EDS warning after airline chapter 11

Electronic Data Systems on Thursday announced that a bankruptcy protection filing by one of its largest customers may cut its earnings by up to 3 cents per share in the third quarter - king the latest trouble to hit the IT outsourcing giant.

US Airways' financial problems could reduce EDS' third-quarter earnings to 2 cents a share in the third quarter, down from the 5 cents analysts had estimated, according to Thomson First Call. The airline filed for Chapter 11 protection on Sunday.

EDS had $27m in receivables and accrued work in progress associated with the airline at the time of its bankruptcy protection filing, EDS stated in its filing with the US Securities and Exchange Commission. EDS also has $16m in assets, such as equipment, associated with the carrier.

"As of the date of this filing, EDS has not made a final determination regarding the amount of reserves to be established for the US Airways receivables, although it expects to reserve for all or a substantial portion of such amounts which would negatively impact third-quarter earnings by up to 3 cents a share," EDS said in its SEC filing.

During the first half of the year, the long-term US Airways contract generated $77m for EDS. The company raised a total of $10.4bn in revenue during the same period.

US Airways' Chapter 11 filing, its second in two years, comes at a time when EDS is struggling financially. EDS announced earlier this month that it would cut as many as 20,000 jobs within two years, as the company tries to slash costs and stabilise its finances. EDS has approximately 122,000 employees.

EDS inherited US Airways as client in July 2001, when it purchased the outsourcing business of travel specialist Sabre. The company declined to comment on whether it will retain US Airways as a customer.

Other problems EDS faces include a recent downgrade of its debt rating from Moody's Investors Service, a problematic contract with the US Navy that has resulted in losses and an ongoing investigation by the SEC related in part to the Navy contract.

Dawn Kawamoto writes for CNET News.com.