Aviation Week & Space Technology July 24, 2000, p. 103

EADS Completes Europe's Long-Awaited Restructuring

Pierre Sparaco

The European Aeronautic Defense and Space Co. is emerging as a world-class player with an aggressive business plan and global ambitions, including transatlantic partnerships.

The merger of Aerospatiale Matra, DaimlerChrysler Aerospace (DASA) and Construcciones Aeronauticas (CASA), implemented on July 10, is a huge multinational undertaking as well as a formidable management challenge.

Newly incorporated EADS, the world's third biggest aerospace group behind Boeing and Lockheed Martin, has an estimated $22 billion in annual revenues and 96,000 employees, with research and development and production facilities in three countries. It owns the Franco-German Eurocopter company, 80% of Airbus Industrie (and controls the Airbus Military Co.), 75% of Astrium, 45.7% of Dassault Aviation, a 29.5% stake in Arianespace and is poised to form a joint venture with Finmeccanica/Alenia Aerospazio Aeronautics Div. (see p. 134). EADS's members have a combined 43% share in the Eurofighter/Typhoon and, ironically, have an indirect interest in archrival Rafale's fate.

To complement a myriad of multinational joint ventures and affiliates such as Toulouse-based Avions de Transport Regional, EADS also plans to jointly form a unified missile company with Italy and the U.K. within the next 12 months. The new "MBD" group will be the second biggest missile system producer in the world, behind Raytheon, with nearly $3 billion in annual revenues.

Creating EADS was complicated by political demands and lengthy negotiations to determine workable financial valuations. But the members' product ranges did not overlap (with minor exceptions), and no major compromises were needed in order to complete an overall agreement.

During the last three decades, EADS's founding members formed numerous business partnerships and joint ventures. Work-sharing accords helped eliminate duplications while cutting production costs.

For example, Franco-German aerospace links, which led to major military programs such as the C160 Transall airlifter, Alpha Jet advanced trainer and tactical missiles, emerged from a protocol signed in 1963 by Chancellor Konrad Adenauer and Gen. Charles de Gaulle. DASA's predecessors and CASA concluded their first business partnership as early as 1923, an EADS official pointed out.

Due to the lack of unified laws and regulations in the European Union, EADS was incorporated in the Netherlands, a "neutral" and taxation-friendly haven. Amsterdam-based EADS NV controls operational companies in France, Germany and Spain and retains "dual headquarters" in Munich and Paris.

As it comes into existence, the mega-company symbolizes the European aerospace/defense industry's rapid restructuring, achieved in 1998-2000 after several years of intricate debates and political interference with the industrialists' efforts to forge a unified strategy.

EADS's roots are largely born of circumstance and behind-the-scenes negotiations involving a large number of actors. In the midst of the U.S. industry's consolidation, which created formidable, giant competitors in an increasingly global context, Germany aggressively promoted pan-European mergers and the need to achieve major economies of scale. But it firmly rejected dogmas such as state ownership that prevailed in France, Italy and Spain.

The Daimler-Benz group's (DaimlerChrysler's predecessor) savoir-faire in consolidation arrangements—although it established DASA as a global player—initially could not convince France to modify its industrial policy, which was essential for shaping a new course.

In sharp contrast with DASA's quest for change, France's reluctance to abandon a tradition of state ownership in aviation-related businesses (including air transportation) was further complicated by fears of relinquishing the national pride at the core of its aviation sector.

Ironically, the left-wing coalition of French Prime Minister Lionel Jospin, which came to power in 1997, rapidly formulated a more realistic industrial policy than its right-wing predecessors. Jospin and then-Finance Minister Dominique Strauss-Kahn devised pragmatic guidelines including subtle compromises such as the partial privatization of state-controlled companies.

In July 1998, they readily endorsed the surprise Aerospatiale/Matra Hautes Technologies merger set to combine the state-owned aerospace company and the Lagardere group's defense arm into a shareholder-value-driven enterprise. This milestone, which reconciled market forces with the "new left,'' radically changed the course of events and installed new actors on the aerospace stage.

For example, the charismatic Jean-Luc Lagardere, a former Dassault Aviation engineer who transformed missile producer Matra into a highly diversified group, was instrumental in bringing together German and French policy makers.

Last year, shortly after DASA failed to merge with BAE Systems, Lagardere vigorously promoted the idea that France and Germany could become the cornerstone of the European aerospace industry. After succeeding, he convinced Spain to join the bilateral accord.

EADS's shareholding arrangement clearly indicates that the three-fold merger revolutionized Continental Europe's aerospace/defense industry. EADS NV is owned jointly by DaimlerChrysler (30%), the French Topco company (30%) and Spain's Sociedad Estatal de Participationes Industriales (5.4%); the remaining shares are listed in Paris, Frankfurt and Madrid.

Although the French government retains a 50% stake in Topco, it owns no more than 15% of EADS NV. This minority "golden share'' will ensure France's say on sensitive defense-related matters such as nuclear ballistic missiles, which are now placed under the responsibility of EADS Launch Vehicles (formerly Aerospatiale Matra Lanceurs).

The priority goal of EADS's top executives is to quickly create a streamlined company structure and an all-new culture encompassing the multiple industrial sites of a "stateless'' group in a multilingual environment, while eliminating duplications, cutting costs and boosting profitability. An 8% profitability ratio is expected no later than 2004, up from 6.4% in 1999, EADS Co-CEO Philippe Camus said.

The group's July 10 initial public offering (IPO) attracted more than 900,000 individual and 500 institutional investors. Although demand significantly exceeded the IPO's 166.5 million shares priced at €18-19 ($17.1-18.05), on its first trading days, EADS closed at about €17, signaling uncertainties about the company's envisioned profitability.

Financial analysts, however, expressed divergent opinions on EADS's slow start. The unusual cross-border structure and unknowns about planned cost cuts are cited as causes for a weak debut. In addition, the massive investment required by the A3XX mega-transport, as well as Boeing's counter attack, could curtail EADS's profit outlook. According to Co-CEO Rainer Hertrich, the A3XX program will achieve profitability when the 250th aircraft is delivered. "The A3XX will have a small impact, of no more than 2%, on EADS's foreseen profitability," he added.

Airbus plays a critical role in EADS, as it generates as much as 54% of the group's annual revenues. However, defense-related revenues are expected to increase steadily. "Europe's military procurement budgets stopped decreasing and will remain at around €40 billion per year,'' Camus said. He added that recent conflicts exposed major shortcomings in the European forces' operational capability. As a result, procurement spending could increase soon in specific areas.

Similarly, according to Camus, the proposed A400M airlifter, to be launched in the next few months, should generate €20 billion in revenues, exclusive of export orders, over 20 years. Additional market segments such as missiles have a positive outlook. The British decision to select Matra BAE Dynamics' Meteor as a beyond-visual-range air-to-air missile is of "capital importance for Europe," Camus stressed.

"The next challenge is to penetrate the U.S. [military] market," he noted. Today, about 17% of EADS's revenues stem from sales in the North American market and are expected to increase gradually, spurred by new business partnerships. However, EADS's top executives don't foresee strategic alliances with U.S. partners in the shorter term.

Combining EADS founding partners' purchasing power and establishing a streamlined company structure will cut costs by an estimated €500 million per year, according to Hertrich. About 50% of such savings will be generated by Airbus' restructuring, lower headquarter-level overhead will reduce costs by 11%, while all four business units also will achieve better efficiency, he said.

EADS's management structure is nevertheless conventional. Lagardere and former DASA Chairman Manfred Bischoff have been appointed co-chairmen. An executive committee, headed by Camus and Hertrich, reports to a 10-member board. Four cross-border business units have been formed: Military Transport Aircraft (headed by former CASA Chairman/CEO Alberto Fernandez), Aeronautics (Dietrich Russel, former Airbus chief operating officer), Space (Francois Auque, former Aerospatiale Matra chief financial officer) and Defense & Civil Systems (Thomas Enders).

They are complemented by an Airbus Unit that is scheduled to evolve, no later than next January, into a stand-alone company owned jointly by EADS and BAE Systems. Camus predicts that Airbus' revenues and profits will soar in 2002 and beyond, partly due to the A340-500/600's service entry and the A320 series' growing production rate.

EADS's healthy $91-billion backlog, Airbus' rising market share and plan to soon launch the A3XX and A400M airlifter should enable the company to boost efficiency without job cuts, officials claim.

Worker unions have not opposed the consolidation move, and on July 11 they ratified an agreement to jointly form with their multinational employer a Dutch-law European Workers Council (EWC). It is set to promote "cross-border understanding and mutual cooperation" as well as offer a common employee forum throughout all three countries included in EADS's perimeter, according to company officials.

Although national labor issues are still expected to be discussed by EADS's domestic branches, all transnational issues will be handled jointly by the group's executive committee and EWC.

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