An inquiry into possible insider trading threatens the balance of leadership of the European aerospace giant. A long legal battle could lie ahead
Within Airbus, Thomas Enders, the company's 48-year-old CEO, is nicknamed "Major Tom." A major in the German army reserves who doesn't shy away from conflict, and there's a military brusqueness to his management style.
Enders lived up to his nickname once again last October. According to leaked information, French stock market regulator Autorité des Marchés Financiers (AMF) had set its sights on Enders and 20 other senior executives at Airbus and parent company EADS, as well as its major shareholders Daimler and Lagardère, for suspected illegal insider trading. The regulators alleged that Enders and other executives possessed insider information about the A380 superjumbo jet's production problems when they exercised stock options in late 2005 and early 2006.
"I feel I'm the victim of a smear campaign," Enders told his closest advisors. Taking the approach that offense is the best defense, Enders and six other executives responded sharply to the accusations by filing a lawsuit against an unknown defendant in the Paris prosecutor's office. The AMF also received a strongly worded letter.
Far from intimidating the agency, the letter merely egged on the French regulators. As of Tuesday of last week, it is quite clear that AMF plans to broaden its original case against Enders and 16 other current or past senior managers. Airbus parent company EADS and its shareholders are also suspected of misconduct, including not having given investors early and sufficient warning about the problems associated with the A380, and of having benefited financially from the troubled project.
The AMF also passed on its evidence to the Paris prosecutor's office. If the regulator's suspicions are confirmed, Enders and his fellow defendants could face not only millions in fines, but possibly even prison sentences.
It hasn't come to that yet, but the smoldering affair is already jeopardizing the planemaker's reputation as well as the delicate balance within top management, which only recently seemed to have recovered from turbulence of the past. Top managers at the German-French consortium have spent years at each other's throats. It wasn't until the summer of 2007 that the squabbling executives managed to enter into a truce. It was arrived at after tough negotiations and with the active involvement of German Chancellor Angela Merkel and the then newly elected French President Nicolas Sarkozy.
It came as a surprise that Frenchman Louis Gallois, widely regarded for his diplomatic skills, was named the sole chief executive officer of EADS. Enders became the president and CEO of key subsidiary Airbus. "I have realized that I'll probably have more fun here," he told friends.
But now, this harmonious façade will be put to the test. According to reports in the French press, regulators are investigating not only a group of former executives, but practically the group's entire senior management, including Enders and other important figures such as his deputy Fabrice Brégier, Chief Commercial Officer John Leahy and Ralph Crosby, the chairman and CEO of EADS North America. Crosby garnered much respect within the company when he used his lobbying skills to get the US Air Force to award the contract to replace its aging fleet of airborne tankers to an EADS/Northrop Grumman consortium.
All of these executives will spend the coming months trying to save their own skins, even at the expense of their former colleagues. Airbus CEO Enders may end up playing the unwanted role of a star witness, because of a blunder he is still likely to regret today.
The frontal attack that Enders launched in June 2006 against his archrival and then EADS co-CEO Noël Forgeard is now causing serious problems for his former employer and current EADS shareholder, German carmaker Daimler.
In March 2006, Forgeard and other top executives sold large numbers of stocks, even though it was already clear that the aircraft manufacturer was headed for trouble. A short time later, the final assembly line at the company's main plant in the southwestern French city of Toulouse had to be shut down because of problems with the wiring for the fuselages shipped from the company's plant in Hamburg, Germany.
This apparently didn't stop Forgeard and other top executives from unloading their shares while prices were still high, at over €30 ($47). "I am innocent," Forgeard continues to insist today. Soon afterwards, major shareholders DaimlerChrysler and Lagardère followed suit, each selling 7.5 percent of its shares. The two companies also deny any wrongdoing.
There was one person who didn't play along: Enders. "I didn't consider it opportune at the time," he told a news agency, with unexpected diplomacy, shortly after the company issued a poor earnings forecast in June 2006—thereby dealing Forgeard what Enders's former co-CEO refers to as a death blow. The autocratic Airbus top executive lost his job shortly thereafter.
The last time Enders sold his shares was in November 2005, when, he now argues, the true scope of the A380 debacle could not be foreseen. But it is precisely this reserve that could make him a hot target for his fellow executives and the company's owners today.
Enders will get off scot-free if French authorities believe his argument. But his fellow executives and major shareholders Lagardère and Daimler may not fare as well. In a hearing before the AMF in September 2007, Enders reluctantly provided evidence against the executives and shareholders.
He confessed to the investigators that he had been plagued by scruples over selling his shares in March 2006, adding that there had, after all, been unconfirmed rumors of potential delays of the A380 at the time. According to Enders, there were also rumors that DaimlerChrysler and Lagardère, as well as BAE Systems, another partner in Airbus at the time, planned to sell some of their shares. As experience has shown, this is the sort of thing that depresses the price of a publicly traded security.
If Enders sticks to his version of the story, it will cause problems for his former employer, DaimlerChrysler. Investigators will not be the only ones asking why a global corporation was taking advantage of market opportunities when one of its top executives had long since made it clear that he no longer considered this activity appropriate.
The insider trading charges also threaten to turn into a crucial test for Enders and his major shareholder, whose approval he needs to make important changes within the company. In addition, Enders and his colleagues will need to devote a lot of work time in the coming months to preparing themselves for impending legal action.
All of this comes at a time when EADS has bigger concerns on its plate. Now that the planned sale of three Airbus plants to OHB, a space technology company based in the northern German city of Bremen, has failed, the production schedule for the company's new, fuel-efficient A350 is in jeopardy. If Enders fails to find an alternate investor by the end of April, the company will have to foot the bill for the long overdue, €500 million ($790 million) conversion of the plants to state-of-the-art carbon fiber technology.
To make matters worse, the high-profile A380 project faces new difficulties. The industrial series production of the superjumbo jet is just getting underway in Toulouse. In the future, the aircraft's wiring will no longer be painstakingly installed by hand, but with the help of a modern 3-D design system.
The first series production A380, with the serial number MSN 026, was originally slated for completion by the end of last year. Instead, the work continued until early April.
If the company does not make up for the delay, it will have trouble making good on its plan to deliver 13 jets this year. Enders already warned last October—to sharp internal criticism—that the production goal was probably a little "ambitious."
It remains to be seen how long it will take for the company to officially admit that it has miscalculated—yet again.
Translated from the German by Christopher Sultan