Cablegate: Airbus Grounded by Power8 and the Dollar?

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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

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STATE FOR EUR/AGS AND E/TRA.
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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

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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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