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Latest update : 2009-10-20

The soaring euro spells trouble for the European aerospace sector

The European aerospace industry is facing two problems: high labour costs and the soaring value of the euro. FRANCE 24’s correspondent Chris Bockman reports from the industry’s heartland in Toulouse about the new financial cloud on the horizon.

There is a new financial cloud on the horizon for Europe. The euro is currently trading close to record highs against the US dollar. For European wishing to holiday in the United States it’s great news, but for European manufacturers it makes it extremely difficult to export their goods competitively. Few sectors are feeling the negative impact of this development as severely as aerospace.
 

FRANCE 24’s correspondent Chris Bockman in Toulouse reports, “It is one of the few industries where Europe is still really leading the pack. Our manufacturers build the planes in euros but sell the planes in dollars, so thisis eating into their revenue significantly. In the Toulouse region, 30,000 to 50,000 people work in this industry, which tells you just how much is at stake.

European aerospace giant EADS has two manufacturing subsidiaries, Airbus and ATR, in Toulouse. Both units are feeling the pinch from the soaring euro.
 

The ATR 600 is the latest high tech airplane to take to the skies. The 50 seater plane has a brand new cockpit, is more fuel efficient and cheaper to fly. In other words, it’s a highly attractive option for short haul airline companies.

However, the Franco-Italian manufacturer is caught between two financial storms. Firstly, 10 percent of the orders for its latest offering have already been cancelled due to an inability by its clients to get financing, and secondly, the soaring value of the euro is seriously eating into profits.

To deal with the crisis the airplane manufacturer has no choice but to cut costs by buying parts outside of Europe.

Chief Financial Officer Giovanni Tramparulo told FRANCE 24, “We have a major part of our costs in euros and 100 percent of our revenues are in dollars. We have reacted by increasing our purchasing in US dollar zones or increasing purchasing in low-cost countries, such as Mexico or China.

Airbus is also pushing the panic button. It has warned that every ten cent rise in the euro wipes 1 billion dollars off its profits. Airbus first highlighted this issue when the euro was close to 1 dollar 30 cents. Now, of course, it’s around 1 dollar 50 cents. With most of its workforce in the euro zone – it is now desperately trying to outsource work outside of Europe to cut its running costs. The company has set up its first assembly line in China, and more work is now being transferred to Tunisia.

Airbus has hundreds of suppliers in France. These suppliers are also feeling the squeeze from the high value of the euro. PMV is one such company and it is based half an hour from Airbus, it produces custom made seating for Airbus planes. The work at PMV is highly labour intensive. Airbus is now piling on the pressure for PMV to slash its costs. 

Furthermore, Airbus’s overseas clients who may like the quality of product may still switch to cheaper competitors inside the United States.

PMV's Financial Director Frances Genebes reports that it is not possible to compete with the euro at its current level.

Genebes expanded on this point, saying, “A supplier like us risks losing some of our business to competitors in the United States or the dollar zone. It’s not easy to deal with.  For the time being our customers do not ask us to be paid in dollars but the risk is that this will happen one day, and that will be a real problem for us."

Most suppliers say the biggest problem for them is the uncertainty. With so much volatility in the currency markets it’s extremely difficult for them to plan ahead, yet no one seems to know where the euro is heading from here.

 

By Christopher BOCKMAN

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