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 
 
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SUMMARY 
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¶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]. 
 
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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. 
 
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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