Germany and the Airbus Management Squabble

UNCLAS SECTION 01 OF 02 BERLIN 001803 SIPDIS SENSITIVE SIPDIS STATE FOR EUR EUR/AGS, EUR/ERA AND EB/IFD/OMA PASS TO USTR MOWREY E.O. 12958: N/A TAGS: EAIR ETRD PGOV EINV PREL EUN GM SUBJECT: Germany and the Airbus Management Squabble SENSITIVE BUT UNCLASSIFIED. ¶1. (SBU) SUMMARY: Pressures on Airbus to re-design its A350 and to resolve production problems with the jumbo A380 have focused German official and press attention on shortcomings in the current Franco-German management of Airbus. Inquiries into insider trading of Airbus shares have increased pressure for changes. Airbus' indecision about the changes needed for a successful A350 has stalled German officials' review of a possible approval of launch aid. END SUMMARY ¶2. (SBU) French Airbus CEO Noel Forgeard publicly pointed the finger at the Hamburg Airbus production plant on June 19 as the major cause of expected delays in the delivery of Airbus' flagship model A380 to customer airlines in 2007. The Airbus manager at the Hamburg assembly plant swiftly rejected the allegation. Although Forgeard has since offered a public "mea culpa" in Germany's business press, the atmosphere has reportedly soured between the Franco-German management of both Airbus and its parent company EADS. Calls have grown to reduce the complexity of a cumbersome management structure designed to balance the Franco-German political equities in the enterprise. Specifically, Daimler-Chrysler and other German shareholders reportedly want an end to dual supervisory board chairs, which would likely cost French incumbent Forgeard his job. The German press speculates the current German CEO of Airbus, Gustav Humbert, would also resign as part of a shakeup. ¶3. (SBU) The Merkel government's press spokesperson Ulrich Wilhelm expressed confidence Airbus could ably deal as a private firm with its sales and management crisis. He told a June 26 press conference "the Government expects and is convinced that the company will succeed in meeting the challenges that have arisen particularly now over the A380 and A350 models." Economics Minister Michael Glos used the June 23 budget debate in the German Bundestag to emphasize that "it is up to private industry to get things in order" and that he saw no reason for the German government to become involved. QUESTIONS OF CORPORATE GOVERNANCE ¶4. (SBU) The hint of scandal involving insider trading of Airbus shares adds to the fuel in the "crisis in the Franco-German marriage," as the influential newsweekly Der Spiegel remarked. Many shares were apparently sold on the Frankfurt exchange before the embarrassing revelations in May and June concerning the A350 re-design and the A380 delays. The German financial oversight authority, Bafin, is looking into possible trading abuses by Airbus and EADS managers who sold their stock options at that time. The Bafin inquiry is also looking into possible negligence by EADS and Airbus managers when they failed to alert investors in a timely manner about Airbus' problems. In addition, Daimler Chrysler reduced its 30% stake in Airbus when it sold 7.5% of its shares in April through intermediary investment banks. (Reportedly, the buyers of the shares absorbed the financial losses when the share prices plunged in May and June.) Daimler Chrysler has claimed it was unaware of the mounting problems of Airbus' flagship products at the time of the sale. EADS Co-chair Thomas Enders, Forgeard's German counterpart at the helm of EADS, has emphasized he did not sell any shares at the time. LAUNCH AID ¶5. (SBU) The German Chancellery and Economics Ministry are currently examining the question of launch aid for a re-designed A350. German officials tell us Airbus management problems are affecting their assessment of whether to extend government-backed soft loans for Airbus' radical changes in the A350. Chancellery officials say the internal Airbus spat and uncertainty about the firm's future leadership have delayed the Chancellery's risk analysis for a launch aid package. Economics Ministry officials say Airbus indecision about the market segment it will serve by a redesigned A350 has also stalled its review of launch aid. Officials are skeptical Airbus will be able to clarify the situation with the A350 sufficiently to warrant a decision on launch aid by the time of the UK's July 17 Farnborough Air Show. Economics Ministry sources say they would need sufficient details to consult with relevant Bundestag committees concerning Airbus model strategy before the Government could extend a launch aid package. ¶6. (SBU) Both Chancellery and Economics Ministry officials say Airbus parent company EADS already has significant financial resources to tackle the A350 model design. Officials also say they are sensitive to the risk that a decision to give launch aid would block further bilateral U.S.-EU talks on aircraft industry subsidies. They claim they would prefer a bilateral solution. However, once Airbus sets its house in order, they feel they will BERLIN 00001803 002 OF 002 come under more pressure for aid due to the major challenges recent failures in Airbus planning and management have created. TIMKEN JR