Unions gear up for fight over EADS’s defence arm shake-up
When Tom Enders launched EADS’s €36bn tie-up with Britain’s BAE Systems last year it was meant to unshackle the pan-European aerospace group from Franco-German political meddling and bolster its struggling defence business.
But after months of fraught discussions between Berlin, Paris, London and Toulouse, the deal collapsed and the EADS chief executive was forced to Plan B.
Having quickly persuaded Germany and France to reduce their stakes and interference in his business, Mr Enders has now reached Section 2 of Plan B: restructuring EADS’s defence and space subsidiaries.
Adjusting to Europe’s deep defence downturn without the help of the BAE tie-up will hurt, Mr Enders has warned. Unions are already gearing up for a fight, fearing he may cut as many as 9,000 of the defence unit’s 45,000 jobs.
This week he is expected to reveal just how painful the integration of Cassidium, Astrium and Airbus Military, under the renamed Airbus Military and Space organisation, will be and where the wounds will be deepest.
Union leaders are to be told details as early as Monday before the company’s top management figures gather in London on Wednesday for EADS’s annual meeting with institutional investors and analysts.
Cuts at EADS would hit hubs in Germany, France and Britain, with Spain largely spared because it had already been consolidated, one person close to the company said.
EADS is no longer going for growth in its defence business, which brings in €14bn of the company’s €56.5bn total sales. Instead, the focus is on improving profit margins, says Marwad Lahoud, its head of strategy.
The group’s profit margins severely lag behind those of its competitors. Margins at its Eurocopter helicopter division are 5 per cent, half those at AgustaWestland, its closest competitor.
At Astrium, EADS’s space business, they are 5.4 per cent, well below the comparable margins of Thales Alenia in Europe and Lockheed Martin and Boeing in the US. EADS’s lowest margins are at Cassidian, its defence business, much of which is in electronics. Last year, Cassidian’s margins were well below its peers at 2.5 per cent, suffering from writedowns and German budget cuts.
Cassidian’s margins look even thinner when its mature, high-margin joint ventures are taken out of the equation. These include MBDA, its missiles and weapons partnership with BAE of the UK and Italy’s Finmeccanica, Eurofighter, maker of the Typhoon fighter jet, and another joint business with the two MBDA partners.
“The rest of EADS’s defence business is much less profitable and may be lossmaking,” says Nick Cunningham, analyst at Agency Partners, noting that much of the group’s lowest-margin business is in Germany, a country that spends less than 1 per cent of GDP on defence. “As a defence company, you are much better off in the UK, France and even Italy in terms of government support.”
That is why Mr Enders pushed so hard for a tie-up with BAE and the restructuring plan he will lay out this week is a distant second choice strategy.
EADS has gone through years of restructuring and job cuts. Analysts and executives expect this latest round of cuts to be less drastic and smaller than the 20 per cent reductions that workers fear. However, concerns over the consolidation of EADS sites in east and west Munich and a handful of plants in Paris are likely to prove well founded, they say.
In late November, more than 20,000 EADS workers took to the streets in German cities from Manching to Hamburg and Bremen, to protest over the coming lay-offs and plant closures.
Rüdiger Lütjen, EADS’s European staff council, says the protests were a warning to EADS that its workers would not accept cuts or heavier burdens without a fight. “It is quite clear, there cannot be any mandatory redundancies . . . employment opportunities within the company must be secured for all colleagues.”
Leaders of IG Metall, the German union, are demanding there be no compulsory lay-offs and that affected workers be secured alternative jobs within the group, whose successful civil aerospace division contrasts with its troubles on the defence side.
Germany’s powerful unions represent one of the biggest potential stumbling blocks for EADS because the company needs their approval to make major changes.
Negotiations with the unions are expected to revolve around how best to achieve savings – from lay-offs to salary freezes – with executives warning that they could delay the process, but were unlikely to stop it.
The squeeze on government spending is so tight that Mr Enders and his peers expect Europe to develop no new significant pieces of defence equipment – such as a fighter jet or aircraft carrier – in the coming 10-15 years.
Nevertheless, the UK, France and Germany in particular are keen to maintain the capability to make critical weapons domestically, prompting them to keep a close watch on any lay-offs and plant closures at EADS and other defence suppliers.
EADS has discussed its plans with key politicians and does not expect it will be foiled by national interests. Nevertheless, Mr Enders has been wrongfooted by Angela Merkel, Germany’s chancellor, once before and, as with his unsuccessful BAE-tie up, politics is likely to play a crucial role in the success or otherwise of Plan B.