EUROPE

Summer 2007

by Philip Lawrence

Franco-German tensions within Airbus and its EADS parent company did much damage to the European planemaker’s A380 super-jumbo project, writes Philip Lawrence. But they were far from being its only problem

The strategic significance of Airbus and its parent company EADS for Europe’s economy and science base is widely acknowledged. Airbus and EADS are rightly seen as key industrial assets. The two also have a profound symbolic importance, epitomising the best aspects of European cooperation and technical capability. To underscore the symbolism, at the A380’s roll-out in January 2005 France’s then President Jacques Chirac commented that the super-jumbo would, “carry the colours of our continent and our technological ambitions, to even greater heights”.

It is hardly surprising, then, that the acute downturn in Airbus’s industrial fortunes and the destructive political in-fighting at EADS have attracted massive media attention. The questions of what caused the industrial difficulties at Airbus and how to cure them are of profound importance to the company’s credibility. In the financial media, much of the commentary on this question has advocated a “de-politicisation” of Airbus and EADS, particularly in terms of EADS’s board membership and shareholdings. However, this is a fanciful conjecture. Whatever solutions are proposed to fix the problems of Airbus and EADS, the national political dimensions will remain.

The crux of Airbus’s industrial and commercial problems is rightly regarded as revolving around the A380. A series of delays on the project, often announced after previous denials that anything was wrong, have resulted in the programme being nearly two years late and will cost EADS a projected US$6bn cash shortfall up until 2010. In the collective mind of Europe’s financial journalists, these problems on A380 reflect the illogical management structure of EADS and the loss of focus at Airbus on their basic mission; to design and build large commercial aircraft. But it is not that simple. The industrial structure that Airbus used for the A380 was similar to its successful past projects. So could the A380 have been successfully developed within the current managerial and industrial structures? As the answer is a resounding yes, why did A380 go wrong?

When the new management team led by Noel Forgeard arrived at Airbus in 1998, part of its brief was to steer the company towards its new identity as ‘a single corporate entity’. This was of critical importance as it was believed that Airbus would be at the centre of a wider process of European defence/aerospace consolidation. This would also clearly place the new Airbus CEO in the key command post in the sector. Much to the frustration of Noel Forgeard, this process stalled. But some visible changes in Airbus nevertheless became quickly apparent. Many of the old guard associated with Forgeard’s predecessor Jean Pierson were quietly shown the door, and there was a new feel at Airbus; less association with the product and a more politicised executive culture. But for two years the real implications of these changes were held in check, because in the unchanged corporate structure the four national partners kept a close and tight watch on the purse strings and constrained what the new management could do.

The new single Airbus company, under joint ownership of EADS and the UK’s BAE Systems, was created in 2000 and permitted the A380 to be launched in December of that year. The industrial programme was not undertaken in a radically different way from previous Airbus endeavours, but was clearly larger and more complex. What was different was the management, because as in all programmes problems emerged, but these were not fixed.

Around the time of the A380’s launch some rapid changes in corporate culture were becoming evident. Some top managers have since admitted that a new arrogance began to set in, with some executives basking in Airbus’s glory. Yet these same executives had had little or nothing to do with Airbus’s legacy of success, which had been built around the achievements of men like Bernard Ziegler and Jean Pierson. As this new culture took over it also began to exhibit some very unhealthy characteristics. Airbus’s motto could easily have become “bring me good news”. To use a concept developed by the sociologist Ron Westrum, a “pathological” culture developed where feeding bad news up the line to senior managers became a form of career suicide. If the messenger is to be shot, then messengers keep the messages to themselves. As Airbus’s commercial supremo John Leahy, remarked later, “people were in denial”.

When the first problems on the A380 emerged they could have been fixed quite simply, had these problems been acknowledged up the chain of command. It is also true to say that the original timescales for the A380’s development were, for the scale and complexity of the programme, very ambitious. From a project management standpoint, insufficient “defensive scheduling” was in place to cover unanticipated modifications. Another technical blunder that was committed right at the beginning of the project, was the decision not to immediately establish a common set of design tools so that all the engineering teams had real interoperability. Instead of an optimal policy to create harmonisation, the option was taken to work with the existing tools. Again, this has nothing to do with the corporate governance of EADS but was a managerial error reflecting the inability of Airbus to meld together different national working practices. It had also been a long existing problem.

In the 1990s, the US amalgamated its defence and aerospace industry around the Boeing-Lockheed-Raytheon triumvirate to achieve the economies of scale the Pentagon demanded and to remove post-Cold War over-capacities in the sector. Europe, too, needed to respond to the challenge, and from 1997 on European aerospace and defence consolidation became a major strategic priority. Yet the resulting structure was not what had been expected; EADS came about only when a planned merger between DaimlerChrysler Aerospace and BAE Systems had to be abandoned at the eleventh hour so that BAE could acquire Marconi Electronic Systems (MES). BAE has since argued that it had no choice but to drop its erstwhile partner so as to prevent MES falling into a competitor’s grasp. This may be true, but the more interesting question is why MES was dangled in front of BAE at that precise moment. Insiders believe there were key individuals in the British establishment determined to wreck any Anglo-European amalgamation as they much preferred to lock the UK in with the US on key defence matters.

This history is worth mentioning because the Anglo-Saxon business culture of BAE and the Rhineland capitalist model of DaimlerChrysler would have been highly compatible. Leading foreign policy analyst Alfred Grosser noted in the early 1980s in his influential book “The Western Alliance” that the then West Germany was the only continental country to have adopted Anglo-Saxon style economic liberalism after 1945. Today, some of the tensions inside EADS reflect a conflict between this liberal model and a more Latin-style French paradigm for business operations.

Following the failure of the Anglo-German gambit, EADS was created in 1999 by bringing together Aérospatiale Matra, Spain’s CASA and DaimlerChrysler. Commentators quickly looked askance at the managerial structure, which with two CEOs and two Chairmen was a huge departure from orthodoxy. Yet in the personalities of Germany’s Rainer Hertrich and his French counterpart Philippe Camus, EADS had found two individuals able to work together and put the interests of the company and of Europe first. This is a key point, as not only the business structure but also the individuals involved and their behaviour can be seen as critical to the outcome. From a cultural point of view there is no doubt that some of the Franco-German tensions and fault-lines go to the heart of the EADS structure. But of equal importance is how these are managed and played out. While Hertrich and Camus jointly ran EADS, the company more or less doubled its turnover and moved decisively to the number two slot in world defence and aerospace. Nevertheless, on the French side there was still more of a state-run and dirigiste spirit that did not always square with the more Anglo-Saxon perspective of the German executives.

In 2004, Rainer Hertrich announced that he would retire from EADS in the following year, after he learned that Philippe Camus was not to be reappointed as co-chief executive. This offered Airbus CEO Noel Forgeard the enticing possibility of achieving the sort of power in European defence and aerospace that he had first envisaged back in 1998, on becoming the head of Airbus, the future EADS’s subsidiary. With Camus pushed to one side and Hertrich to retire he could now move to the CEO’s post at EADS and place it under unitary French control by liquidating the role of the German joint chief executive. But to effect this strategy a bitter battle had first to be fought and won. Forgeard and his backers had to persuade or coerce the German interests at EADS to accept a single French chief executive. The ensuing conflict turned up the heat around the Franco-German divide in EADS and politicised the atmosphere to a high degree. The intensity of personal ambitions and the ferocity of the battle for the top position deflected attention away from the pressing industrial issues on the A380. The key here was personalities, not the structure of EADS.

A month after the A380’s first flight in April 2005, senior Airbus managers began to acknowledge that there were problems; a six-month delay and US$1.5bn cost overrun was announced. Noel Forgeard boldly pronounced that “The problem is recognised, put on the table and treated”. But of course it wasn’t so simple. The political battle over the top job at EADS was deflecting attention away from Airbus’s industrial troubles, and to make matters worse, rival French and German candidates were also squaring up for the Airbus CEO’s position in Toulouse. This became a further distraction from the increasingly serious industrial problems confronting the A380.

In June last year the governance issue flared again when still more bad news about A380 was released to the media. Noel Forgeard pointed the finger at failures in German factories while defending his own record at Airbus. By this time it was indisputable that the whole question of the EADS and Airbus performances had become mired in Franco-German political conflict and intrigue. Yet analysts agree that this type of conflict is not inevitable; much depends on how the Franco-German relationship is managed.

After 1949, West Germany was rehabilitated through the mechanism of becoming a key player in the nascent European Coal and Steel Community, (the EU’s forerunner), and then as a staunch and loyal member of the NATO alliance. After the 1989 fall of the Berlin Wall, Germany was preoccupied with the re-integration of the former GDR and all the attendant economic problems, which took longer to resolve than many had expected. But in the last few years it has become clear that Germany has been rediscovering its self-confidence and that German political behaviour is more what one would expect from the EU’s largest member state. This is significant in many ways, but it is particularly relevant to EADS. Today, we can expect Germany to be more assertive and less willing to bow to French hegemony on strategic and industrial matters. This places a great responsibility on the political and industrial leaders of both countries. Not just EADS but the whole of the EU will be shaped by how the new Franco-German relationship is handled. On the French side it requires that leaders understand the new paradigm. The days of automatic French leadership have gone. For members of the German industrial and political elites it requires restraint on how German power is exercised. Chancellor Helmut Kohl aimed to place a “European roof on Germany” and sensible leaders will still see this as the best way forward.

As to the more technical aspects of EADS and Airbus governance, one of the key issues in this imbroglio is the matter of succession planning. It was clearly disastrous to have had simultaneous leadership disputes at EADS and Airbus. The articles of the two companies should therefore preclude the holder of either job moving to the other. The political question is more complicated. As a strategic industry, defence and aerospace as embodied in the form of EADS cannot realistically expect to escape political inputs, especially when governments provide so much R&D funding, fork over taxpayers’ cash for new project development in the form of Repayable Launch Investment (RLI) and when Europe’s regions give expensive infrastructure support.

It is likely that over time the regulatory regime for strategic industries will be less national and more EU dominated, but for the moment some form of economic nationalism is inevitable. In the recent crisis at Airbus, the most damaging feature of the politicisation of the issues was that it slowed down the formulation and implementation of the Power-8 recovery plan. Unfortunately, it is probably an inevitable feature of co-operative ventures that the partners work more harmoniously during times of success than periods of failure. As the politicians argued over the Airbus rescue package, however, they needed to bear in mind that they could soon be arguing over an industrial corpse unless the right business solutions were adopted. Ultimately, EADS does needs to move to a unitary leadership structure with a single CEO, so perhaps a decision to have neither a German nor a French national in this role would be courageous and worthwhile.