European aerospace group EADS on Thursday reported a smaller than expected drop in second-quarter earnings while taking a EUR500 million euro charge for the recent redesign of its next Airbus passenger jet.

EADS ditched its earlier pessimism over its ability to generate cash in 2007 in the face of a weak dollar but warned of risks to major military projects.

The parent of jetmaker Airbus said second-quarter earnings before interest and tax fell to EUR278 million from EUR863 million a year earlier. Quarterly sales fell 4 percent to EUR9.509 billion and net profit fell 85 percent to EUR81 million.

The figures included a EUR500 million charge for the cost of redesigning and relaunching the Airbus A350 -- now dubbed A350 XWB for "extra wide body" -- to compete with the successful 787 Dreamliner which has strongly boosted Boeing's fortunes.

The charge came on top of a restructuring charge of EUR688 million taken in the first quarter as Airbus cuts 10,000 jobs to compensate for the dollar's record weakness against the euro and repair the cost of delays to its A380 superjumbo.

EADS said its cash position had been bolstered by a big harvest of orders at the Paris air show. Airbus bagged a record tally of orders at the June event, triggering a slew of downpayments on future deliveries.

Full-year cashflow is now expected to be positive compared with a shortfall of up to EUR1 billion forecast in May.

However EADS said the "risk level on certain key programs" prevented it from raising its other core forecasts despite the stronger operating performance at its biggest unit Airbus.

EADS is in the midst of examining the costs of another major Airbus project, the A400M military airlifter, and has run into problems in delivering the NH90 military helicopter on time.

Its Eurocopter unit took a EUR105 million euro NH90 charge.

The group reiterated its forecast for a low single-digit percentage drop in 2007 sales and "roughly stable" EBIT, while tightening its euro exchange rate assumption to USD$1.35 from USD$1.30. The euro currently stands at USD$1.37.

EADS has predicted a "substantial" loss for the second year in a row for Airbus in 2007 but a combined EBIT close to EUR1 billion for the combined helicopters, defence and space businesses.

It confirmed the one billion euro target on Thursday but said this was "before any impact from the A400M cost assessment".

The tactical heavy lifter designed for 7 European NATO nations is now expected to stage its inaugural flight in the summer of 2008, later than the previous target of early 2008. EADS had already announced a three month production delay.

"The (A400M) program contains material risks on the overall time schedule, and system providers continue to face challenges that may (imply) late design implications," it said.

The EADS figures came after rival Boeing reported a higher-than-expected second-quarter profit and raised its full-year forecasts on Wednesday.