EADS/AIRBUS CRISIS -- THE SAGA CONTINUES

UNCLAS SECTION 01 OF 03 MUNICH 000715 SIPDIS SENSITIVE SIPDIS STATE FOR EUR EUR/AGS, EUR/ERA, EB/IFD/OMA AND INR/I PASS TO USTR MOWREY E.O. 12958: N/A TAGS: ECON EAIR ETRD PGOV EINV PREL EUN FR GM SUBJECT: EADS/AIRBUS CRISIS -- THE SAGA CONTINUES SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION. REFS: A) MUNICH 437, B) MUNICH 558 C) BERLIN 1803 -------------- SUMMARY -------------- ¶1. (SBU) Amid a flood of bad news, a senior EADS official told the Consulate the A380 would, despite delays, be certified for flight. However, the A380's drain on resources was adversely impacting programs such as the A350 and the A400M, possibly resulting in a postponement of the A350 program. The A400M was proceeding on track, with the first aircraft to be delivered in 2009, despite press reports to the contrary. Our contact said DaimlerChysler was looking to sell 7.5 percent of its 22.5 percent share of EADS, opening the door to the possibility the German government might purchase the shares. While acknowledging the political pressure Moscow could bring to bear, our contact downplayed speculation Russia could gain influence over EADS, saying the present shareholder agreement makes this all but impossible. Our contact expressed hope that EADS's successful bid to build U.S. Army helicopters would bode well for its bid to produce U.S. Air Force tankers. Our contact was evasive on the question of future "launch aid" to counter the cash-flow problems resulting from the A380 program. End summary. -------------- EADS - STORMY FLYING WEATHER -------------- ¶2. (SBU) POL/ECON Officer and Econ Specialist met October 12 at EADS's German headquarters outside of Munich with Wolfgang Wilhelm, manager of DaimlerChrysler's 22.5 percent EADS share. DaimlerChrysler effectively represents the interests of the German government in EADS. The grim atmosphere at EADS was palpable -- it's not hard to come away with the impression of a company under siege. The morning of our meeting, the press had reported that Standard & Poor's credit ratings agency had lowered both its long and short term corporate credit ratings on EADS, reflecting increased analyst concern over the company's management and its ability to meet organizational and competitive challenges. This news came on heels the of EADS co-CEO Christian Streiff's resignation after just 3 months, as well as the announcements that the Airbus A380 program would face an additional delay of more than a year and that the A350 program was in question. Adding to this unpleasant mix is the prospect of job cuts as the firm desperately attempts to find cost savings due to the A380 program's voracious appetite for resources. -------------- THE A380 SUPERJUMBO -- BETTING THE RANCH -------------- ¶3. (U) Wilhelm acknowledged the A380 continued to be plagued by engineering challenges, leading to the program running two years behind schedule. The latest delay of at least one year will lower EADS earnings by Euro 4.8 billion through 2010. Within this amount, EADS expects costs and penalties will add up to Euro 2.8 billion alone. The wiring harness remains a particular sore spot. Wilhelm noted the harnesses, provided by a French supplier, must be custom configured for each aircraft in Hamburg -- a gargantuan task given the over 500 kilometers of wiring in each A380. ¶4. (SBU) Regarding the issue of wake turbulence, Wilhelm said there would likely be a requirement for increased separation behind A380s during take-offs and landings, but he expected the distance would not ultimately be as high as ICAO's interim recommendation calling for 10 nautical miles separation. Wilhelm said the flight test and certification program is proceeding on track, noting that no airlines have cancelled any orders as of yet. When asked if the previously stated break-even point for the A380 program of 300 aircraft (Ref A) remained accurate, Wilhelm said he did not expect it had changed [Note: A380 orders remain at 159, with none booked this year. According to press reports, both Emirates and Virgin Atlantic are closely reviewing their orders. End Note]. The pricing of commercial aircraft in U.S. Dollars also contributes to EADS's cash-flow woes -- Wilhelm said the current exchange rate is cutting into EADS' bottom line. -------------- WITHER THE A350? -------------- MUNICH 00000715 002 OF 003 ¶5. (SBU) We asked Wilhelm about reports that the Airbus A350 program, intended to compete against Boeing's 787 Dreamliner, might be shelved due to a lack of resources. He acknowledged that development of the A350, with development costs of Euro 8-10 billion might have to be "postponed," as the priority for Airbus' financial and engineering resources had to be the successful completion of the A380 program, followed by the A400M military transport. When asked if this lack of available resources for the A350 meant that EADS would seek government release of "launch aid" for the program, Wilhelm obliquely said that this question would have to be examined in the context of the "indirect subsidies" Boeing receives in the form of defense contracts, as well as the U.S.-EU Agreement on Ending Subsidies for Large Civil Aircraft. -------------- A400M MILITARY TRANSPORT -------------- ¶6. (U) We asked Wilhelm about possible delays in the delivery of Airbus' A400M military transport, designed to compete with the Lockheed C-130. Media reports have speculated that the initial delivery of the A400M to the French Air Force, originally scheduled for October 2009, could be delayed by between 18 and 24 months, and possibly as much as three years. Wilhelm brushed aside reports of delays, saying he expected the plane to meet its target delivery date. [Note: EADS co-CEO Tom Enders has also said publicly that the promised delivery dates have not changed, but acknowledged that they are "ambitious." End Note]. -------------- BERLIN'S INTENTIONS? -------------- ¶7. (SBU) Wilhelm told us that DaimlerChrysler ultimately intends to reduce its holding of EADS from 22.5 to 15 percent. Concerned over the possibility of job losses due to cost-cutting measures within EADS, the German government reportedly is prepared to increase its leverage over the company by purchasing the Euro 1.3 billion 7.5 percent stake from DaimlerChrysler. Reportedly, the German government-owned KfW bank is preparing a contract for the share acquisition that would be ready to sign by the end of the year. One press account quotes an unnamed German official as saying "We don't want that stake to end up in the hands of Chirac or Putin." Wilhelm expressed the view that increased government control over EADS was not what the company needed at this time, particularly since the German government did not have a good track record of running industrial projects. Ministry of Economic officials also have stated the government's involvement in EADS is not a long-term solution. -------------- RUSSIA'S INTENTIONS? -------------- ¶8. (SBU) September 11 EADS announced Russia's state-owned Vneshtorgbank had purchased 41 million EADS shares worth more than Euro 920 million, giving it 5.02 percent ownership of the company. Senior Russian officials have been quoted in the press saying Russia is seeking a larger share of EADS, with the intent of gaining a seat on the EADS board and a blocking minority. When asked about Russia's potential role in EADS, Wilhelm took pains to play down the significance of the share purchase. Owership of less than 10 percent of the company outside the shareholder pact was "inconsequential." Even should Russia attempt to increase its stake to over 25 percent, it would not achieve a blocking minority, as the shareholder pact effectively restricts strategic decisions to the Germans and the French, specificly to DaimlerChrysler, Lagardere and the French government. The only way Russia could exert influence over the company would be to become a majority owner, something Wilhelm considered highly improbable. ¶9. (SBU) Wilhelm did acknowledge, however, that Russia could put considerable political pressure on the French and German governments, possibly leading to the shareholder pact being renegotiated and giving Russia a place at the table. Wilhelm thought this too was improbable, as renegotiating the shareholder pact would be opening a pandora's box, making EADS' present mess even messier. He said Chancellor Merkel and EADS management had made it clear to President Putin that Russia should not use its stake to disrupt EADS. While a blocking interest in EADS may not be in the cards for Russia, EADS would consider partnering with Russia on various aerospace projects where Russia could bring its MUNICH 00000715 003 OF 003 considerable engineering expertise to the table. Wilhelm pointedly acknowledged that EADS' desire to become a supplier of defense items such as refuling tankers to the U.S. Government would not be helped by Moscow gaining a role at the helm of EADS. -------------- MUSICAL CHAIRS IN THE BOARDROOM -------------- ¶10. (U) October 9 Christian Streiff, named Airbus CEO just three months earlier, resigned over EADS' refusal to give him more autonomy to restructure Airbus. Louis Gallois, named co-CEO of EADS on July 2, replaced Streiff, while retaining his EADS co-CEO position. This new management structure essentially makes Gallois the co-CEO for Airbus, and German co-CEO Tom Enders responsible for the rest of EADS' divisions. When asked if it would be problematic for Gallois to serve in both positions simultaneously, Wilhelm replied that this model worked well for DaimlerChrysler, where Dieter Zetsche serves both as CEO of DaimlerChrysler and the Mercedes Benz division whithin the company. -------------- A FUTURE U.S. AIR FORCE CONTRACT? -------------- ¶11. (U) Wilhelm expressed hope Eurocopter's success at breaking into the U.S. defense market (Ref B),along with the choice of a European design from AugustaWestland for the new Marine One Presidential helicopter bodes well for EADS' bid to win at least part of the U.S. Air Force contract, expected to be awarded in late 2007, for 200 aerial refueling tankers to replace the KC-135 fleet. Wilhelm said the engineering work on the refueling "boom" for the tanker was complete, and that EADS would be ready to start outfitting A330 airliners as tankers at its Mobile, Alabama plant once awarded the Air Force contract. -------------- COMMENT -------------- ¶12. (SBU) We were struck by a couple of observations in our conversation with Wilhelm. First is how the A380 program has become a black hole draining EADS' financial and engineering resources to the point that decisions regarding critical programs such as the A350 are no longer being made based on market conditions, but rather on what few resources are not being sucked into the A380. EADS has, in effect, bet the ranch on the A380. Our other observation is related to the first -- due to the drain of the A380 program, the temptation for EADS and its government partners to seek the release of launch aid for the A350 must be enormous. Our interlocutor was uncharacteristically standoffish on this question -- particularly given EADS's previous position that it does not need launch-aid. While we have not received any other indications EADS will seek launch aid, the response to our question leads us to wonder if the possibility is not under discussion. ¶13. (U) This report has been coordinated with Embassy Berlin. ¶14. (U) Previous reporting from Munich is available on our SIPRNET website at www.state.sgov.gov/p/eur/munich/ . NELSON