The Wall Street Journal had an interesting article on Friday about the fact that Airbus’s revenues are hit by the Euro-Dollar exchange rate (“Strong Euro Weighs on Airbus, Suppliers“, Wall Street Journal, October 2009).
The article discusses the interesting interface between operations management and finance, and in particular it discusses financial and operational hedging. There are several interesting facts in the article:
1. While Airbus operates in Euros, their transaction of selling the A380 to Air France was priced in U.S. dollars, the de facto currency of the global aerospace industry, which means that Airbus is earning much less than it anticipated.
2. But it’s not as if Airbus was not prepared.
EADS covers some of Airbus’s exposure with currency hedges and options, which secure future rates. Thanks to deals struck several years ago, EADS has locked in a euro rate of $1.32 for the second half of this year and $1.35 for next year. But as the euro has strengthened, EADS’s ability to outrun it has diminished. Its rate for 2011 and beyond is $1.39, and its volume of hedges shrinks. And hedging, which is essentially a type of insurance policy, costs money.
3. Airbus does not stop here. It also uses a more diverse supply network to address these issues (among others)
Another move Airbus has taken against the euro is to buy American. Air France’s A380, for example, is more than 50% American, based on the value of its components, according to Airbus. That includes four U.S.-made engines from a joint venture of General Electric Co. and the Pratt & Whitney unit of United Technologies Corp.
While the above two hedges are done in order to handle exchange rate risk (which is temporary in nature), the article identifies a more substantial trend, in which European firms expand their operations in the U.S., Mexico and Morocco, and, Europe’s future competiveness could suffer even when it comes to skilled labor. Let me end with a shameless plug for a class I will be teaching in the Spring quarter on Operations Strategy in which we will touch upon these issues.