Not a happy Noël

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By Helen Massy-Beresford in London

Noël Forgeard must be looking back with something approaching nostalgia on the events of two weeks ago, when billions of euros worth of forecast lost earnings and BAE Systems’ angry reaction to the timing of the announcement of further Airbus A380 delays were the worst of the stories splashed across the world’s media (see graph).

When, in the days that followed, EADS’ key shareholder Arnaud Lagardère called for answers just as French and German regulators revealed they were investigating the company’s share price movements, Forgeard could have been forgiven for thinking he had hit rock bottom.

Instead, the situation has deteriorated even further, with crucial Airbus customers talking about cancelling orders and a furious row erupting among French politicians about how the situation can be resolved and what structural changes should be made to EADS.

“ILFC’s Steve Udvar-Hazy knows more about airline economics and residual values than anyone; if he cancels that’s a serious warning,” says analyst Richard Aboulafia of the Teal Group. The furore that has dogged the company over the past fortnight raises serious questions for the future – not just of the individuals involved, but for the structure of EADS itself.

The most pressing question is whether co-CEO Forgeard himself can survive the mire that is engulfing EADS: the fact that the scandal has spilled over into the political arena will increase pressure on Forgeard to resign, as French prime minister Dominique de Villepin wants to prove he is dealing with the situation and “doing something”, says one analyst. On the other hand: “perhaps what is needed most at a time like this is management continuity,” he adds.

The consensus seems to be that Forgeard will not be able to cling on, but there will be a large question mark over his replacement. Given the management wrangling that preceded the selection of the current chief executives, the EADS board will have to think long and hard about embarking on another round of appointments. Eurocopter chief Fabrice Brégier has been mooted as a possible replacement, but some industry experts question whether he has the necessary experience to take on the role. SNCF head Louis Gallois is another possibility – he certainly has the relevant “experience, age and gravitas”, according to one analyst – but would he want the job?

Beyond the immediate question of what will happen to the man at the centre of the storm, there could be far-reaching implications for the structure of the company itself. French finance minister Thierry Breton called for more hands-on involvement by the French government in parliament last week, and is understood to have met Lagardère and his German counterpart Manfred Bischoff of DaimlerChrysler to discuss possible changes. But German shareholders are unlikely to take kindly to such a shift in power. One analyst points out that, while the calls for more government power will appease public opinion, any attempt for a reworking of the shareholder agreement in favour of the French would be swiftly blocked by German shareholders.

At executive level within the company, the dual chief-executive structure has caused headaches in the past, so could EADS take this opportunity to shelve it, in favour of a more streamlined, traditional management structure?

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“The dual CEO structure is likely to remain in place as long as the Franco-German shareholding is maintained,” says analyst Ben Fidler of Deutsche Bank. Nevertheless, other changes could be afoot: one significant shift in ownership is already taking place, as the process of BAE’s sale of its 20% stake in Airbus leaves EADS as the sole owner. Will this be EADS’s chance to strip away an extraneous layer of management and bring the business under tighter control? “Closer integration of EADS and Airbus may now be more likely, particularly once Airbus becomes a wholly-owned subsidiary of EADS. These latest A380 issues have certainly highlighted issues of reporting transparency between Airbus and EADS,” Fidler says.

Analyst Pierre-Antony Vastra of IXIS Securities adds: “The most urgent thing is for EADS to quickly address the problems at Airbus, the reporting process and controlling risk, to do everything they can to make sure this does not happen again. The question of how Airbus reports to EADS can be on the table for the future.”