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EADS Corporate Controlling: Fate or failure?

вЂ" the overview of the processes that lead to the closure of Corporate Controlling department and launch of POWER8 restructuring program

Abstract

This report is intended to show various aspects of EADS (European Aeronautic Defence and Space Company EADS N.V.) activities throughout the months of performance crisis and the measures that were developed to counter it.

Since the creation of EADS its performance was quite amazing - in a few years it became a serious threat to well established competitors of civil aviation and aerospace & defense industry. However, in the beginning of the year 2006 (and from internal perspective probably end of the year 2005) signs of relaxation could be noticed and inevitable delays in most important projects were about to be announced. When Airbus informed public about the delay of A380 EADS lost 1/3 of its value and Airbus CEO had to resign. Market was not happy with the development of A350 either forcing Airbus to redesign it and re-launch almost as a new airplane. Last but definitely not least, weak performance of dollar against euro reduced EADS competitiveness against US peers by approx. 20%.

Increasing cost of hedging, additional research and development spending, significant cost of fines paid to A380 customers for the delays caused the FY 2006 financial results to be really bad вЂ" worst in the entire history of EADS. Something had to be done about it. Somebody had to pay for it.

The document will briefly introduce readers to the one of the most complex and currently troubled company in Europe. It will focus on presenting the impact of the environmental and internal pressure that lead to disassembly of the Corporate Controlling department as well as introduction of the restructuring plan called POWER8.

The paper is based on personal experience of the student who worked for 8 months in EADS Investor Relations department located in German HQ. The content is reinforced by insights provided by his colleagues (manager of IR, intern of Controlling) and various official facts.

1. EADS

EADS is the second largest civil aircraft manufacturer in the world and one of the leaders of aerospace & defense industry. “The group employs about 116,000 people at more than 70 production sites, above all in France, Germany, the UK and Spain as well as in the U.S. and Australia. A global network of more than 30 Representative Offices maintains contact with the customers. In 2006, the company generated revenues of € 39.4 billion.”

1.1. Shareholding structure

EADS was formed in the year 2000 by the merger of DaimlerChrysler Aerospace AG (DASA) of Germany, AÐ"©rospatiale-Matra of France, and Construcciones AeronÐ"ÐŽuticas SA (CASA) of Spain. This “contractual partnership” owns 58.37% of the stocks. Since the creation of the company its shareholder structure was slightly changed: Daimler Chrysler reduced its stocks from 30% to 22.5% in April 2006, French and Spanish stocks are held by state-owned companies вЂ" SOGEADE (27.38%), SEPI (5.46%) respectively. In addition, on August 2006 Russian state-owned bank вЂ"Vneshtorgbank вЂ" bought more than 5% of EADS. However, the “contractual partnership” announced that it do not intend to allow Russians to have impact on the company’s decisional structure.

It is important here to notice that both French and German governments (through majority stakes) have possibility to impose power on EADS management. And they do so - in a very distorting and efficiency weakening way.

Most of EADS European and US peers are 100% public owned companies. It does not mean they are safe from governmental pressure.

1.2. Activities

EADS develops and markets civil and military aircraft, as well as missiles, space rockets, satellites, and related systems. It has a large part of wholly-owned activities such as Airbus, ATR, Eurocopter or Ariane 5. In addition, it takes part (as a shareholder) in various different aerospace & defense related projects such as Eurofighter, Galileo, U.S. Tanker.

The company is divided

in five main divisions:

• Airbus (A320, A350 XWB, A380)

• MTA (A400M, CN-235, C-212, C-295)

• Eurocopter (EC-145, Tiger, Puma)

• Defence (Eurofighter, Eurohawk, Aster)

• Astrium (Galileo, Ariane 5, Paradigm)

The divisions are not entirely separated; some projects

like A400M вЂ" are being carried out by three different

groups (A400M: Airbus, MTA and Defence). This causes serious

managerial problems вЂ" difficulty to develop financial measures and resolve

responsibility issues.

It becomes even worse with multi-corporate managed projects like Galileo вЂ" struggling to assess sufficient funding as well as form an efficient governing platform to deliver project.

Most of EADS revenues come from Airbus (approx. 70-75%) and thus impact of this division significantly affects overall company performance. However, EADS history shows that the business cycles of different divisions do not overlap each other, carrying important hedging function. Eurocopter, Defence and Astrium excel quite well recently when the Airbus is in troubles, while a few years ago the situation was the contrary.

1.3. Summary

All in all, EADS is quite complex company with a rather artificial and troublesome corporate structure. Divisional breakdown causes problems in managing responsibilities. Governments have a say in decision-making processes. External factors have a significant impact the company based on long-term, high-tech, capital absorbing projects. Those factors combined together can put the huge company on its knees.

2.