EADS Exits US Defense Deal to Save Cash

European aerospace group EADS said on Tuesday it had abandoned a "significant" defense acquisition in the United States to conserve cash and prop up Airbus plane sales to crisis-hit airlines.

The Airbus parent company is under pressure to offer financing to buyers to ensure they honor contracts and also faces a raft of possible new provisions for delays to its A400M military airlifter.

Airbus and rival Boeing saw new plane business roughly halve last year after a record 2007 as airlines endured first a record spike in oil prices, then a slump in passenger and cargo demand.

"We want to protect cash so we are focusing and reducing our investment expenses," EADS Chief Executive Louis Gallois told an annual news conference.

"We need this cash to protect the company and sometimes support our suppliers, in particular when they are in common with the auto industry," he said.

Gallois declined to say what level of cash EADS would find comfortable, but revealed that even while closing out 2008 with a 2 billion euro cash increase compared with the end of 2007, it had cancelled an acquisition in the United States to save cash.

"We were on the way to sending the cheque and we pulled out at the last minute. It was a unanimous position by the board," Gallois said.

EADS was forced to abandon the purchase of a U.S. military drones designer in 2007 after a split on its board.

A company official said the price tag on the latest aborted deal was in the region of $1 billion.

EADS last year bought emergency control room specialist PlantCML and targeted at least one other acquisition in 2008 to boost its presence in the U.S. defense or services market.

EADS reported a cash surplus of some 9 billion euros ($12.1 billion) at the end of last year as 2008 revenue rose to around 42 billion euros from 39 billion the year before.

But its order intake fell to around 90 billion euros from 137 billion in 2007, reflecting a decline in new business as airlines battle through the downturn.

The provisional figures were given at a news conference at one of the European parent group's UK defense plants in Wales.

Production Cuts?

Gallois said Airbus, which recently shelved plans to increase production of single-aisle jets, did not exclude cutting output to adjust production to expected deliveries.

Both Boeing and Airbus have said they stand ready to increase financing as airlines seek alternatives to crisis-torn credit markets and most analysts foresee cuts in production.

"We are not worried about the backlog of orders but the threat is to have delivery slots empty in 2009," Gallois said.

He said none of the group's long-term targets had been affected so far by the financial crisis.

He called on banks to play their part in helping the economy and suggested some were refusing to provide credit even where plane contracts were backed by government export agencies.

"European governments are making great efforts to stabilize the financial industry," Gallois said. "Now banks have to make great efforts on their side to keep the economy afloat ... in particular when export credit agencies are guaranteeing financing."

Gallois said he understood the frustration of European NATO countries angry at mounting delays to the A400M military transport plane.

EADS last week announced further delays of at least a year to the plane, which was already two years late.

Britain said on Monday could not accept a three- to four-year delay in delivery of the A400M troop and cargo plane.

"We are in intensive discussions and negotiations with OCCAR to put the program on track," Gallois said, referring to the agency which placed Europe's largest ever single defense order, worth 20 billion euros, for 7 NATO countries in 2003.

EADS has so far taken 1.7 billion euros in A400M provisions.

Gallois confirmed EADS was looking at a bridging plan to supply alternative airlift capacity using A330 Airbus transport-refueling jets, as reported by Reuters in December.