Identifier
Created
Classification
Origin
06MUNICH715
2006-10-13 13:57:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Munich
Cable title:  

EADS/AIRBUS CRISIS -- THE SAGA CONTINUES

Tags:  ECON EAIR ETRD PGOV EINV PREL EUN FR GM 
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VZCZCXRO8654
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHYG
DE RUEHMZ #0715/01 2861357
ZNR UUUUU ZZH
P 131357Z OCT 06
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 3575
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC 0014
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE
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
-------

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