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Wednesday, December 5, 2007 - Page updated at 12:00 AM

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Airbus production may move to U.S.

Seattle Times aerospace reporter

Ralph Crosby, the top North American executive of Airbus parent company EADS, said publicly Monday that if the company wins all or part of the Air Force tanker contract, the European plane maker may "bring other final assembly activities to the United States."

A person close to Airbus confirmed privately that top executives are discussing in detail the possibility of assembling commercial jets in Mobile, Ala., where the company would complete its A330 military tankers.

Airbus could put together A330 commercial freighters and perhaps, eventually, A330 passenger jets at the same plant, said this person, who was briefed on the subject.

Compelling financial forces are driving the idea forward: the European plane maker needs to get more of its production costs in dollars to offset a hit to profits of $1.45 billion for every 10-cent decline in the dollar. The dollar has already fallen 16 cents against the euro this year.

The person close to Airbus said no final decision to do so has been made.

If Airbus were to go ahead, "it's tantamount to Toyota entering the U.S. auto market" with U.S. factories.

"It's Toyota all over again," he said. "We become Americans."

Such a plan would be contingent on winning the tanker bid. The Air Force is set to pick a winner in that competition in February or March.

Procurement officials must choose between a tanker based on the Boeing 767 and one proposed by an EADS/Northrop Grumman partnership based on the Airbus A330. The military contract is worth more than $20 billion for the initial tankers and potentially as much as $100 billion for replacement of all the tankers eventually.

An analyst who has spoken with senior officials at Boeing and at EADS/Northrop said both think the EADS/Northrop bid price is no higher than Boeing's. That worries the Boeing executives because it raises the possibility that the Air Force could get a more modern tanker from EADS for the same price or less than it could get from Boeing.

The governors of five Southern U.S states, including Alabama, sent an Oct. 26 letter to President Bush lobbying for EADS/Northrop, demanding "an unbiased, fair and open" tanker competition, and painting a picture of what an Airbus tanker-assembly plant could mean:

"No individual state in our region has anything that remotely compares to the breadth, depth and significance of the aerospace industry of the Pacific Northwest," they wrote to Bush. "This tanker-aircraft procurement provides our southern region with a rare opportunity to create a new, integrated and sweeping aerospace center of excellence."

EADS has been lobbying hard for a tanker win all year. But a senior EADS executive dropped a public hint of broader intentions in Washington, D.C., Monday.

Citing the pressure from the dollar's slump, Crosby, the EADS executive, told the Reuters Aerospace and Defense Summit on Monday that "we really are at a preliminary point" in considering doing final assembly in the U.S. He added that A330 freighters would be a "logical candidate" to move to Mobile, Ala.

Crosby said some decisions would be made soon, possibly before the end of the year.

EADS Chief Executive Louis Gallois recently described the dollar's fall as an "existential threat" that will force Airbus to move some production outside Europe into the dollar zone, according to European press reports.

Though a promise to build commercial jets in Alabama might help EADS to win the tanker bid, EADS is not yet ready to trumpet the idea. Crosby declined Tuesday to add to his comments made to Reuters.

EADS is now in the middle of delicate political and labor negotiations around outsourcing and job cuts in Europe.

But the attraction of placing work in the U.S. is clear.

The unrelenting dollar slide presents Airbus with a serious problem outside its control: The value of its revenue in dollars is falling steeply compared with much of its costs, which are in euros.

Most of Airbus' revenue comes in dollars — in 2006, according to the annual report, it was $28 billion out of a total $32 billion.

But about half of Airbus' expenses must be paid in euros: labor costs, overhead, taxes, payments to suppliers.

To protect itself from currency swings in the period between an order being placed and a plane being delivered — which can be years — Airbus enters into a financial hedging contract as soon as any airplane order is firm.

These contracts lock in the current exchange rate for an amount that will cover Airbus' euro expenses on that particular order.

However, that hedging is becoming more and more expensive.

Airbus paid $1.40 per euro for recent hedges, according to financial filings, compared to $1 per euro for its 2006 hedging contracts.

The euro today stands at $1.47, down from $1.30 at the beginning of the year.

Put another way, to cover its current exposure delivering about 440 aircraft this year, Airbus financial reports show it needs to buy hedging contracts costing about $14.5 billion.

That's why a 10-cent decline in the value of the dollar means Airbus has to pay an extra $1.45 billion per year to hedge that risk exposure.

That translates neatly to 1 billion euros — meaning, as executives in Toulouse have been saying recently, that no matter how well Airbus performs, every 10 cent slide by the dollar is another billion-euro hit to its profitability.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Copyright © 2007 The Seattle Times Company

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