May 21, 2018, © Leeham News: In February, consultant Richard Aboulafia colorfully said Airbus was plagued by “decapitation” of its executive ranks as retirements and resignations came one after another after another.
In April, LNC raised the prospect of déjà vu all over again, discussing the Airbus departures and product turmoil beginning in 2016, recalling another one 2006 and comparing it with Boeing’s era of upheaval from 2007.
Last week, industry leader Steve Udvar-Hazy remarked at the 38th annual Airfinance Journal conference in Miami that “Airbus has its hands full with senior management leaving. Airbus has got to refocus to maintain market share.”
One day later, Carter Copeland of the Melius Research firm published a note devoted to the upheaval at Airbus.
I found the note to be of particular interest.
With Copeland’s permission, the entire note is reprinted below.
By Carter Copeland
I vividly remember upgrading Airbus in 2011. In the months prior, I spent more time working on the name than any other company in my previous seven years as an analyst.
After hundreds of hours work, thousands of rows in a model that would have 70 iterations before it was finished, and several conversations with key members of management, our team finally mustered the courage to recommend the stock; it wasn’t an easy call.
We had such a disagreement as a transatlantic research team that I had to fly across the ocean to personally lead the pitch to the stock selection committee out of fear that if I wasn’t in the room, it would be undermined.
I’d also have to stand guard at the morning meeting, where the first question from a UK salesperson revealed just how tough this campaign was going to be: “Why should I recommend this rubbish company to my clients?”
The marketing blitz that followed was much the same, with pushbacks to our thesis citing, “too much career risk” to own it, a lack of catalysts to change sentiment, and the claim that Airbus “wasn’t a real company” and was just a “European jobs program.”
While it turned out to be a great call, it was a rough slog for a long time.
Here’s the back story.
The Airbus and Boeing situations are analogous in many ways, but Airbus was much worse.
Both companies crippled themselves in the 2000s by launching big new products and failing to execute on them. In Airbus’ case, the A380 superjumbo never looked like a financial home-run, but it had the potential to unite country-specific silos that existed for decades–a worthy goal.
In this respect, the A380 was a success, but only because it took everyone in every country to fix the program when it went off the rails.
On top of that, Airbus was a giant industrial company with perhaps the world’s largest transactional currency exposure, one effectively constructed, staffed, and capitalized to function at US Dollar-Euro parity.
The A380’s struggles and a €/$ spot rate of 1.50+ would’ve delivered a death blow to Airbus, were it not for the company’s gigantic hedge book. Those hedges bought time to cut costs, but most importantly they bought time to install and/or empower new leaders who took advantage of the crisis, changing things for the better in a way that could hopefully endure.
I honestly believe what turned the whole situation around was the people.
At the time, Tom Enders led Commercial Airplanes, Harald Wilhelm supported him in finance, Fabrice Bregier came over from MBDA to be COO, soft-spoken, yet uber-organized Didier Evrard assumed various program management roles, and long-standing king of airplane sales, John Leahy, was re-tasked with focusing on profits rather than market share.
This team would ultimately succeed the last of the politically-selected leaders of Airbus and oversee the wholesale transformation of the company from a federation of European A&D assets to the Airbus we know today.
The company would finally be recognized in name by its strongest brand and became a credible investment after the sell-down of government shareholdings, a full revamping of the board, and the long-elusive operational and cultural integration of Airbus.
If you look closely, you can see the analogs to each of these Airbus leaders at Boeing.
Greg Smith in finance (now arguably a COO-type leader), Pat Shanahan on program management (now US Deputy Secretary of Defense), Ray Conner at the helm at BCA (recently retired, the first at BCA to do so on his own terms in 20+ years), and so on. The story is remarkably similar-visionary leaders went forward with big, risky projects that put both companies in precarious financial positions. A new wave of leaders came in behind them to clean up the mess, bringing us to where we are today.
Both companies are better positioned than any period in the last half century and for the first time are acting like a mature global duopoly.
Things are great, but, running a global airplane business hasn’t gotten any easier. What has worried us since our [company] launch, and was confirmed with this week’s announcement that CFO Harald Wilhelm will step down in 2019, is that These leaders will be gone.
Everyone in the lead roles will effectively be new-programs, sales, C-suite, finance, and strategy. To use an investment analogy to describe what we think this means, it’s like staffing a gigantic mutual fund with analysts and PMs that have never seen a cycle. Would you do that? Well, the Airbus Board just did. While it’s impossible to quantify the risk that these decisions by the Board to “clean house” have introduced, we think it’s naive to pretend that they don’t exist or won’t grow over time.
Do you think it’s coincidental that Airbus’ sales organization has undergone the only major reshuffling in the last quarter century while Boeing looks to be increasingly winning key aircraft sales campaigns? I certainly don’t. Does it seem odd that Airbus is rumored to have scrapped plans to further modernize the A320/A321 just as major operational leadership is turning over? Perhaps not.
The only plausible explanation for this management shake-up is that the Board is attempting to sterilize the upper management ranks in such a way that creates immunity from the ongoing Serious Fraud Office investigation.
That’s a legitimate goal for them to have; however, given how hard it is to successfully run a large airplane business, this level of turnover amongst well-regarded, successful and highly capable executives, isn’t something that should be overlooked by investors, yet in many cases it is.
We’ve written at length how horrible this business has been over the last 40+ years and we worry that while the Board’s solution to an incredibly complex and challenging problem might result in staving off a few quarters of uncertainty and a billion or two Euros in fines, at the same time it may also introduce multiples of that in risk to the business longer term.
It’s too early to tell, but the risk is real.
At the end of the day, we think a tangible lack of leadership continuity is worrisome.
After all, Airbus is a company that struggles to bring home the full year plan each and every year, as few companies in the world of this size exhibit the same level of H2/Q4 weighting that Airbus does annually (certainly not their primary competitor).
Interestingly, they always get there, largely because the leadership won’t accept failure, notoriously refusing to let up, no matter the challenge. Over the years there have been countless stories and anecdotes to this effect-they simply don’t let up on the lower layers of management, always holding them accountable. This has become the new culture of Airbus, and now is not the time to lose a step.
Boeing is ferociously ambitious these days, and it won’t take long for them to take advantage of any weakness, should it emerge.
So, what do we do with this?
While our earnings model and everyone else’s says Airbus is a phenomenal investment at these levels, we’re reminded that the answer isn’t always in the model.
We keep asking ourselves how much better the numbers might be (due to improvements in A350 profitability and higher A320 rates) and when the best time for an upgrade to Buy-Accumulate may emerge. However, we always come right back around to getting hung up on leadership and the unanswered question of what the future may hold with a new (and potentially very green, at least in terms of the aircraft business) team.
Sure, we can’t quantify the risk and that’s the pushback we get most often, but we think it’s foolish to pretend it’s not there.