Airbus Exec Sold Options Before Stock Took a Dive
Airbus’ woes worsened Friday as a top executive defended his sale of stock options worth $3.1 million months before share prices plummeted this week on news of delays in production of a new super-jumbo airliner.
French regulators said Friday that they were investigating the sales in March by Noel Forgeard, co-chief executive of EADS, Airbus’ parent company, and by his family and other executives.
Legislators quickly demanded a parliamentary inquiry on the stock option sales as well as the Airbus A380 production snags that were announced Wednesday, causing a 26% drop in the stock price that wiped out $7 billion in value. The impact was worsened by the loss of a major order to rival Boeing Co., headquartered in Chicago.
Critics called for the ouster of Forgeard, whose stormy year at the helm of EADS has been marked by squabbles with German fellow executives. Forgeard, an ally of President Jacques Chirac, has led the ambitious project to develop the world’s biggest passenger jet, envisioned as a symbol of a unified Europe. But production has been slowed by problems with wiring.
The escalating bad news adds up to “the worst crisis in the history” of the Franco-German European Aeronautic Defense & Space Co., Le Figaro newspaper declared Friday.
The troubles show that despite Europe’s rise as a vast economic bloc in the global market, cumbersome bureaucracy and strife among political and business elites still pose hurdles in cooperation. And with France afflicted by political crisis, economic malaise and scandals, the blow to a showcase company in an aviation sector closely aligned with the government hits hard, experts said.
“This is not good for national morale at a time when morale-lifting would help,” said Francois Heisbourg, director of the Foundation for Strategic Research in Paris. “It’s somehow seen as worse over here because there is a lot of pride and national feeling invested in the fate of Airbus.”
Despite Singapore Airlines’ choosing a Boeing plane over Airbus’ A350, and demands from airlines for compensation for delayed delivery of the A380, some analysts said Airbus remained a solid business and that profit and jobs would not suffer greatly.
“The world markets are in a storm and the smallest bad news causes a reaction,” said Marc Touati, chief economist for Natexis Banques Populaires in Paris. “I think it’s exaggerated in this case compared to the industrial reality of the company. What the company has to do is react quickly and put out the fire by communicating effectively.”
But the news about the March stock sales added the specter of potential misconduct to the corporate drama.
“What is happening at EADS is unacceptable,” Henri Emmanuelli, a leader of the opposition Socialist Party, said in a statement calling for an inquiry by a legislative committee. “Whether it’s disorganization in the production line, which will have weighty financial consequences, or the behavior of stockholders or the personal and immoral attitude of its president, it all contributes to discrediting the European and French aviation industry.”
Forgeard denied accusations that he and others sold stock options because they had inside information about the A380’s delays. Such conduct would be illegal under French law.
“It was an unfortunate coincidence,” he told Europe 1 radio. “If I had had the slightest privileged information, I would have never sold those options. Did I benefit from privileged information? Categorically, no....The question is whether between the 9th and 17th of March, I knew what we announced 48 hours ago after two months of very difficult studies.”
In addition to Forgeard’s sale of $3.1 million worth of stock options, his three adult children each sold $1.75 million worth of shares, according to news reports. Five other board members also sold shares or exercised stock options during the same period, Forgeard said.
Union leaders and other critics said they found it hard to believe that Forgeard did not know in March of the production problems, which he said Friday were concentrated at a factory in Hamburg, where much of the wiring work is done. If he is telling the truth, they said, it reflects poorly on him as a manager.
“He looks bad either way,” Heisbourg said.
The Financial Markets Authority, a French regulatory board, said Friday that it had been investigating EADS “for several weeks.”
Although Forgeard acknowledged the existence of a “grave crisis,” he emphasized that no orders for A380s had been canceled. “I am only thinking about one thing, which is recovery and emerging from the crisis,” he said.
The troubles could help Boeing reclaim the title of the world’s largest aircraft maker, which Airbus attained with great fanfare in 2003.
Richard Aboulafia, an aviation analyst and longtime critic of the A380 program, said Airbus had taken a huge gamble on a massive and costly project that could prove catastrophic. “This monstrous act of hubris has endangered Europe’s aviation future,” Aboulafia said
Airbus, he said, reflects the convergence of European politics and economics. France and Germany play dominant roles in the European Union’s often complex and sluggish process of balancing the political and economic interests of 25 nations. Some projects, such as the introduction of a common currency, have been smooth. But fierce disputes over a proposed European Constitution show that deep divisions persist.
Airbus developed the A380, a double-decker that would seat more than 500 passengers, to create European jobs, Aboulafia said, and to satisfy aviation egos that have long wanted to surpass Boeing’s 747, currently the world’s largest passenger jet.
“The irony is that Airbus was a successful model of the European Union,” he said. “They’ve squandered it all away on the A380.”
With the production delays, the A380 development cost could exceed $15 billion, far more than the initial estimates of $10 billion, and hamstring Airbus’ ability to quickly develop models to compete with Boeing’s new fuel-efficient 787, he said.
The first A380 was supposed to be delivered in April but will not be ready until December. Airbus has pushed back delivery of subsequent A380s by six to seven months, citing “bottlenecks” in the manufacture and installation of electrical systems resulting from changes made during test flights.
The global mobilization of supplies for the super-jumbo jet’s construction is unprecedented for an industrial project. Airbus has said that movement of parts will rival the Marshall Plan, the post-World War II effort to rebuild Europe.
More than 15,000 suppliers in 30 countries, including several thousand in the U.S., are involved. Plants in Britain assemble the wings, workers in Germany build the fuselage, and those sections are then shipped to Toulouse, France, for final assembly.
Airbus engineers have worried about the complexity of the process, telling The Times in 2003 that any kinks in the intricate global delivery chain could delay the A380 and prove financially devastating.
Economist Touati attributed the delays to a desire to ensure the safety and reliability of a high-stakes product.
“The airplane is new and it is going to take longer,” he said. “I prefer that they take extra time to make sure they will have a trustworthy airplane.”
Heisbourg said he did not think the blame lay with the far-flung production system. Instead, he said, EADS management had been distracted by turmoil between top French and German executives. In an unwieldy arrangement, Forgeard serves with a German counterpart. His appointment last year exacerbated Franco-German conflict in the company as well as his tensions with Arnaud Lagardere, co-chairman of the company board, Heisbourg said.
EADS also recently suffered repercussions of a scandal involving French Prime Minister Dominique de Villepin, who has been accused of trying to smear rivals with a false list of secret bank accounts. Two EADS officials, including a former company vice president close to De Villepin, have been accused by prosecutors of creating the list.
“That seems to have been another distraction,” Heisbourg said. “What was management doing to discover so late in the day that there was a really big production problem?”
Rotella reported from Paris and Pae from Los Angeles.
