Post failed merger, new battle grips Airbus

Written by Reuters | Berlin/Toulouse | Updated: Nov 14 2012, 08:30am hrs
On a cloudy day in southwest France last month a frail 91-year-old Frenchman in a white shirt and white tie took the stage in front of 1,000 Airbus workers and VIPs and delivered a subtle warning.

Known as the Father of Airbus, co-founder Roger Beteille reminded his audience, gathered in a vast new plane factory in Toulouse, how an industry once devoted to destruction had become a symbol of European unity in the decades after World War II.

Only by working hard together, hand in hand, Beteille said, had the European firms employees realised their dream to create the largest and best airliner manufacturer in the world.

The meaning of the revered engineers message to Europes feuding politicians and industry barons was plain: Cooperate with each other or lose what you have built.

Just two weeks before the ceremony to mark the start of production of the new Airbus A350 jet talks between France, Germany and Britain to create a European aerospace and defence giant bigger than Boeing had collapsed in acrimony. German Chancellor Angela Merkel, Europes most powerful leader, had refused to back the $45-billion merger between Airbus parent EADS and British defence group BAE Systems, effectively dooming the deal.

Top officials in the German government deflected blame, alleging discord between Paris and London over the size of the French governments stake in the combined group. But two confidential sets of demands sent by the German government before and during the talks and described to Reuters, as well as conversations with senior officials in Germany and France, confirm that the roots of the failure lay far deeper.

The mega-deal fell apart because of Berlins growing resentment of what it saw as its loss of influence within EADS, wariness about France sometime rival, sometime partner and suspicion about the motives of the firms German CEO Tom Enders.

We already have an imbalance on technology within EADS, to the benefit of the French. We didnt want to make this situation even worse by hooking up with BAE, a senior German official said.

For Enders, who in the months before the BAE talks had come under acute pressure from Berlin to move prized Airbus research work to Germany from France, the proposed deal with BAE was a last-ditch attempt to free EADS from the yoke of government influence.

The deals failure is likely to bring the opposite result. Germany, emboldened by its growing stature in Europe, looks set to push ever more aggressively for jobs, technological know-how and management influence as the French did to detrimental effect in the early years of the firm.

Insiders say this could have disastrous consequences for the company. Some fear it will also tarnish ties between Berlin and Paris at a time when Merkel and French President Francois Hollande must find common ground to solve the crippling euro zone debt crisis.

The fight that is happening now over Airbus is a grave threat, said an industry veteran with close ties to EADS. Going back to a situation where you have to argue at the board over every industrial decision would be a disaster. That could really kill the company.

Enders declined to be interviewed for this story. The German government, Airbus and EADS also declined comment.

EADS was formed in 2000 through a merger of Frances Aerospatiale-Matra and Germanys Dasa, together with Spanish aerospace assets.

The deal was hailed as a breakthrough for the fragmented European aerospace and defence sector. It gave Toulouse-based Airbus, the hugely successful civil jet-making joint venture between France, Germany, Britain and Spain, a dominant parent. And it was a powerful symbol, just a year after the birth of the euro, of Europes potential for industrial cooperation.

Its first decade brought major successes: Airbus outsold arch-rival Boeing and launched the double-decker A380 superjumbo, the worlds largest passenger plane.

But the company was also dogged by infighting. It wasnt until Enders was put at the top of Airbus and Louis Gallois became CEO of parent EADS in 2007 that the healing between the Germans and French could begin. By June this year, when Enders took the top EADS post, the days of national strife finally seemed at an end.

Behind the scenes, however, German politicians led by Peter Hintze, a theologian and close party ally of Merkel, were deeply unhappy. He believed the balance of power within Airbus had been tilting toward France for some time.

First, the main A380 factory had been placed in Toulouse. Then the plane makers next-generation jet, the A350, was to be built there in a plant named after Beteille. This would give French workers many more jobs in the $15 billion project up to 42% of the total work when top suppliers were included.

In return, Germany negotiated the right to build a successor to the best-selling A320 exclusively in Hamburg. But as struggling airlines looked for fuel savings, Airbus decided instead on a quick, modest revamp of the existing A320 with new engines. The A320neo, to be built in both Toulouse and Hamburg, proved a huge success and boosted EADS stock. But in Berlin the triumph was bitter.

In late February, months before Enders began merger talks with BAE, Hintze wrote to him with a list of demands that threw Berlins newfound assertiveness into stark relief.

In the letter, according to people familiar with its contents, Merkels ally noted that an imbalance had developed within Airbus to the disadvantage of the German plants. This development is unacceptable to the German federal government, wrote Hintze. What is required, therefore, is a reversal of the trend, and a restoration of the Franco-German balance, particularly in research and development.

For Germany, this was a not just a battle for jobs, but for know-how and control.

Among Hintzes demands was the relocation of one of aviations crown jewels, Airbus Flight Physics, from Toulouse to Bremen.

The work carried out by scientists in the department located in M-01, an office shaped like an upside-down pyramid dates back to Concorde. Its recruitment ads seek experts in disciplines like aeroelastics, the science of how flags fly and wings flutter.

Hintze also insisted that a German be appointed to the prestigious chief engineering post, and that the group responsible for plane structure be relocated east of the Rhine. Hamburg, he declared, must have full control over the A320s successor.

The icing on the cake was Hintzes request for a one-for-one balancing of French and German Airbus staff from the top down through the first five levels of hierarchy. Horrified EADS executives said this would reverse a half-decade drive to rid the company of national rivalries.

Enders fired back a toughly worded rejection of Hintzes demands with the backing of the companys board, a person familiar with the matter said.

The division of labour should be dictated by economics, not politics, Francois Heisbourg, special adviser at the Paris-based Foundation for Strategic Research and a former aerospace executive, told Reuters last month. Toulouse is a high-tech aerospace cluster, the largest and most competent in Europe. You dont simply decree that it all has to move to Germany.

It was against this tense backdrop that Enders took the reins of EADS and began serious merger planning in June.

One of his first acts was to move the companys headquarters to Toulouse, ending the awkward split between Paris and Munich that had existed for more than a decade. In Berlin, it was seen by many as a confirmation that France was bent on taking de facto control of EADS, aided and abetted by a CEO who was placing the company above national loyalties.

On July 25, 45 years to the day after France, Germany and Britain authorised Beteille to start planning the airbus, Enders won the support of the EADS board to pursue the idea of an audacious merger with BAE Systems of the UK.

The would-be deal was never given more than a 50% chance of success, according to people on both sides. But political hurdles were thought to be highest in France or Britain two long-term, fiercely patriotic rivals or in the United States, where BAEs status as a privileged foreign contractor might be questioned. Few expected Germany to object.

The merger would create an integrated aerospace and defence firm bigger than Boeing, and an undisputed European champion with a strong presence in the lucrative US market to boot.

Enders believed the ambitious nature of the deal alone would help overcome any government opposition. By giving Germany, France and Britain a golden share that allowed them to block future takeovers, he also hoped they would agree to pare back their day-to-day involvement in the firm a dream that was dashed when the French insisted on retaining their stake in EADS.

Hintze was against the deal from the start and wasnt shy about letting his bosses know.

While the French and British quickly appointed senior officials to oversee the talks and formulate a list of red line demands, Berlin stayed silent.

During the Berlin air show, it was reported that merger talks were underway, forcing EADS into a mad one-month scramble to convince governments to back the deal.

Berlin finally delivered its own list of seven conditions at the end of September.

It picked up where Hintzes demands from late-February had left off. It called for key EADS radar assets and Atlas Elektronik, an affiliated maker of submarine sonars, to be ringfenced inside a new German company, two of whose directors must be government-approved; it demanded balance between French, British and Germans on the board and executive committee; no job losses for Germany; special voting rules for strategic decisions; a German group headquarters and, crucially, full research-and-development control over all single-aisle jets - the cash cow of Airbus.

Enders wanted the deal badly and agreed to all points but one: The German demand that he shift the operational command centre of the combined firm from the freshly painted EADS headquarters in Toulouse to Ottobrunn, outside Munich.

Still, Berlin would not budge. In the weeks that followed, Merkel became convinced that if she let the deal go through, the new company would run roughshod over German interests. She sealed the deals fate in a call to Hollande on the morning of October 9.

The unborn giant was buried with no name Airbus had been rejected by BAE and unpublished plans to save 850 million euros were placed back in the drawer. In a final call, say witnesses, Enders told BAE counterpart Ian King, Lets stay friends.

Almost a month later, EADS has moved to contain any damage from its summer dalliance with BAE, touting business as usual.

But the tremors sent by the failed deal will be felt in Toulouse, Paris and Berlin for some time.

The EADS chief is unlikely to ease off his drive to rid the company of state pressure. Meanwhile, Germany is pressing to buy even more shares.

In a paper sent to members of the German parliaments budget committee last month, the economy ministry urged lawmakers to free up 2.65 billion euros to take Germanys stake in EADS up to 15% on par with France. This could set the stage for a battle over seats and influence on the EADS board.

With the dream of a European defence giant dashed, the French could take another look at consolidating their own fragmented sector, which includes combat-to-business jetmaker Dassault, and Thales, Europes leading defence electronics group.

Keen for a bigger slice of the massive US defence budget, EADS management may feel compelled to look outside Europe for deals, although politics could get in the way again. I dont think weve seen the end of this. We may have only seen the first stage, said Alexandra Ashbourne-Walmsley, who runs a defence consultancy in London.

Most worrying of all, say industry sources, is the spectre of a political fight over the crown jewels of Airbus that stokes dormant national rivalries and scares off investors. With no major new projects on the horizon soon, the opportunities for redistributing jobs are limited for now. But that seems unlikely to keep the Germans at bay.

By blocking the BAE deal, Berlin sent a signal to its partners. It may be open to closer European cooperation, but only on its own terms. That has implications not just for the bold planemaking project launched by Beteille and others in the decades after World War II, but also for the crisis-hit bloc as a whole.