Every year, prior to the aviation shows in Paris, London and Berlin -- the European Aeronautic Defence and Space Company (EADS) organizes a small but pleasant conference. High-ranking managers from the Airbus parent company meet with aviation and arms experts from all over the world in order to celebrate the most recent advances. And of course to celebrate themselves a little too.
This year's conference is taking place on Friday, just before the Paris Air Show -- and it promises to be a meeting full of suspense. For the first time, the conference will be co-hosted by EADS chief executives, 48-year-old CEO Thomas Enders and his 63-year-old French colleague Louis Gallois, who is also the CEO of EADS subsidiary Airbus.
What the top managers have to say will be listened to, of course, but more attention will likely be paid to how they treat each other. A recent disagreement -- triggered by the controversial severance pay received by former Airbus CEO Noël Foergard -- has once again cast a shadow over their relationship. When Foergard resigned about a year ago, he was given €8.5 million ($11.3 million) -- despite the billion-euro debacle over the delays in the production of the superjumbo A380.
'Something Went Badly Wrong'
"Something went badly wrong there," Enders complained to German mass-circulation tabloid Bild Zeitung -- before blaming the French members of the supervisory body. They "downright twisted the arm" of the Germans, according to Enders, who himself is a former DaimlerChrysler manager. "If the German members of the EADS board of directors disapproved of the severance pay, they only had to vote against it," was Gallois' response.
The two CEOs are now facing tough times ahead. The new French president Nicolas Sarkozy wants to meet with German Chancellor Angela Merkel as well as representatives of the two major EADS shareholders, DaimlerChrysler and Lagardère, in Toulouse in mid-July. It is highly unlikely that changes to the Power8 savings program -- aimed at saving the company more than €2 billion ($2.7 billion) a year by 2010 -- will be the only item on the agenda.
With a single blow, Sarkozy wants to end the power struggle that has gone on for years between the Germans and the French at EADS: By abolishing the corporate governance code established in 2000.
It was then that major shareholders DaimlerChrysler and Lagardère decided to henceforth control the fate of the company on their own -- notwithstanding the fact that each only has holdings of around 15 percent. At the same time, the French state transfered the voting rights associated with its own 15 percent share to Lagardère.
"How can you entice new shareholders to invest in the company with a shareholder pact which gives new shareholders the obligation to pay, but not the right to vote?" Sarkozy has said in support of his proposal for reform. But so far, Sarkozy has faced fierce resistance from the Germans. Both Merkel and DaimlerChrysler CEO Dieter Zetsche aren't even remotely interested in changing the shareholders pact.
Costly for Both Sides
Holding on to the antiquated shareholders' pact could prove costly for both sides. Just last week, Russian airline Aeroflot threatened to purchase new jets worth about $2 billion from Boeing rather than EADS -- annoyed by the fact that Russia is not allowed to either increase its EADS share of 5 percent or participate in company decisions.
Just how much the company now suffers from the divergent interests of its two main shareholders was revealed again recently at the EADS annual general meeting in Amsterdam. Before the meeting, the French government had encouraged an increase in capital stock in order to cover the rising financial costs associated with the new A350 long-haul airliner. At the same time they called on shareholders to renounce their dividend payments due to the delayed production of the A380 superjumbo.
The suggestions fell through because the French state could not reach an agreement with the two major shareholders from the private sector. Both companies want to withdraw from the aviation industry in the medium term and are therefore not particularly enthusiastic about investing more money in the company.
In a fix, Enders and Gallois came up with a compromise which envisaged only paying out small dividends and establishing a convertible loan. But that loan was also "shot down" at the last minute by the EADS board of directors, as Enders -- who likes to go parachuting in his free time -- put it bluntly.
Caught in Mutual Paralysis
The shareholder meeting on May 6 quickly turned into a farce. First, the decision on when and how to procure new funds was postponed. Instead, the shareholders were allowed to decide themselves on what should happen with the meagre earnings. By a majority vote it was decided they should be distributed. EADS leadership couldn't have demonstrated more clearly the extent to which they are now mutually paralyzing each other -- to the detriment of the company.
Now Sarkozy, of all people, could be the one to come to the rescue -- in his own unique way.
When Munich-based Siemens began sizing up its French rival Alstom in 2004, the French state helped Alstom out by purchasing minority shares, following pressure from Sarkozy -- only to later sell the shares to a building contractor who happens to also be one of the politician's friends.
Sarkozy could have something similar in store for EADS. France's public prosecutor's office has recently been conducting investigations into possible crimes by high-ranking EADS managers. The allegations concern questionable share transactions prior to the crash in stock prices in the aftermath of the A380 disaster in spring 2006.
A recording of a telephone conversation has appeared that suggests some top managers at EADS may have known about the wiring problem that stalled the production of A380 much sooner than they have so far admitted. Prominent EADS executives -- including the former supervisory board chairman, Manfred Bischoff, and his colleague Arnaud Lagardère -- had to testify before the court for as long as nine hours in recent weeks.
The demoralized EADS shareholders DaimlerChrysler and Lagardère may in the end agree to withdraw from the company. And if French newspapers are to be believed, Sarkozy already has an alternative solution ready in case this should happen.
A strategic investor willing to take over DaimlerChrysler's shares would have to be found in Germany, while Lagardère's shares could initially be transferred to the Bouygues construction company, just like those of Alstom were before. The owner Martin Bouygues knows Sarkozy pretty well: He was best man at the French president's wedding.