Farnborough Air Show

EADS confronts credibility crisis over Airbus program delays

 - November 16, 2006, 5:36 AM

EADS executives can talk all they want about refusing to allow the Farnborough airshow to dictate the timing of their decisions, but in their current predicament they simply don’t enjoy the luxury of ignoring the opportunity to claw back some credibility here this week. Having seen the value of the European conglomerate’s stock dip steeply in the wake of newly announced delays to the Airbus A380, impatient shareholders are clamoring for answers and so co-chief executives Tom Enders and Louis Gallois can either seize the chance right here to demonstrate how tightly they’ve come to grips with the problem or return to their offices in Munich under the same cloud of public cynicism that followed them to Farnborough.

“Undoubtedly the reputation of this company has suffered,” Enders told a group of reporters during a company media seminar held the weekend leading up to the show. “We have talked too much about management in the past. Now it’s time to deliver.”

Judging by the tenor of the weekend’s discussion, it appeared certain that today the company will indeed deliver its first detailed look at the “new” A350, whichis set to be dubbed the A350XWB, or extra widebody. Airbus billboards here at Farnborough were hastily covered up on Friday, but one was left exposed and this revealed the tell-tale details.

During his first airshow appearance as the new head of Airbus, Christian Streiff will present the case for the airplane and detail its attributes during a press conference this morning. “Certainly we don’t feel pressed [to launch the new A350], but this is part of a story that is already too long,” said Enders.

Selected jointly by Enders and Gallois, Streiff replaced Gustav Humbert, who resigned his position last month after announcing the latest delay to the A380 superjumbo, an episode that also saw Gallois replace Noel Forgeard on July 2 after French authorities had launched an investigation into the former co-CEO’s sale of €2 billion in EADS stock just weeks before the company ordered an internal assessment of the production problems. Now, EADS faces a class action lawsuit by shareholders seeking to recover losses incurred by a one-day drop in share price of 26 percent.

Meanwhile, one of the lawyers representing the shareholders that issued the writ against EADS in a Dutch court last week has accused as many as 150 Airbus executives of having been engaged in illegal insider trading. The group seeks ?10 billion in damages in the Netherlands [where EADS is legally headquartered] and might file more suits in London and New York.

All the turmoil has led to calls for an overhaul of a two-headed management structure that many blame for the problems EADS still faces. Enders, for one, rejects this proposition, insisting that EADS’s dilemma doesn’t stem from an inherent structural defect.

“This has nothing to do with the two-CEO scheme,” said Enders. “For the past six years the two-CEO structure, at least for most of the time, has worked very well. The shareholders have decided we will go on with the dual structure. There are good reasons to do that and we will make it work.”

That’s not to say that the company’s management structure couldn’t use some fine-tuning, added Gallois. “We are thinking of better integration at the EADS level…a leaner kind of reporting with less bureaucracy,” he said. “We could make huge progress that way.”

Whether that means tighter control over Airbus by EADS remains a big question on many minds. “We’ll take our time to look at improving ways of managing the Airbus group, improving the way of cooperating with Airbus,” said Enders. “We are not shooting from the hip on that one. We’ll take some time–not too long–to review that, and we’ll come back with answers when we feel it’s time to do that.”  

Such assurances come as cold comfort to BAE Systems, which ordered an audit of its 20 percent holding in Airbus after N M Rothschild & Sons valued its stake at a mere €2.75 billion, at least €1 billion less than it had anticipated. The timing of the A380 delay announcement reportedly infuriated BAE Systems CEO Mike Turner, particularly given that he triggered the option to sell BAE’s Airbus stake only seven days earlier.

But if bad blood between BAE and EADS executives continues to boil, Enders didn’t show it. “We did not force the put option on them,” said Enders. “BAE has been a fine shareholder…they know the business very well and have supported all major business initiatives. If they stay [as an Airbus shareholder], well, I don’t think this would be a major disaster for Airbus.”  

Enders, meanwhile, stressed that the company would meet its delivery target of 400 airplanes this year and that no one has yet announced an intention to cancel their orders for A380s or A350s. In fact, EADS’s desire to outline its plans for the new A350 at the show even in the absence of a full industrial launch has more to do with customer relations than political or public perception. “We have 180 airplanes on order or MOU,” noted Gallois. “We need to say something to these airlines.”

It now seems clear that the EADS brass regrets that the company didn’t say more about the A380’s problems earlier on, when wiring harness changes first showed the potential for causing more delays. In a refreshing exhibition of candor, Airbus executive vice president of programs Tom Williams blamed the company’s culture and attitude as much as technical complications for its predicament.

“We were complacent and arrogant,” said Williams. “There were things we could have done earlier that we didn’t do. We underestimated the richness of the specifications by the customers.”

In perhaps an even more surprising admission, Williams said Airbus underestimated Boeing’s ability to make a go of the 787. “I wish we reacted earlier,” he said. “We were expecting the normal paper airplane from them, and by God they actually launched it.”