Le Monde recently published an opinion piece by Stéphane Laurier contending that the business world needs more CEOs like Louis Gallois: ready to give up bonuses that go against the public opinion’s mood of the day, as well as limiting their salary to a “reasonable” amount.
His decision to abandon his non-competition bonus is likely a good choice personally, but hardly a good one for EADS, nor one that reflects particularly well on his leadership and management qualities. By scoring cheap political points, he is attempting to keep his record at the head of EADS away from too much scrutiny, nothing else.
EADS’ performance since 2006 hasn’t been good. Revenues have gone up quickly (between 4.6 and 6.4% year on year depending on how you calculate it), but profits have been stuck in the doldrums (0.7% to 0.8% per year). Between 2001 and 2006 EADS grew revenues roughly two thirds as fast (2.7% to 5.3% year on year) but had a much better profitability (1.9% to 2.1% per year).
Sure, the sub-prime and European debt crises have had a deep impact on EADS’ business under Gallois’ tenure, but 2001-2006 had the dot-com bubble crash as well as the 9/11 attacks that had a devastating impact on airlines. Boeing, BAE Systems, Northrop Grumman and Lockheed Martin all weathered the crises since 2006 better than EADS did, keeping their profitability significantly higher whilst keeping revenue growing. Boeing, for instance, has been 7 times more profitable than EADS, despite growing their revenues only half as fast as EADS.
Profit alone isn’t an accurate indicator of a business’ performance. It is after all nothing more than the cost of capital and debtors’ confidence. But even when one looks at other aspects of the business EADS doesn’t seem to be in a stronger position today than it was five years ago.
Astrium, EADS’ space business, is stuck manufacturing Ariane 5s, with almost no product development. The Space Tourism Project hasn’t been heard of since 2007, and it’s looking increasingly unlikely that there will be a first launch in 2012 as scheduled. Ariane 6 is more a dream than an actual project, with the first missions planned to start around 2025. Space has been for the past 30 years a sector with slow and incremental development, but over the past 5 years things have flared up.Virgin Galactic, Bigelow Aerospace, SpaceX and a whole host of others are emerging onto the scene, backed by wealthy investors who are prepared to commit hundreds of millions in investment to go toe to toe with Astrium. They have aggressive product development schedules and it’s looking increasingly unlikely that Astrium will be able to live off Ariane 5 alone until 2025.
Eurocopter has a solid market share, but since the 1990s has only been incrementally improving already existing helicopters produced by the group. The only “new” craft is the X3, but even that seems to be a purely defensive move as its test flight was just over two years after the Sikorsky X2… Which is a helicopter with almost the same configuration and aims. Sikorsky plans to turn the X2 into a military craft by 2014 (the S-97 Raider), but Eurocopter’s X3 is only scheduled to become a product around 2020…
Cassidian are plodding onwards, with an increasing focus on cybersecurity and unmanned vehicle systems, but overall nothing significant happening over the past decade. Eurofighter is reaching the end of the Typhoon program, and it’s looking increasingly unlikely that there will be a follow-up project to keep Eurofighter in business given how expensive and underwhelming the Typhoon ended up being.
All in all, Airbus and Airbus Military are the only bright-ish points on Gallois’ record. Airbus has kept its order books full to the brim, but has focused on re-engineering existing aircraft rather than looking at new designs. Between 1990 and 2006, Airbus launched 6 completely new aircraft designs, which is one every three years on average. Since 2006, Airbus hasn’t announced projects to begin work on any new designs for aircraft. Two airplanes have had their maiden flight since 2006 (A330MRTT and A400M), whilst a third has yet to complete its maiden flight (A350). The A 330 MRTT is a re-engineered version of the A330, which Airbus has been producing since the early 1990s. The A400M closed its first sale in 2003 and entered production in 2007, but will only start being delivered to clients in 2013. The A350 (expected in 2014) had already started before Gallois became CEO, and the first sale was completed only 12 days after he joined EADS… Hardly evidence that he had any input in the early stages of the project.
I can’t see much reason to be enthusiastic regarding EADS’ performance over the past 5 years. Airbus have done fine, but by stretching out time between completely new designs, Airbus is risking making the same mistake Boeing made in the 70s and 80s, when the slow roll-out of new designs allowed a market gap to form, which in turn ended up helping Airbus to emerge. Gallois hasn’t managed to reign in the difficulties of the A400M program, the A350 is already a year behind schedule, and despite strong sales on the Airbus lines, it looks likely that Astrium, Eurocopter and Eurofighter will not introduce a new project for years.
EADS’ low profitability is nothing more than the direct translation of their cost of capital and confidence, which is incredibly low thanks to extremely strong backing by European governments who are both important customers (Cassidian, Eurofighter Typhoon, A400M, Astrium…) and shareholders (the French state owns 22.35% through SOGEADE, the Spanish state owns 7.5%, and the German state exerts considerable political influence over DaimlerChrysler’s 22.35% ownership… combined, this represents over half the voting rights and ownership). However, Gallois hasn’t put this low cost of capital to particularly good use. EADS is hardly better prepared today to tackle the future than it was five years ago. The Power8 restructuring program has fallen short of its promise, the project pipeline seems as dry as ever, whilst the structural difficulties that have lead to so many delays and over-runs don’t seem to have been tackled at all.
Gallois’ choice to renounce his non-competition bonus might be a salutary signal to the masses, but his leadership of EADS leaves much to be desired. So much that I think we don’t need more CEOs like him.