Gallois prepares to take on unions and sway investors
Airbus and parent company EADS are facing the twin challenges of placating an angry workforce and reassuring cautious investors as they begin the long process of implementing the Power8 restructuring measures designed to create a "new" Airbus.
While unions in France and Germany have reacted with predictable outrage to the projected loss of 10,000 jobs across Europe, investors have greeted the proposals with cautious enthusiasm, reserving most of their concerns for whether Airbus can successfully implement the plans.
Chief executive Louis Gallois's sweeping reforms address concerns that have been troubling observers since the A380 debacle began to unfold, but inevitably some questions remain unanswered.
Airbus has set itself ambitious targets of EBIT contributions of €2.1 billion from 2010 onwards and an additional €5 billion cumulative cash flow from 2007 to 2010. Revealing details of the plan last week in Toulouse, Gallois made it clear that failing to achieve these aims is not an option. "This is the minimum - we have no choice."
Immediate concerns focus on lack of detail on elements of the restructuring set out by Gallois.
© S Ognier/Airbus
Face off: Unions and Airbus are going head-to-head
EADS shares fell when the market opened after Power8 was revealed. "I think that's because some areas of the plan were still not clear enough," says analyst Ed Stacey of HSBC. But if Power8's problem is a lack of credibility, Gallois himself might be the answer. It is no coincidence that the man drafted in to turn Airbus around is a veteran of France's railway company SNCF.
"It all comes down to belief - and I think he came across as quite credible," says one analyst. "His history is that he delivers: he managed to restructure the heavily unionised SNCF."
But Michael Richter, co-president and head of aerospace and defence investment banking group at Jefferies Quarterdeck, warns: "French employees and trade unions will exploit the forthcoming French presidential election to put pressure on politicians to directly intervene and save French jobs. If that happens with any degree of success, this could lead to the whole plan unravelling."
He adds: "Any extended strikes will have serious implications on Airbus' finances and customer goodwill, particularly given the A380 delays and cost overruns."
Airbus aims to achieve the 10,000 job losses partly through laying off temporary workers and arranging voluntary early retirements, and is not planning to cut engineering or shopfloor jobs. But Gallois admits he may in future look at possible redundancies.
The company has estimated the costs of shedding the 10,000 jobs at €680 million which it will recognise in the first quarter of 2007. But there is concern among some analysts that other restructuring costs, for which Airbus has not yet given an estimate, could spiral.
In particular, it is unclear how the company will manage to create an "extended enterprise" by forming partnerships to help manage the transition of sites from metallic to composite work and to share risk, capital expenditure and development costs.
Gallois is unflinching on the need to form strong partnerships: "We have no strong partners. The most important partner of Airbus is EADS - this is not enough."
The company says it has had "unsolicited proposals" from partners "ready to invest in these sites and to possibly take partial or full control of them".
But formal talks have not begun and some doubts remain: "Admittedly, it is too early for Airbus to have carried out detailed negotiations on these, but on the surface it looks as if they're expecting industrial partners to rather generously contribute a lot of the hard work and costs of the restructuring, but allow Airbus to retain the benefits," Stacey says. But the long-term agreements that would probably be required to secure a partnership could be a major draw.
"From the point of view of the long-term future of those plants that are to be sold or merged with industrial partners, the news could be quite good. There's the potential for these facilities to become not only Airbus centres of excellence, but also to start attracting work from other customers," says Stacey.
But are the partnerships enough? One analyst is not sure: "Bringing in partners to run Filton, Méaulte or Nordenham will not solve the underlying problem: the weakness of the US dollar. That is not something it can get around without outsourcing production to non-euro zones."
And with final assembly still split between two different countries, is Airbus doing enough to gain the production efficiency it so desperately needs? In an ideal world, perhaps not, says the analyst.
"But Gallois is making the best of the hand of cards he has been dealt. Not only does the plan have to deliver what is required in the face of the currency headwind - it has to be sufficiently digestible that it actually happens."