Ailing EADS Airbus in Trouble as A380 Project Stalls

The super-jumbo A380 was supposed to become a symbol for Airbus's superiority and Boeing's decline. But it hasn't turned out that way. Instead, the prestige project could turn in to a symbol for the Europeans' aerospace downfall.


It was beautiful -- in an almost otherworldly way. Fairies and elves hovered above the trees as wisps of fog rose into the air. Everything was bathed in shimmering blue light. The 5,000 invited guests, the crème de la crème of the European business, political and cultural worlds were enchanted as they watched the world's largest passenger aircraft, the A380, being unveiled in the southwestern French city of Toulouse.

It was such a momentous event that the guest list even included four European heads of state. One of them, then German Chancellor Gerhard Schröder, seemed practically airborne himself when he said: "Perhaps we have reached for the stars, but when it comes to aviation, we have a significant number of them in our hands today."

It was January 18, 2005, a date almost everyone expected to go down in the history books in European aviation. With its €11 billion A380 project, Airbus planned to finally out-fly American competitor Boeing, long the leading force in this high-tech industry. Even at its unveiling, the A380 was more than just an airplane. It was also a symbol of what was to become Old Europe's victory over the United States.

Now the fog has dissipated, the fairies have flown away and the world's largest passenger aircraft -- 73 meters (240 feet) long and 24.1 meters (79 feet) tall -- is flying -- at least in test flights. And as expected, it has become a symbol. But not the one Europeans had been hoping for. Instead, the A380 has become emblematic of the European aviation industry's most severe economic crisis ever.

Technical problems and expensive delays

Last Friday, Airbus's board of directors attempted to assess the financial damage to the consortium -- not to mention the incalculable image problems that now plague the once-prestigious Airbus project. The list is long.

The A380 still faces some technical challenges, and correcting them will cost a lot of money and time. The first customers for the new mega-jet will not be taking delivery in 2006, as they had been promised, but presumably not until late 2007. As a result, Airbus faces the prospect of being sued for damages running into the hundreds of millions of euros. And what would happen if a major customer, the Dubai-based airline Emirates, for example, decided to cancel its order altogether?

Airbus has also been plagued by a weak dollar, prompting parent company EADS to reduce its profit forecasts for the current year by what insiders say could be up to half a billion euros. Airbus's new CEO, Christian Streiff, faces the unpleasant task of having to flesh out a drastic cost-cutting program that could even involve shifting a portion of production to Russia, India and China.

Yet whereas management should be focusing on solving the company's most acute problems, the German and French partners in EADS and Airbus are instead busy assigning blame to one another. The French say EADS shareholder DaimlerChrysler is responsible for the fiasco because it cut corners so drastically at its Hamburg-based aviation subsidiary, Dasa, that it now lacks the qualified personnel and expertise needed for prestigious major projects like the A380. The Germans, irritated by their French neighbors' constant attempts to seize power, have retaliated with their own accusations.

The company suffers from a chronic stalemate, as heads of state grapple for power and influence in the aviation and space group, which also produces helicopters, military aircraft and guided weapons. It's touchy terrain -- a minefield for executives and politicians alike. To make matters worse, the rules are constantly changing.

Germany pulling out?

The French state recently bolstered its position when a state-owned French bank acquired a 2.25 percent ownership stake which had previously belonged to the private investor Arnaud Lagardère. Not to be outdone, the Russians bought up a 5 percent stake.

Meanwhile, the Germans appear to be pulling out. Under its new CEO, Dieter Zetsche, major EADS shareholder DaimlerChrysler plans to focus purely on its automotive interests. The Stuttgart-based company has already sold 7.5 percent of its 30 percent stake in EADS. An additional share package of similar magnitude is expected to come up for sale soon.

Even the German government is suddenly alarmed over these developments, prompting Chancellor Angela Merkel to meet with Zetsche for an update on the situation. Meanwhile, the German government is already discussing the potential consequences should other countries boost their stakes in Airbus. In an attempt to head off a sale of DaimlerChrysler's next share package to anonymous or even foreign investors, influential politicians within Merkel's governing coalition are looking into the possibility of German government-owned development bank, the Kreditanstalt für Wiederaufbau (KfW), acquiring the EADS shares, at least temporarily. The KfW has, in the past, performed a similar service, having acquired temporary stakes from the German Postal Service and telecommunications giant Deutsche Telekom.

In the spring, when DaimlerChrysler announced the sale of its first block of shares, Economy Minister Michael Glos, a member of the conservative Christian Social Union (CSU), attempted to intervene. He asked the head of a major German bank to assemble a consortium of private investors as potential buyers. But as Airbus's problems gradually came to light, interest among German industrial corporations quickly fizzled.

Together with his colleagues in the Chancellery and Economy Ministry, Thomas Mirow, a state secretary in the Ministry of Finance, is now looking into ways the KfW could ensure that the DaimlerChrysler shares remain in German hands. Of course any such effort would stand in contradiction to the Merkel government's economic policies to date -- a conservative philosophy that believes the state should leave the economy alone as much as possible. Indeed, the German government plans to reduce its participation in such companies as Deutsche Telekom, Deutsche Post and the German train company Deutsche Bahn.

Whatever helps is fair game

And Berlin plans to stick to this basic tenet of its economic policy, at least in principle. Under one plan, if the KfW were to acquire shares in EADS, it could sell some of its holdings in Deutsche Telekom and Deutsche Post at the same time, thereby keeping the KfW's stake in private enterprise at about the same level. But the politicians involved are well that such a move has little to do with the market economy. The French, Spanish and Russians, on the other hand, take a more pragmatic approach to their industrial policies: Whatever helps their countries is fair game.

Spain, for example, has so far received about 7 percent of the orders for the production of Airbus aircraft. The Spaniards are apparently dissatisfied with the arrangement. A spokesman for the country's Ministry of Industry demanded: "We want 10 percent."

If the French, Spaniards and Russians were to assume control over EADS, the Airbus production sites in Germany -- plants in Hamburg, Stade, Bremen, Varel, Buxtehude, Nordenham and Laupheim -- could be in danger and German factories would undoubtedly be the first to face job cuts. Conversely, plants in the countries of the group's biggest shareholders would likely be favored when it came to new orders.

Politicians in Hamburg have followed the current power play with particular interest, fearing that assembly of the A380 could be shifted entirely to Toulouse. If that happened, the planned shipment center for the giant jets wouldn't be built after all. The politicians themselves would come across as minor players who, after pampering a major corporation with countless, costly gifts, might end up with little to show for their troubles.

Hamburg may not have bent the law, but it did introduce a new law of eminent domain designed purely to meet the needs of Airbus. The city spent years fighting a series of minor battles with fruit farmers and churches. It spent €44 million on real estate. It approved €38 million in subsidies to extend the companiy's railroad spur. And, finally, it spent €665 million on a project to fill in one of Europe's biggest wetlands areas to create space for assembly factories.

Proportionate distribution

If the KfW does invest in EADS, Hamburg could expect to see some support coming its way in the future.

But the tight grip the Germans, French, Russians and Spaniards enjoy over EADS shares could have fatal consequences for the consortium, as politicians would play an even more influential role in the company's future -- making it even less likely that Airbus could quickly escape its financial difficulties.

The group already suffers because executive positions must be distributed proportionately among major shareholders. For every German senior executive there is a Frenchman. If the head of a division is a German, he'll be supervised by a Frenchman, and vice versa. Nationality, not performance, is what counts. As a result, orders for aircraft production are not automatically awarded to the plants that are most qualified for the job. The volume of work is distributed in proportion to the shares held by the individual countries in the consortium -- or on the basis of political pressure exerted by individual heads of state.

Former German Chancellor Schröder was only willing to approve a low-interest loan of about €1 billion for construction of the A380 on the condition that Hamburg would gain an adequate share of the aircraft's production. In fact, German EADS Supervisory Board Chairman Manfred Bischoff even threatened to withdraw Germany's support for the project altogether. "You can't possibly believe that this plane will ever fly unless key parts are produced in Germany," he warned the then Co-Chairman Jean-Luc Lagardère.

And Bischoff's threat worked. Hamburg seemed to have won, even if it came at the expense of the company. It would have made more economic sense to assemble the giant plane in a single location. As compensation, Hamburg could have been awarded the production of the smaller A320.

As long as business went well, Airbus could afford these politically motivated decisions. But all that has changed as the entire company suffers from the problems facing the giant aircraft. If the company is forced to spend more money on and assign even more engineers to the A380 project, it will lack the necessary experts and funds to develop other aircraft models. Management is at a loss. The Airbus board apparently isn't exactly sure how much money and time the A380 will consume, nor can it accurately predict when the first aircraft will be ready for delivery. For this reason, at a meeting last Friday the supervisory board adopted a resolution to do nothing for the time being. In fact, it didn't even set a date for its next meeting.

Things couldn't be worse for Airbus. Until it resolves its problems with the A380, the company will be essentially crippled and unable to launch any major new projects. And this at a time when management should, in fact, be turning its attention to the new A350 jet -- a product meant to compete with Boeing's new long-range, fuel-efficient passenger liner, the 787.

No influence for Russia

The company can expect even more squabbling once Airbus CEO Streiff completes his restructuring plan. The plan will likely call for work on the A380, now carefully distributed among plants in Germany, Spain, France and Great Britain, to be concentrated in fewer plants -- a move that would almost certainly be met with energetic intervention by cabinet ministers and heads of state.

Airbus would stand the best chance of emerging from its crisis if it were transformed into a conventional stock corporation, and if the French and Spanish governments would withdraw from the consortium. The company could then build its aircraft in its most productive factories and reward its employees based on performance, not nationality.

Although this remains only a remote possibility for Airbus, German Chancellor Angela Merkel apparently did manage to achieve a minor coup at a meeting two Saturdays ago with French President Jacques Chirac and Russian President Vladimir Putin by putting a stop to even greater political influence over Airbus.

Ahead of the meeting, the Russians had signaled their interest in acquiring a larger share in EADS, which could provide them with a blocking minority. That option was apparently off the table when the meeting ended and a stone-faced Putin announced that his country sees its involvement in EADS purely as a financial investment.

By Dinah Deckstein, Konstantin von Hammerstein, Dietmar Hawranek, and Gunther Latsch

Translated from the German by Christopher Sultan

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