Germany and the Airbus Management Squabble

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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

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come under more pressure for aid due to the major challenges recent
failures in Airbus planning and management have created.
TIMKEN JR