art
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Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 10:21 am

Contracts to sell aircraft in a single currency can create severe problems for the manufacturer due to currency instability.

For example, if Airbus today contracts to deliver an aircraft for $US100 million in 3 years time (today equivalent to 125 million euros) but the $US weakens 20% against the euro over 3 years, Airbus will receive the equivalent of 100 million euros for the aircraft. Since most of Airbus' costs are in euros (I guess), such currency movements must have a major impact on profitability.

Additionally, when the euro is strong against the $US, one can expect Airbus to be less competitive and to receive less orders and vice versa. This deamnd increase/decrease due to currency movements must feed through (to some extent) to accelerating/decelerating the rate of production. Another problem for the manufacturer.

Would it not mitigate these problems if sales contracts were made in more than one currency? For example, 50% payable in $US dollars, 50% in euros. And would it not mitigate these problems even further if staff and suppliers were paid in a mix of currencies?

The end year $US dollar/euro exchange rates over the last few years illustrate the instability problem (source US Federal Reserve):

1997 1.17
1998 1.01
1999 0.94
2000 0.89
2001 1.06
2002 1.05
2003 1.26
2004 1.35
 
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lightsaber
Crew
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 10:32 am

Its simpler and cheaper just to buy derivatives to cover currency fluctuations. Both Boeing and Airbus utilize derivatives on a huge scale.

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atmx2000
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 10:33 am

Of course passing currency risk to customers, suppliers and workers would work to the manufacturers benefit. But it would be the manufacturers' job to convince its customers, suppliers, and workers to accept such contracts and the increased currency risk that it entails.
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NAV20
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 10:39 am

Quoting Art (Thread starter):
Would it not mitigate these problems if sales contracts were made in more than one currency? For example, 50% payable in $US dollars, 50% in euros.

I think the answer is, Art, that any manufacturer is already free to specify payment in any currency, or even a mix of currencies, if they so wish.
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Planesmart
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 11:05 am

A has always priced ans sold aircraft in curriencies other than USD. Since late 2004, B has been selectively offering multi-currency pricing.

The USD is the settlement currency for seats and freight, but many airlines have significant exposures in local and other currencies.

Aircraft are sold in so many different ways, including the split between buy/lease & capex/non-capex, currency is just one factor in the equation. The biggest driver by far is TAX effectiveness. In some cases the total $'s of option A could be higher than option B, but after tax, total costs are lower.
 
roseflyer
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 11:20 am

For international European Union companies like Airbus, the depreciated value of the dollar hurts their profits. Costs remain the same within the EU for Airbus, BMW, Daimler Chrysler, Volkswagen and more, as the value of their products continue to fall. Significant amounts of sales from these companies are directly to the United States. Airbus' only strong competitor is Boeing, which is an American company. The low value of the dollar and high value of the euro gives Boeing an advantage over Airbus.

Airbus prices its planes in dollars as most products in the aviation sector duopoly are priced in dollars. This helps airlines from throughout the world get a full comparison when shopping for Airbus and Boeing as both companies use the same international currency. Airbus planes have 43% of their costs in Euros, and those planes sell in dollars. With the recent appreciation of the euro compared to the dollar "Costs are higher [in dollar terms]; revenue is the same; so the rate of return is lower," said Adam Pilarski, an industry analyst with Avitas. "When the dollar gets weaker, it's not good for [Airbus]." Venturing into the currency hedging market is one of the only options for European companies. Airbus hedges almost all of its costs priced in euros which amount to approximately $10 Billion per year. The expense of getting into these contracts hurts the company, but they are necessary. Airbus needs to lock in an exchange rate when they negotiate prices for their airplanes (which often have contracts signed 3 years before the plane is built and paid for) in order to protect themselves from exchange rate fluctuations.

To compete with an American company when the United States foreign exchange rate policy favors American businesses by keeping an undervalued currency, a European Union corporation must lower costs. Airbus fortunately purchases many of the parts for their planes in dollars due to the dollar being the primary international currency used in the aerospace industry. This lowers Airbus' risk by allowing them to protect themselves from exchange rate fluctuations since both cost and revenue are in dollars. Another way that they combat the problem is by increasing efficiency. Airbus is cutting labor costs (which is their biggest Euro denominated expense) and increasing efficiency by developing new production techniques for their factories in Germany and France. These are long term procedures that hopefully will help Airbus fight its higher cost base over its American competitor.

In the long run these cost benefits might turn out to really benefit Airbus. Currently cost reductions are necessary for the company to survive, but in the future the dollar may appreciate. If it does, these cost reductions will help Airbus undercut Boeing. EU companies currently are forced to cut costs and increase efficiency, since it is one of the few ways to combat an overvalued currency like he euro. However, in the future the dollar may appreciate since the United States is growing much faster then the European Union. The prolonged undervalued currency will make the US economy strong, which eventually will push the value of the dollar up against the euro. The EU is not very competitive on the international market with such a low value of the dollar. A devaluation in the euro due to a weaker economy will place the European Union in a better position. In the future if a devaluation occurs, costs for EU companies will be comparatively low compared to the US since they are developing more efficient production techniques. Airbus currently needs to weather the storm, but its prospects are still strong in the future with the hope that eventually the dollar will appreciate against the Euro and which will make Airbus more competitive.
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Planesmart
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 11:34 am

Despite that RoseFlyer, both A & B have, and will in the future, price aircraft, engines and other products & services in USD, EUD, other currencies, including multi-currency.

In the good old days when B, L and McD ruled the commercial aviation world, and there were really no dominant airlines, it was a case of USD, take it or leave it.
 
roseflyer
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RE: Should A/c Be Sold In A Mix Of Currencies?

Thu May 19, 2005 12:10 pm

I agree with you PlaneSmart, but the Dollar is the international currency. It has been that way ever since WWII (and the failed European Exchange Rate Mechanism). While the Yen and Euro have gained strongly, the dollar still dominates transactions. For example if Lufthansa buys a Rolls-Royce engine from the UK, they still pay for it in US Dollars. That is the way business is done in almost every industry. Agricultural products are priced in dollars, as well as cars, ships and many other highly valued products.

A single currency is useful in international finance because it protects companies from a specific currency. The dollar has been the most reliable currency since WWII, and many countries use it. For example 83% of imports to the country of Vietnam are priced in USD (source Wall Street Journal). Doing this allows companies to know how much they will have to pay for a good and will find it easy to compare prices. Airbus, Boeing, Bombardier and Embraer all price planes in Dollars, which makes it easy for any airline to compare prices. Often times the finance arm in the contracts from B/A/B/E will include future contracts that will allow an airline to pay in its own currency, but the plane is still priced in Dollars. The airline will have to take the risk of converting currency in the future and subject themselves to exchange rate fluctuations, or to go through the cost of using financial instruments to lock in exchange rates. These are just the costs of doing business in Global economy. The airplane industry is a great example.

And to go back and answer the original question, Airbus is facing a problem now. They can't nearly discount as much as Boeing can since the Euro is overvalued. There is a reason why Boeing sales are picking up (even though many here want to say it is only because Boeing planes are better). Airbus benefited around 2000 as the dollar was overvalued compared to the Euro. Things move back and forth and hopefully are equal in the long run. Unfortunately though for Airbus the Fed and the US government are a lot more orientated about keeping a strong economy with a devalued dollar than the European Central bank is as the two economic policies have big differences.

[Edited 2005-05-19 05:24:44]
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roseflyer
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RE: Should A/c Be Sold In A Mix Of Currencies?

Fri May 20, 2005 3:46 am

Here is a good article on the subject of currencies affecting Airbus and Boeing.

http://seattletimes.nwsource.com/htm...ace/2002122290_airbusdollar17.html

The dollar's prolonged decline against the euro has not hurt Airbus — yet.

But it is finally beginning to cloud the European manufacturer's future, threatening to squeeze profit margins and hurting the business case for the A350, the new jet Airbus last week committed to pitching against Boeing's 7E7.

"Costs are higher; revenue is the same; so the rate of return is lower," said Adam Pilarski, an industry analyst with Avitas. "When the dollar gets weaker, it's not good for [Airbus]."

Airbus has delayed the effect of the dollar's decline through a meticulous currency-hedging strategy, which ensures that it will feel little pain at all until 2007. But with the reckoning ahead, it plans a fresh round of cost-cutting.

In the past three years, the U.S. dollar has lost more than a third of its value against the euro. By making American products cheaper, the shift helps U.S. exporters and places a heavy cost burden on European competitors.

So far, the dollar's fall has certainly not held Airbus back. During that long currency slide, Airbus has consistently outsold Boeing and risen to become the world's No. 1 airplane-maker.

Just last month, with the dollar at its lowest point in years, Boeing executives blamed aggressive pricing when Airbus won a crucial large order from Air Berlin.

But beyond 2007, the dollar's plummet will take an increasing toll, eating gradually into Airbus profit margins.

That makes the planned A350 a riskier investment. And it could force Airbus to increase airplane prices, making it harder to sustain the constant undercutting of Boeing.


The article continues to go on and discuss how the companies hedge against exchange fluctuation. It is a good read, and free from Boeing's hometown newspaper.
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