VZCZCXRO2170
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #0850/01 1211441
ZNR UUUUU ZZH
R 301441Z APR 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 2877
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNMEM/EU MEMBER STATES
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 04 PARIS 000850 
 
SIPDIS 
 
 
FOR COMMERCE FOR USTR ASSISTANT M O'NEIL and DAS PAUL DYCK 
 
SENSITIVE 
NOT FOR INTERNET DISTRIBUTION 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EIND ECON ETRD EAIR PREL FR
SUBJECT: AIRBUS -- FORGING A CORPORATION FROM A CONSORTIUM 
 
This is the first of two cables on Airbus and U.S. interests.  It 
was drafted by APP Toulouse with support from Paris and represents 
the Consul's farewell report at the conclusion of a three year 
assignment.  A subsequent message will focus on export controls. 
 
¶1. (SBU) SUMMARY: Airbus, a division of the European Aeronautic 
Defense and Space Company (EADS), continues to face growing pains as 
it evolves from a business cobbled together from national champion 
aviation companies in France, Germany, Spain, and the UK into a 
fully integrated multinational.  Seven years after this merger, 
remnants of the original fractured organization and its accompanying 
corporate culture still hamper efficient operation.  To address 
organizational weaknesses revealed by the ambitious A380 program and 
significant financial difficulties, the company's management has 
launched a reform program that should place Airbus on the long and 
bumpy road to becoming a true multinational corporation as long as 
national governments stay on the sidelines. END SUMMARY. 
 
AIRBUS: AN INTEGRATED EUROPEAN COMPANY? 
 
¶2. (U) Announced in 1967 by the French, German, and British 
governments as a consortium of national aerospace companies, Airbus 
was designed to strengthen European cooperation and challenge U.S. 
aviation dominance.  In an effort to streamline decisionmaking, the 
Airbus consortium reorganized itself into a single integrated 
company in 2001.  Incorporated under French law, the four national 
entities -- France, Germany, Spain and the UK -- transferred their 
assets to, and became shareholders of Airbus while retaining 
separate legal structures.  Headquartered in Toulouse, France, 
manufacturing, production and sub-assembly of parts for Airbus 
aircraft are distributed around 16 sites in Europe, with final 
assembly in Toulouse and Hamburg. 
 
¶3. (SBU) A single, publicly-traded European corporation for over 
seven years, national interests remain apparent at Airbus and its 
parent company, the European Aeronautic Defense and Space Company 
(EADS).  (The latter was formed in July 2000 by a merger of 
DaimlerChrysler Aerospace of Germany, Arospatiale-Matra of France, 
and Construcciones Aeronuticas SA (CASA) of Spain.)  Governments 
have helped finance the development of Airbus aircraft through low 
interest loans repayable once a plane achieves profitability (i.e. 
launch aid).  To defend their national concerns, France and Germany 
insisted on a complicated, nationality-based management structure in 
which EADS had French and German co-Chief Executive Officers, with 
Airbus oversight accorded to the CEO whose nationality differed to 
that of the Airbus President.  The 2007 end to this system required 
the involvement of the German Chancellor and French President. 
Under this new cross-reporting agreement, EADS is headed by Louis 
Gallois, a widely-respected and well-connected French industrial 
manager, to whom Airbus German President -- and former EADS co-CEO 
-- Tom Enders reports. 
 
A380 -- THE TEST CASE 
 
¶4. (SBU) Airbus' A380 program -- the first aircraft fully developed 
since the merger -- was expected to prove European transnationalism 
at its best.  At the plane's unveiling ceremony in 2005, the 
British, French, German, and Spanish heads of state all highlighted 
it as a triumph of the European "dream."  In reality, the A380 
demonstrated Airbus' overall lack of unity and the weakness of the 
management structure.  As short-lived Airbus CEO Christian Streiff 
said after a 2006 review, "Airbus is not yet an integrated company. 
Airbus doesn't yet have a simple and clear organization.  There are 
shadow hierarchies -- leftovers from the never-finished 
integration." 
 
¶5. (SBU) Although it claims to be multinational, national rivalries 
persist at every level of Airbus.  When the long-time German Chief 
Operating Officer (COO), Gustav Humbert, succeeded Frenchman Noel 
Forgeard as Airbus President in 2005, employees joined the French 
public in expressing concern that France would be slighted in Airbus 
decision-making.  Airbus employees also have told Consul that some 
claim the highest ranking American employee, COO Customers John 
Leahy, is a spy.  Therefore, even though he is highly respected, no 
one could imagine him as the company's President.  By the same 
token, most cannot imagine a scenario in which a British or Spanish 
citizen -- both integral parts of Airbus -- would become the 
President. 
 
¶6. (SBU) Many experts believe the confused management reporting and 
strongly nationalistic culture contributed to the significant delays 
in the A380 program.  The refusal of French and German engineers to 
use the same software in developing the A380 -- and the failure of 
Airbus senior management to compel them to do so -- clearly 
 
PARIS 00000850  002 OF 004 
 
 
illustrates Airbus' challenges.  Due to this lack of technological 
communication, a five centimeter shortfall in 530 kilometers of 
wiring became apparent on the final assembly line.  The inability to 
connect cabling between A380 sections led to a two-year delay in the 
program and the need to send 1300 German mechanics to Toulouse -- 
local French workers could not undertake the job since Germany is 
responsible for this part of the plane -- to painstakingly re-wire 
every aircraft at the final assembly line. 
 
REFORM TAKES FLIGHT 
 
¶7. (SBU) In total, Airbus' difficulties in the industrialization of 
the A380 will cost EADS around USD 6.6 billion.  At the same time, 
Airbus is grappling with its first military program, the A400M, and 
embarking on its A350 program.  The market for the latter represents 
the industry's future with Boeing having sold over 900 of the 787 
and Airbus sales of the competing A350 at over 300.  Late to the 
market after several unsuccessful, cheaper versions, the A350 
program will require an investment of approximately 12 billion 
euros.  Furthermore, the falling dollar has led to record losses 
given Airbus sells in dollars but has significant Euro-dominated 
costs.  In 2007, the company recorded an operating loss of 881 
million Euros (i.e. approximately 1.35 billion USD), up from 572 
million Euros (i.e. 879 million USD) in 2006. 
 
¶8. (SBU) In an attempt to cope with this financial situation and 
address its structural weaknesses, Airbus embarked in 2006 on a 
reform program entitled Power8.  Intended to be more internally 
focused than previous projects, which primarily sought to pressure 
suppliers to lower prices, Power8 aims to significantly restructure 
the company.  An eight point project, it seeks to radically cut 
Airbus' internal and external costs through a hiring freeze and 
renegotiating procurement contracts, speed up development by 
bringing suppliers into the process earlier, and streamline the 
production process through a rationalization of manufacturing 
sites. 
 
¶9. (SBU) Viewed by suppliers, Power8 does not depart significantly 
from previous programs, such as Route 06, even though Airbus' 
current COO argues that two-thirds of savings have come from 
internal changes.  Under the guise of Power8, Airbus procurement is 
pressing for development cost sharing (i.e. suppliers' seconding 
engineers for product definition and defraying charges for product 
testing and certification), along with the usual significant price 
reductions.  Given current exchange rates and the strength of the 
U.S. aviation industry, Power8's increased emphasis on a global 
supply chain should be a golden opportunity for U.S. suppliers.  In 
reality, numerous U.S. executives have told Consul that they must 
seriously evaluate each work package's business case and sometimes 
choose to not bid due to stringent profitability conditions imposed 
by their own boards and stockholders.  Although this situation is 
bleaker for French companies given that Airbus requires bids in 
dollars, U.S. business contacts have complained that their 
competitors can accept less favorable conditions, because the French 
government will subsidize them if losses become too great. 
 
¶10. (SBU) For Power8's desired risk sharing to succeed, Airbus must 
overcome an insular, balkanized corporate culture found at all 
levels.  Its goal to integrate large, often American, suppliers into 
the early stages of product development will fail if Airbus 
engineers refuse to truly cooperate due to fears of losing control 
of the process, according to industry sources.  U.S. suppliers often 
complain that Airbus' working level -- both arrogant and afraid of 
downsizing -- keeps tight control of information, imposes changes, 
and rejects input.  Recognizing this situation, the company's 
management recently emphasized at a large suppliers' conference that 
any supplier with a previously-rejected, cost-reducing proposal 
should re-submit it.  A high-level supplier summarized its role in 
Airbus' reform as "We are the change agent," meaning Airbus 
management is relying on outside partners to stimulate new operating 
practices since it is unable to force change from above. 
 
¶11. (SBU) The plan to manage costs by awarding larger work packages 
to fewer suppliers -- the upcoming A350 will have around 70 aircraft 
systems contracts as compared to approximately 160 for the A380 -- 
also will stumble if Airbus succumbs to significant political 
pressure to continue to buy directly from local small and 
medium-sized enterprises.  Airbus executives have told Consul that 
the company has devoted significant resources to explaining its new 
procurement concept (i.e. reduce the overall number of Tier 1 
suppliers from more than 3000 to less than 500 with the expectation 
that the latter will employ the former as Tier 2 suppliers) to the 
relevant French authorities, including government agencies, the 
French aerospace industry association, and Chambers of Commerce. 
 
PARIS 00000850  003 OF 004 
 
 
The company asserts that the latter accepted the need to reform even 
though local politicians continue their criticism. 
 
¶12. (SBU) Even more sensitive than procurement reform is the sale of 
plants in France, Germany, and the UK (internally titled Zephyr). 
Intense political pressure, especially in France and Germany, to 
balance the divestitures influenced the choice of factories and time 
lines.  A theoretically open process, Airbus ended up choosing 
companies from the country in which the sites are located as 
preferred bidders (i.e. choosing the French Latecoere for two French 
factories, British GKN for the one in England, and German OHB/MT 
Aerospace for three in Germany).  Off-the-record, suppliers and 
Airbus contacts have stated their expectation that the reconstituted 
businesses will seek government funding after the sales.  Airbus 
thus would benefit by not only removing employees from its payroll 
but also obtaining more state support -- though indirect -- than 
under the old system, which always required a careful balance of 
competing German and French interests.  In informal conversations 
with executives at the French business Latecoere, they mentioned 
that they used their comparative appeal to French unions as a French 
company during negotiations.  Playing off fears of American business 
practices, they highlighted that labor leaders would accept them 
more easily. 
 
¶13. (SBU) In March, Airbus and OHB/MT Aerospace ended talks without 
an agreement, and EADS has announced that it will proceed by 
creating a holding company for the three German plants.  This 
development may put the entire process in jeopardy if political 
forces interfere.  Local industry sources have told Consul that the 
governments want Airbus to divest in France and Germany at the same 
time to ensure that one country does not have more Airbus 
production.  Airbus currently is denying this scenario, and 
Latecoere's integration of Airbus personnel appears on track. 
Nonetheless, French unions have once again called for strikes in 
response to the perceived preferential situation in Germany. 
 
THE FUTURE OF REFORM 
 
¶14. (SBU) Any revival of national tensions could create larger 
problems for Airbus, which is still struggling with the 
modernization of its peculiar governance structure.  The 
Franco-German shareholders' pact, which officially delineates 
government influence over EADS, remains complicated.  The agreement 
has created an imbroglio between political interests and market 
participants that has proved difficult to unravel, vesting 
representation of national interests in private shareholders (the 
French firm Lagardere and German Daimler-Benz), both of which are in 
the process of exiting the business.  The Financial Times reported 
in March that France and Germany were near agreement on a proposal 
to give each country a "golden share" with veto power over sales to 
new shareholders of more than 15 percent of the company's stock. The 
EU Commission opposes this scheme, but France and Germany may argue 
that aeronautics is a "strategic" industry or could ask shareholders 
to adopt a poison-pill defense that has been used successfully by 
other Netherlands-registered companies. 
 
¶15. (SBU) For its part, Airbus appears to realize that government 
involvement can be detrimental to the company.  Although it sought 
and received launch aid commitments for the A350 from the 
governments of France, Germany, Spain, and the UK, it has not yet 
drawn this money.  According to high-level sources in government 
affairs at Airbus, it still may employ this financing depending upon 
the outcome of the WTO case filed by the U.S. and internal reform. 
If the company can succeed in reducing costs, use of government 
assistance to develop the A350 appears less likely.  Interestingly, 
during discussions of Airbus' financial difficulties, neither 
industry leaders nor the media currently mentioned launch aid as a 
response. 
 
¶16. (SBU) Instead, in light of the continuing weakening of the 
dollar, Airbus has begun "Power8 plus," with a strong emphasis on 
low cost country/dollar sourcing.  With Airbus currently claiming it 
spends 46 percent of its procurement budget for "flying parts" in 
the U.S., it especially is pushing suppliers in this direction. 
Airbus primarily will focus efforts on decreasing significantly the 
percentage of its employees based in Europe.  According to the 
company's current COO, Airbus aims to reduce in the next ten years 
its European workforce from 97 percent of total employees to between 
70 and 80 percent.  Plans to open final assembly lines -- the 
company's strongest symbol -- in China and Alabama will assist this 
goal.  So far, Airbus has mastered the communication related to this 
controversial move, suffering little political or union backlash. 
However, if the French begin sensing a loss of Airbus jobs and 
equilibrium with the Germans, this calm could quickly end. 
 
PARIS 00000850  004 OF 004 
 
 
 
¶17. (SBU) COMMENT: Airbus' recent reform program shows that its 
upper management recognizes the necessity of becoming a more 
integrated, global company in order to succeed, especially in light 
of the falling dollar and efforts to forego launch aid.  However, 
such a transformation will not occur quickly or smoothly because of 
the rival vision of relevant governments and parts of Airbus itself. 
 They still view the corporation as a collection of national 
champion companies, which primarily exist to advance national pride 
and create well-paid employment. As long as aircraft sales continue 
at their current extraordinary rate, allowing globalization to occur 
without threatening European jobs, Airbus should manage to slowly 
implement its vision.  Any number of factors -- a further 
depreciation of the dollar, significant tariffs on planes due to a 
negative WTO outcome, the rise of an aircraft manufacturer in China 
or Russia, a French government decision to use Airbus as a last 
stand against globalization -- could upset this precarious balance. 
 
Stapleton