US embassy cable - 07HAMBURG72

AIRBUS GROUNDED BY POWER8 AND THE DOLLAR?

Identifier: 07HAMBURG72
Wikileaks: View 07HAMBURG72 at Wikileaks.org
Origin: Consulate Hamburg
Created: 2007-12-18 18:10:00
Classification: UNCLASSIFIED
Tags: EAIR ECON ETRD EIND GM
Redacted: This cable was not redacted by Wikileaks.
VZCZCXRO4751
RR RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ
RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHAG #0072/01 3521810
ZNR UUUUU ZZH
R 181810Z DEC 07
FM AMCONSUL HAMBURG
TO RUEHC/SECSTATE WASHDC 0198
INFO RUCNFRG/FRG COLLECTIVE
RUEHRL/AMEMBASSY BERLIN 0181
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHAG/AMCONSUL HAMBURG 0218
UNCLAS SECTION 01 OF 03 HAMBURG 000072 
 
SIPDIS 
 
STATE FOR EUR/AGS AND E/TRA. 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR, ECON, ETRD, EIND, GM 
SUBJECT: AIRBUS GROUNDED BY POWER8 AND THE DOLLAR? 
 
REF: 06 MUNICH 715 
 
HAMBURG 00000072  001.2 OF 003 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION. 
 
1. (U) SUMMARY: Airbus, the renowned producer of the new A380 
super jumbo jet, is one of the largest and most publicized firms 
in Europe.  The civilian and military aircraft manufacturer has 
struggled to stay ahead of its competitor Boeing amid a 
corporate restructuring program, an executive scandal, 
production delays, and a weak U.S. dollar.  While Airbus is 
certain to remain a major player in the aerospace industry, how 
the corporation shapes its structure over the near future 
remains open.  Further changes will affect stakeholders across 
Europe, including US suppliers.  END SUMMARY. 
 
EADS RESTRUCTURING AMID SCANDAL 
 
2. (U) The European Aeronautic Defense and Space Company (EADS) 
consists of five divisions, including commercial airplane 
manufacturer Airbus, that represent every segment of the 
aerospace industry.  Louis Gallois is the new CEO of EADS, while 
Dr. Thomas Enders manages Airbus.  EADS also possesses a rather 
unique capital structure.  The French State and media/technology 
firm Lagard'ere control 27 percent of equity; German Daimler 
Aerospace and other affiliated investors control 22 percent; and 
SEPI, a Spanish holding company, controls five percent.  The 
German state does not own any portion of the company, but 
politicians have assumed a significant role in EADS' 
development.  These divested financial stakes originally stemmed 
from the merger of French, German, and Spanish aerospace 
companies in 2000 that created EADS.  In fact, two people - one 
German and one French - shared the role of CEO until Chancellor 
Merkel and President Sarkozy agreed upon the firm's current 
leadership structure in 2007. 
 
3. (SBU) Shortly after this milestone in EADS history, reports 
of corporate fraud began to surface.  The media reported that 
EADS CEOs Gallois and Enders (before leadership changes) and the 
company's largest investors (Daimler and Lagard'ere) sold EADS 
stock between November 2005 and November 2006 based on insider 
knowledge.  The parties are accused of profiting from privileged 
information about potential production delays of Airbus' newest 
model, the A380.  German and French authorities continue to 
search for substantive proof amid a myriad of claims, but so 
far, investigations have failed to substantiate the allegations. 
 EADS reported 2007 third quarter losses of 696 million Euros (1 
USD billion).  (Note:  A senior EADS contact close to Tom Enders 
expressed skepticism over the motives of the French 
investigation into Enders' actions, telling ConGen Munich that 
the manner in which this "old story" was illegally leaked to the 
press, made it difficult to exclude that certain circles in 
France had an interest in damaging Enders' reputation.  End 
Note.) 
 
THE NEW LEVIATHAN 
 
4. (U) For decades, Boeing dominated the aviation market with 
the 747, until recently the world's largest civilian aircraft. 
The 747 led long-haul commercial aviation for decades.  For the 
last few years, however, Airbus penetrated the market with a 
series of new airplanes, including the revolutionary A380. 
 
5. (U) The A380 is by no means a simple machine.  It measures 
240 feet in length, 80 feet in height, and weighs about 400 tons 
without fuel.  The airplane's wheel base alone takes up 100 ft 
of space on the runway.  Furthermore, the A380 has two cabin 
decks (i.e. levels), from nose to tail, that are capable of 
transporting 555 passengers distances ranging up to 9,400 
standard/statute miles.  From wingtip to wingtip, the plane 
spans nearly the length of an American football field (79.8 
meters).  In comparison, Boeing's present 747 (type 400) model 
has a much shorter upper-deck, carries roughly 400 people, and 
travels a maximum of 7,700 standard/statute miles.  And the 
A380's size is just one manifestation of the airliner's 
capabilities and engineering sophistication. 
 
A GLOBAL AIRCRAFT 
 
6. (SBU) Like several other Airbus aircraft, the A380 is 
manufactured in different facilities across Europe.  Seven of 
the sixteen Airbus European regional facilities are located in 
Germany and employ alone around 20,000 people.  (Note: 
Including its subsidiaries in the U.S., Japan, and China, Airbus 
has a total number of approximately 57,000 employees.  End 
Note.)  Six of these factories are located in Northern Germany, 
producing a variety of components and assembling fuselages 
(cylindrical mid-sections) and cabin sections.  Hamburg is the 
largest of all the German factories and constructs portions of 
the A320 and A380 aircraft.  Sections and other materials are 
transported between sites regularly, but Hamburg often operates 
the final assembly process.  The A380's interior cabin sections, 
 
HAMBURG 00000072  002.2 OF 003 
 
 
for example, arrive from Laupheim during the final stages of 
production. 
 
7. (SBU) During a December 11 visit at the Airbus factory in 
Hamburg-Finkenwerder by Hamburg CG and Berlin EMIN, Airbus 
Deutschland General Secretary David Voskuhl estimated that about 
forty to sixty percent of the A380's materials are purchased 
from suppliers in the United States.  This varies according to 
the aircrafts' specifications.  Engines purchased from American 
companies, such as General Electric or Pratt & Whitney, consist 
of parts from around the world and contribute to the difficulty 
in identifying an airplane's absolute composition. 
 
POWER 8 RESTRUCTURING 
 
8. (U) The production of the A380 was delayed in 2006 due to the 
company's underestimation of the aircraft's immense electrical 
and structural needs.  This led to a drastic change in Airbus' 
operations and earnings, especially in light of the weakened 
U.S. dollar.  The firm immediately embarked upon a four-year 
corporate restructuring program in 2006 entitled "Power8."  The 
financial plan calls for a reduction in overhead and supply 
costs, faster product development, leaner manufacturing 
processes, and improved customer service.  Power8 was 
unanimously accepted by the EADS board of directors in February 
2007.  The company aims at recovering five billion Euros by 2010 
and an additional two billion Euros in 2011.  Already, Airbus 
has cut the manpower needed to complete an A380 in Hamburg by 
about one-fourth. 
 
9. (U) Adhering to the Power8 strategy requires Airbus to 
recover nearly 32 percent of its earnings before interest and 
taxes (EBIT) through the elimination of 10,000 jobs across 
Europe, including 3,700 in Germany.  According to the firm, half 
of these positions are temporary or sub-contracted. 
Nevertheless, the future job cuts have outraged local 
politicians, unions, and their members, who assert the firm is 
trying to implement an easy solution to a much larger issue. 
Stakeholders in affected countries, especially Germany, continue 
to lobby their local and national governments to protect their 
interests. 
 
10. (U) The Power8 model also focuses on "core businesses" and 
long-term partnerships because Airbus anticipates the need to 
grow in key competencies relating to the industry.  According to 
CEO Gallois (EADS), these consist of elements "that are 
essential to design, develop, produce, deliver, and support the 
best and most efficient products" for the customer.  "If we move 
carefully, pragmatically, and quickly," he says, "we will 
leverage our position as a leading global player in the civil 
airliner market."  To decrease further costs, Airbus also plans 
on developing a "consolidated supply base."  This includes 
partnering with major industrial firms and suppliers that will 
help or take over some of its manufacturing and engineering 
processes. 
 
A TOUGH SELL 
 
11. (SBU) Although Airbus has received interest from several 
suppliers willing to purchase a number of its production sites, 
closing the deal has been rather difficult.  Six of the sixteen 
European factories, including Nordenham and Varel in 
Lower-Saxony, Germany, are presently available for full or 
partial acquisition.  In a conversation with Airbus 
representatives in the spring of 2007, Hamburg Pol/Econ Officer 
asked why Airbus was willing to sell these plants after having 
invested in making them centers of excellence.  The Airbus rep 
responded that the plants would continue to specialize in their 
areas of expertise and Airbus would contract with them, thus 
cutting overhead costs - i.e. creating "core businesses."  In 
the December 11 meeting, Voskuhl explained that Airbus, like all 
companies, is in the process of finding the balance between 
contracting out and maintaining control over production.  He 
implied that by selling some of the Northern German plants, the 
company would be saving costs and yet still maintain its high 
levels of quality control. 
 
12. (U) Airbus originally favored the interest of Voith 
Locomotive Company from Kiel, Schleswig Holstein because of its 
locality and manufacturing expertise for the Lower Saxony 
plants.  In October 2007, Voith explained it no longer was 
interested due to concerns about profitability.  Consequently, 
there are only two remaining bidders, OHB/MT Aerospace and 
Spirit Aerosystems.  While both firms are well positioned to 
acquire any of the sites, locals favor the Bremen-based 
aerospace technology company, OHB.  Supporters suggest that 
maintaining German influence may secure domestic interests, 
solidify the supply chain, and prevent a communications gap with 
the parent firm. 
 
 
HAMBURG 00000072  003.2 OF 003 
 
 
13. (U) Spirit is a major supplier to the civil aviation 
industry and appears to fit the Power8 model exceptionally well, 
but it is a U.S. firm that happens to be a supplier of 
competitor Boeing as well.  Stakeholders fear a conflict of 
interest and disapprove of an acquisition by a non-European 
company that may implement further job cuts.  On December 10, 
CEO Thomas Enders stated the company requires more time to 
evaluate offers for the factories and will not make a decision 
until early 2008. 
 
THE FUTURE OF AIRBUS 
 
14. (U) Despite the two year-long production delay of the A380, 
Airbus remains a strong player in the aviation industry.  The 
first A380 delivery to Singapore Airlines in October 2007 
prompted a sigh of relief among Airbus executives.  In 2006, 
Airbus received 844 total aircraft orders, including 165 for the 
new A380 model, valued at 75.1 USD billion.  Airbus recently 
secured a contract for 160 of its aircraft with the Chinese 
Aviation Industry and is trying mightily to crack the Japanese 
market. 
 
15. (U) Still, securing more orders is only getting tougher. 
Boeing's rival 787 "Dreamliner" grabbed the media spotlight with 
its July premiere.  The airplane's fuel efficiency and flying 
range surpass that of its Airbus counterpart, the A350, which 
Boeing credits to its incorporation of 50 percent composite 
materials (e.g. carbon-based) in the airplane's wings and 
fuselage structures.  The company reports 740 orders from 51 
customers. 
 
16. (SBU) Apart from competition, other difficulties continue to 
plague the struggling EADS division.  Power8's five-to-seven 
million Euros in savings was based upon an exchange rate around 
1.30 USD in late 2006.  Airbus pays its expenses in Euros, but 
most of its transactions for airplanes are quoted in U.S. 
dollars.  At 1.50 USD to the Euro, Airbus calculates it will 
need to increase its Power8 savings goal between 2.1 and 3.1 
million Euros.  This will require drastic measures, including 
further job cuts.  When questioned in December 2007 if the firm 
will adjust its selling prices, Airbus Deutschland General 
Secretary Voskuhl stated the firm will first assess operational 
 
SIPDIS 
costs, and if necessary, approach its clients for further 
negotiation, but stressed that the firm remains focused on 
quality, efficiency, and satisfaction to the customer - even if 
that means less profit.  He also added that there is room for 
price negotiations, particularly for contracts that run over 
several years. 
 
17. (SBU) Airbus has considered relocating more of its 
manufacturing operations outside of Europe to combat the weak 
U.S. currency.  In the United States, for example, it is 
exploring the opportunity to build a production facility in 
Mobile, Alabama.  The company hopes a closer proximity to 
military installations can increase its bargaining power with 
customers like the U.S. Air Force for its military carrier, the 
KC-30 Tanker.  Airbus also announced it may relocate some 
production facilities to Russia and China.  Yet even without the 
currency problem, the firm will need to continuously restructure 
if it is to meet its goal of becoming a commercially viable 
enterprise - one free, we can only hope, of massive state 
support. 
 
18. (U) This message has been coordinated with Embassy Berlin 
and ConGen Munich. 
JOHNSON 

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