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The Wall Street Journal: Airbus CEO’s Resignation Reflects Company’s Deep Structural Woes

EXTRACT: Those tensions are a further example of the troubles arising from European efforts to maintain national balance within multinational companies. Petroleum giant Royal Dutch/Shell, industrial group ABB and consumer-products giant Unilever have all stumbled in recent years in part because of split management that was guided as much by political forces as economic interests.

THE ARTICLE

By DANIEL MICHAELS
October 10, 2006; Page A1

The resignation of Airbus Chief Executive Christian Streiff after just three months on the job underscores the steep hurdles facing the big European aircraft maker as it tries to overcome damaging delays in its largest jet program and overhaul a cumbersome structure beset by politics and bureaucracy.

The major French and German shareholders of Airbus’s 80% owner, European Aeronautic Defence & Space Co., quickly named a top EADS official to succeed Mr. Streiff, who resigned after a clash with the EADS board over his demands for greater autonomy as well as over how to quickly implement a planned tip-to-tail restructuring of Airbus announced last week.

In a letter to employees, Mr. Streiff pointedly blamed Airbus’s complex structure for the tensions that have roiled the company over the past several days, writing: “I am leaving because I believe the position of Airbus CEO, in the current governance structure, has insufficient delegation to lead Airbus through the crisis successfully.”

The structure of Airbus — created in 1970 by technocrats in France, Germany, Britain and Spain — is rooted in its origins as a consortium and has long proved more effective at spreading jobs and tapping subsidies than generating profits. Airbus’s parent company, EADS, run by a split Franco-German management, is fraught with national rivalries.

Those tensions are a further example of the troubles arising from European efforts to maintain national balance within multinational companies. Petroleum giant Royal Dutch/Shell, industrial group ABB and consumer-products giant Unilever have all stumbled in recent years in part because of split management that was guided as much by political forces as economic interests.

In Airbus’s case the tensions have been aggravated by the company’s recent problems, especially the repeated delays in its $12 billion program to build the world’s largest-ever passenger jet, the A380, which is now two years behind schedule and about 30% over budget. The delays have alienated customers and dented profits at Airbus, but they are benefiting U.S. rival Boeing Co. at a time when Boeing, which not long ago was losing ground to Airbus, is enjoying a resurgence.

The EADS board lost confidence in Mr. Streiff after differences arose between him and his bosses over how to implement his restructuring plan for Airbus and how much independence he would have in the future. “He wrote a letter basically saying, ‘I want to run this company on my own and come to Munich three times a year,'” said a person close to German auto maker DaimlerChrysler AG, which is EADS’s largest shareholder, with about a 22% stake in the company. EADS’s German headquarters, where the Airbus CEO reported, is in Munich.

EADS said in a statement that Louis Gallois, its 62-year-old co-chief executive and a longtime board member, would step in to run Airbus. Mr. Gallois, who previously has run France’s state railway and two state aerospace companies, is a well-respected manager, and his appointment fits with EADS’s strategy of keeping closer tabs on the aircraft maker.
 
The leadership change at Airbus comes as EADS officials are fending off unwanted advances from Russian state-owned bank OAO Vneshtorgbank, which announced on Sept. 8 that it had acquired 5.02% of EADS’s listed shares. Russian government officials subsequently declared they wanted a seat on the EADS board, but EADS immediately rejected the idea.

Airbus and its new chief face a tougher challenge than ever in regaining credibility with the aircraft maker’s customers, suppliers and investors. Airbus and EADS will need to reassure airlines that, despite the management upheaval, they remain focused on the future and still plan to introduce a new midsize A350 XWB jetliner even as they struggle to rescue the troubled A380 superjumbo jet program.

Not long ago, Airbus appeared to be on the upswing, churning out popular planes and snatching orders away from Boeing. The U.S. aircraft maker had faced its own production and management crises in recent years. But Boeing, unburdened by a cumbersome multinational management structure, was able to move aggressively to make the tough decisions necessary to right itself, completely overhauling its airplane-manufacturing operations. Though it dismissed two CEOs and a finance chief in the wake of ethics scandals, the turnover barely affected its key commercial aircraft division.

Today, sales figures clearly show that Boeing is benefiting from its restructuring, as well as from Airbus’s troubles. While Airbus is on course to deliver more planes than Boeing this year, thanks to orders placed several years back, it lags badly behind on new sales. For the year through Sept. 30, Airbus logged orders for 226 new planes, of which only 36 were higher-margin widebodies. Boeing, through Oct. 3, posted orders for 723 new planes, including 184 widebodies.

Boeing recently has been able to negotiate higher prices from customers thanks to Airbus’s weakness, say people who follow aircraft deals. Boeing’s stronger order inflow and revenue stream could over the long term amplify the current gap between the rivals, if Boeing is able to invest more in new products and develop them faster than Airbus can. Airbus had pledged to tackle all its problems and rebuild its tarnished reputation just last Tuesday, when it unveiled the outlines of a sweeping restructuring plan.

The so-called Power8 restructuring plan, which Mr. Gallois will now spearhead, goes beyond getting the A380 program back on track. Managers of both Airbus and EADS indicated last week that they were willing to “break taboos” and tackle politically sensitive issues. When EADS was formed in 2000 from the merger of aerospace companies from France, Germany and Spain, the company said it aimed to run Airbus efficiently, breaking with the aircraft maker’s past by keeping a cold eye on the bottom line. That has proved difficult.

EADS’s split management — with dual French and German chairmen and CEOs — was created to avoid tipping the balance of power inside EADS toward France or Germany. Maintaining that balance has saddled Airbus with a clumsy division of labor between French and German factories. The arrangement has helped preserve jobs in both countries over the years, but has proved costly in building planes.

Mr. Gallois is expected to unveil the details of the Power8 plan early next year. In its statement after Mr. Streiff’s resignation, EADS said its board had “underlined its unanimous support for the Power8 program” and for the “immediate implementation of the A380 recovery plan.” The statement said EADS will decide on the A350 XWB in coming weeks, but left uncertain what the decision will be.

“Now, they’re scrounging around for quick ideas to patch wounds,” said Christian McCormick, chief executive of Natexis Transport Finance in Paris, a unit of France’s Natexis Banques Populaires SA and a leading player in arranging funding for airlines to acquire aircraft. “What they need is stability and long-term thinking,” something Mr. Gallois should be able to provide, he added.

Airbus’s manufacturing troubles with the A380 aircraft came to the fore in June, when the company announced that it was facing a second six-month delay in production of the aircraft. The delays prompted a plunge in EADS’s share price and led to the firing of then-Airbus CEO Gustav Humbert and EADS co-CEO Noël Forgeard on July 2.

Mr. Streiff was appointed the same day and quickly got down to work on an internal audit of Airbus. At a meeting of the EADS board on Sept. 29, he confirmed reports that the A380 would be two years late — double the delay previously announced.

The chief executive proposed a recovery plan for the A380 that the EADS board accepted, say the people familiar with the situation. EADS later announced that the overall A380 delays would cut €4.8 billion ($6 billion) from its operating profit over the next four years.

Mr. Streiff went further. To tackle costly complexities in the organization of Airbus manufacturing, he proposed the Power8 plan, which the EADS board also endorsed, according to people familiar with the situation. But then, disputes abruptly arose over how Mr. Streiff would implement the plan.

According to the people familiar with the situation, Mr. Streiff demanded vast independence in managing and restructuring Airbus. The request surprised EADS officials, who have for months said that they would exert tighter control over Airbus once EADS took over 100% of the aircraft maker. EADS expects this week to buy the 20% of Airbus it doesn’t own from British defense giant BAE Systems PLC.

Last Tuesday, the EADS board met again and Mr. Streiff stuck to his guns. He told EADS officials that he would resign if his demand for more autonomy wasn’t met, say the people familiar with the situation. DaimlerChrysler and EADS’s main French shareholders, media group Lagardère SCA and the French state — which together own around 22% of the company — held crisis talks this past weekend. French President Jacques Chirac even phoned Mr. Streiff in an attempt to defuse the situation, according to a French government official and another person familiar with the situation.

But by yesterday, EADS’s board members, on both the German and French sides, had lost confidence in Mr. Streiff’s ability to implement his plans successfully, say people familiar with board members’ discussions. They felt the executive wasn’t diplomatic enough to handle the politically sensitive task of restructuring Airbus — especially because it is likely to entail job cuts, closing plants and shifting high-profile manufacturing work from one country to another.

–Stephen Power and David Gauthier-Villars contributed to this article.

Write to Daniel Michaels at [email protected]

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