Transatlantic Axis

Contract of the Century

Last week, the German-French Aeronautic Defence and Space Company, EADS, together with its US-American partner Northrop Grumman was awarded the US Air Force contract worth US $35 billion. The US Armed Forces will buy 179 KC-30 tanker aircraft, a military version of the Airbus A330 commuter plane. According to the German press, more deals could follow this "contract of the century". For more than $100 billion, the US Air Force is planning to replace its entire fleet of refueling aircraft containing planes over 40 years old.[1] This contract worth billions is but one more in a series of EADS' strategic market successes within a brief period of time. EADS will also sell military refueling aircraft to Great Britain, Australia, Saudi-Arabia and the United Arab Emirates. These deals are a major blow to its US rival Boeing, who, for decades, has held the monopoly in this field.[2]

Backlog

Regardless of this current success, the German-French company still lags behind its US rival in decisive economic parameters. Whereas Boeing had an annual turnover of approx. US $66 billion (45.9 billion Euros), EADS achieved only 39.4 billion Euros in 2006. Above all, in comparison to its US rival, EADS must adapt itself to the long years of backlog in rates of return. For 2007, Boeing was counting on an operative margin of around ten percent, for both its civilian aircraft and its armaments branch. These were the goals EADS set nearly eight years ago, at its founding, that have yet to be achieved. In 2005, its best year of income returns, EADS achieved 8.3 percent, in 2006 the results had dropped to one percent and for 2007 it is expected to "break even," in other words, zero returns.[3]

Major Supplier

To finally make a decisive advance, EADS seeks to expand its armaments branch over the next few years - to counterbalance its civilian business, which is dependent on market fluctuations. As its priority target, EADS is focusing on the USA, by far the world's largest national armaments market. Accordingly, the German business press is applauding the refueling aircraft deal as a "gigantic victory on the American market."[4] With a US $3 billion contract for the delivery of multifunctional helicopters to the US Army in 2006, the German-French company was for the first time able to land a deal making it a main Pentagon contractor. This new sales success enabled EADS to become a major supplier of the US Air Force. Notwithstanding the company is still encumbered with a considerable need to catch-up in the United States. Whereas 40 percent of the sales of the British arms company BAE Systems are in the USA, EADS' sales are a mere one percent. This is why the company seeks to multiply its annual returns in North America by 5 to reach US $5 billion by the year 2012. The dollar's weak exchange rate will also be useful.[5] The first proposals are already being made.

Serious Questions

Before these plans can be realized, resistance both in the USA and France must be surmounted. The expansion of the German-French arms company is being very critically observed in Washington, not least of all because of its close cooperation with Russia.[6] The new contract for the 179 refueling aircraft worth billions is provoking new dissonant tones. The defeated US competitor Boeing is considering a lawsuit against this contract being awarded to its European rival. Influential Democrats are demanding a congressional inquiry into the EADS arms contract - to have the EADS contract revoked. It is said that awarding the contract to the German-French arms company raises "serious questions" of national security.[7]

Internationalization

France is also objecting to the reinforcement of EADS' transatlantic axis.[8] Since the foundation of the corporation, the German fraction has been seeking to expand business in the USA, while France has been trying to apply the breaks. The German side would also like to enhance production inside the United States. France, not accepting this outsourcing of production, has announced it will resist.[9] The "contract of the century" is reviving this dispute. Tom Enders, the German chief executive of the EADS subsidiary, Airbus, announced "more internationalization" of the company and sees his strategy, aimed at expanding the production into the dollar zone, as being confirmed. The city of Mobile, Alabama was chosen for the final assembly of the refuelling aircraft produced for the US Air Force in Europe.[10] French Prime Minister François Fillon protested this decision and announced he would prevent the outsourcing.

Shift of Power

But the French government's chances to impose its interests within the company are diminishing. When EADS negotiated a new leadership structure last year, which strengthened the German position, the German government gloated, because it had attained "more influence than ever over the company".[11] Now Berlin has even imposed its planned restructuring of voting rights. The French government, by virtue of its EADS shares, can assert a direct influence on company policy, while confronted on the German side only by Daimler, the private big shareholder. This is why Paris has been strictly opposing the introduction of so-called "Golden Shares" for the governments of Germany and France. These share holders will have significantly more rights, than other share holders. This would give Berlin veto rights in important strategic questions. The corresponding German proposals, as advanced by Germany's Minister of the Economy, Michael Glos or by Daimler representatives, have been vehemently rejected.

Line of Retreat

But French resistance to German power ambitions has again been unsuccessful. After the French EADS director, Louis Gallois, changed sides in February and declared himself in favor of "Golden Shares," it is being reported from within French government circles that "there is a basic agreement with Berlin."[12] Press reports alleging that Paris and Berlin have finally reached an agreement have been repudiated. The French government's final line of retreat, the possibility to block the sale of single plants and locations, is the last bone of contention.[13]

[1] Jahrhundertauftrag für fliegende Tankstellen; Financial Times Deutschland 01.03.2008
[2] Vereinigte Arabische Emirate bestellen bei EADS Tankflugzeuge vom Typ A330 MRTT; www.eads.com 29.02.2008. See also Sentiments of Spring and Stück um Stück
[3] EADS muss Boeing ziehen lassen; Financial Times Deutschland 27.12.2007
[4] Tankflugzeuge: So schnappte sich Airbus den Milliardenauftrag; Welt online 01.03.2008
[5] EADS plant große Einkaufstour in den USA; Die Welt 11.01.2008. EADS geht auf milliardenteure Übernahmetour; Financial Times Deutschland 28.01.2008. EADS will in den USA zukaufen; Financial Times Deutschland 09.03.2008. See also Rückenwind, Signale and Handlungsfreiheit
[6] s. dazu Irritationen
[7] Tankflugzeuge: US-Demokraten wollen EADS-Deal untersuchen; Welt online 04.03.2008. US-Abgeordnete wollen Auftrag für EADS kippen; Handelsblatt 07.03.2008. Boeing: Vor Klage wegen Rüstungsauftrags an EADS; Die Presse 10.03.2008
[8] EADS stärkt Basis für US-Expansion; Financial Times Deutschland 03.03.2008
[9] see also Problemgeschüttelt
[10] Airbus plant neue "Strukturmaßnahmen"; Handelblatt 07.03.2008
[11] see also Zur Wahrung der Standortinteressen, More Influence Than Ever and Nationale Karte
[12] EADS: Gallois jetzt doch offen für Goldene-Aktien-Regelung; WirtschaftsWoche 16.02.2008. Verschärfter Staatsschutz für EADS; Financial Times Deutschland 07.03.2008. Deutsche Regierung will Einfluss bei EADS erhöhen; Salzburger Nachrichten 07.03.2008
[13] Konflikt um Vetorechte lähmt EADS; Handelsblatt 10.03.2008