Fx risk hedging at eads solution

Management FOCUS: Airbus and the Euro
Subject
Business Finance

Question Description
Airbus had reason to celebrate in 2003; for the frst time in the company’s history, it delivered more commercial jet aircraft than long-time rival Boeing. Airbus delivered 305 planes in 2003, compared to Boeing’s 281. The celebration, however, was muted because the strength of the euro against the U.S. dollar was casting a cloud over the company’s future. Airbus, which is based in Toulouse, France, prices planes in dollars, just as Boeing has always done. But more than half of Airbus’ costs are in euros. So as the dollar drops in value against the euro—and it dropped by more than 50 percent between 2002 and the end of 2009—Airbus’ costs rise in proportion to its revenue, squeezing profts in the process. In the short run, the fall in the value of the dollar against the euro did not hurt Airbus. The company fully hedged its dollar exposure in 2005 and was mostly hedged for 2006. However, anticipating that the dollar would stay weak against the euro, Airbus started to take other steps to reduce its economic exposure to a strong European currency. Recognizing that raising prices is not an option given the strong competition from Boeing, Airbus decided to focus on reducing its costs. As a step toward doing this, Airbus gave U.S. suppliers a greater share of work on new aircraft models, such as the A380 superjumbo and the A350. It also shifted supply work on some of its older models from European to American-based suppliers. This increased the proportion of its costs that were in dollars, making profts less vulnerable to a rise in the value of the euro and reducing the costs of building an aircraft when they were converted back into euros. Wings are assembled at the Airbus SAS factory in Broughton, United Kingdom. Completed wings are transported to Toulouse, France, or Hamburg, Germany, for fnal assembly. Source: © Christopher Furlong/Getty Images News/Getty Images In addition, Airbus pushed its European-based suppliers to start pricing in U.S. dollars. Because the costs of many suppliers were in euros, the suppliers found that to comply with Airbus’ wishes, they too had to move more work to the United States or to countries whose currency is pegged to the U.S. dollar.