw a positive contribution from the A400M programme at the time, the provision at Airbus was reversed at the EADS group level in 2006. In addition, due to the overall cost increase for the programme, a negative catch-up of €(66) million was recorded at the EADS group level in 2006 in order to adjust EBIT* recognised on the programme for the years 2003 to 2006.

Just before the end of 2007, EADS announced that the first deliveries of the A400M would be delayed by six to twelve months. In terms of financial impact, Airbus recorded an additional loss-making contract provision and charges totalling €(1.2) billion in 2007, in addition to provisions and charges of €(0.2) billion recorded at EADS group level and €(0.1) billion recorded at other divisions. The provisions are intended to cover, among other things, cost overruns on the programme and the risk of penalty payments to customers.

The following table sets forth the income statement impact in 2006 and 2007 of the items described above:

Although mitigation measures such as a change in A400M programme management, reorganisation of responsibilities and shortening of the chain of command have been implemented, EADS continues to face significant challenges in achieving first flight in summer 2008 and meeting the revised delivery schedule.

A350 XWB programme. In December 2006, Airbus formally launched its new A350 XWB programme and at the same time discontinued the original A350 programme. The launch of the A350 XWB triggered the accrual of a €505 million provision in 2006, related to the anticipated buy-out of delivery commitments under firm orders for the original A350 aircraft that could no longer be fulfilled.

In 2007, EBIT* at Airbus continued to be burdened by charges with respect to the A350 XWB programme, which amounted to approximately €(1.0) billion. These charges related in particular to the recording of loss-making contract provisions on the first orders for the A350 XWB, the margins of which are weighed down by launch-order pricing and initial learning curve costs.

Power8 programme. At the beginning of 2007, Airbus launched a four-year restructuring programme referred to as “Power8”, 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 large part of the cost savings is expected to be realised through the reduction of Airbus’ headcount by 10,000 employees (including temporary and on-site supplier employees). As part of the planned measures under Power8 to reduce overhead costs, and specifically headcount, EADS recorded a restructuring expense of €(624) million in EBIT* in 2007. At the same time, EADS began to register initial cost savings under the programme in 2007. The Power8 programme supersedes the former “Route 06” cost savings programme, including any unrealised cost savings thereunder.

For further information related to the Power8 programme and its ongoing implementation, see “Part2/Airbus—Strategy—Building a leaner, more fully integrated company” and “Recent Developments”.

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 America Barfield B.C. and EADS Sogerma Tunisie — to the TAT Group. Prior to their sale, EADS recorded an asset impairment totalling €(117) million in 2006 — 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. Following the sale of these subsidiaries, EADS Sogerma’s EBIT* was positive in 2007.

Trends

EADS expects that new aircraft orders at Airbus will decline in 2008 to approximately 700 gross orders, following the record 1,458 gross orders recorded in 2007. It also expects that its consolidated research and development expenses will increase in 2008 in connection with the ramp-up of new programmes, in particular development on the A350 XWB, and that some deterioration in the price of delivered aircraft will occur as a result of strong past competition, particularly on long-range aircraft.