In order to maximise value for its shareholders and to balance its portfolio, Management intends to reinforce EADS’ position as a leader in major global aerospace and defence markets. Beyond implementing solutions for current operational challenges, EADS will continue to focus on providing superior value to its customers through innovative product and service solutions. The Group has defined four long-term strategic goals aimed at achieving sustainable value creation for its shareholders:

• Target a long-term leading position in commercial aircraft: Despite the difficulties encountered in 2006, EADS will continue to strive for leadership in the commercial aircraft market in terms of product innovation and customer satisfaction. In particular, it will seek to offer a complete product portfolio to its customers, while at the same time further developing its international partnerships. The full control of Airbus enables further integration within EADS and additional long-term efficiency potential.
• Develop strong growth drivers to improve the portfolio balance: Faced with governmental procurement budget constraints and the scarcity of new development programmes in Europe, EADS intends to pursue its growth strategy by taking a global approach, and will accelerate efforts to offer new solutions by leveraging its broad base of existing capabilities and products. The Group will consider all options for further growth, including targeted acquisitions that strengthen long-term organic potential, enhance its overall competitive position and add capabilities to its portfolio. Management is particularly focused on increasing EADS’ presence in services markets. EADS currently has a young and rapidly developing commercial and defence fleet that has entered into service, which it will seek to support throughout its life cycle.
• Become a truly global industrial group: To ensure continued access to the growth potential of markets where the traditional commercial approach has reached its limits, EADS is designing a long-term industrial strategy that incorporates an industrial footprint in key markets around the world. This approach is also intended to reduce the Group’s exposure to U.S. dollar weakness through enhanced global sourcing and offshoring of production.
• Restore adequate profitability and preserve long-term financial soundness: By acting to reduce costs and streamline its industrial organisation through programmes such as Power8, EADS will strive to rise above its immediate industrial challenges and ultimately re-establish a level of profitability attractive to its shareholders. EADS will also seek to tailor its funding policy to meet the long-term resource demands associated with development of new products in a way that ensures an optimal balance sheet structure and takes into account a potential downturn in commercial aircraft demand. The non-Airbus businesses have continued their overall positive trends, with a record EBIT* of €810 million in 2006. The target is to further improve this, both in relative and absolute terms.

To achieve the strategic objectives above, further integration of Group operations will be paramount. Accordingly, the Group will seek to develop a common approach to marketing and emphasise technology and process sharing in order to stimulate growth and generate cost savings. EADS management has also identified three main growth and profitability drivers for the future. These are defined as the Triple I’s of EADS: Innovation, Internationalisation and Improvement.

Innovation – Focus on all aspects of technology and offer new solutions

Innovation in product, technology, manufacturing and customer offerings will define EADS’ future. With development cycles shortening and new competitors emerging in all fields, EADS must maintain its technological edge and cover a broad spectrum of capabilities in order to remain a market leader.

Compared to its peers, EADS has consistently devoted more resources to research and development, both in absolute numbers and as a percentage of sales. In 2006, EADS spent approximately €2.5 billion in self-financed research and development, equivalent to over 6% of its revenues. It also strengthened its technology department through the appointment of a new Chief Technical Officer, who will report directly to the CEOs and members of the Executive Committee.

To maintain its innovative edge, EADS has set challenging targets for future technology innovation. It will seek to systematically employ the latest digital design and engineering tools in order to complete major platform developments more quickly, and will seek to accelerate the pace at which it reviews its core technologies so as to close gaps against the competition. The Group will also increase the number of technological programmes developed in cooperation with academic and industrial partners worldwide.

In the commercial arena, the growth of businesses such as Eurocopter and Airbus will depend on their ability to face such challenges as environmental issues, shortage of oil supply or increasing expectations in security and safety. Future key technologies such as composite materials, advanced aeronautic research and advanced PLM (Product Lifecycle Management) tools build the backbone of tomorrow’s market leadership. Indeed, in order to leverage on these technologies, those divisions need to build on the combination of know-how and resources available Group-wide.

In the defence and space sectors, customer demand has been influenced by the ongoing transformation of U.S. and European defence forces and public safety agencies, as well as the need for more efficient defence spending. As a result, EADS must offer the latest solutions in lead system capability for defence and homeland security programmes (such as C4ISR), border security, extended air defence, unmanned aerial vehicles and space applications, while simultaneously building on existing successful platforms and military derivatives of civilian products.

In addition to offering the latest systems solutions, EADS will also focus on offering the most innovative services solutions in order to broaden its programme leadership. In particular, EADS intends to expand its outsourced service offering based on the recent experience it has gained through long-term contract management.

Internationalisation – Becoming a Global Industrial Group

In order to gain a foothold in certain countries, having a true industrial presence is often decisive. Such development must be orchestrated at the Group level in order to anticipate needs more quickly, generate synergies and ensure that business units are employing a cohesive strategy.

Consistent with this approach, EADS is seeking to establish itself as a strong local player in key markets such as the U.S., China, Russia, South Korea and India. EADS’ implementation of a long-term vision and industrial footprint in these markets is aimed at establishing long-term market access, while benefiting from high market growth potential, technology potential and natural hedging, risk-sharing opportunities and structural cost advantages whenever possible. In 2006, EADS pursued efforts to strengthen its industrial presence in key markets by making targeted investments and entering into strategic partnerships.

In the U.S., the goal is to establish a firm presence as a valued corporate citizen in the world’s largest defence and homeland security market. EADS is in the midst of pursuing a four-pillar strategic approach: creating a U.S. industrial presence, developing transatlantic co-operations, acquiring small/mid-sized defence companies and cooperating with U.S. prime contractors. EADS has partnered with key players in the market: the Military Transport Aircraft division with Raytheon for the Future Cargo Aircraft campaign, Northrop Grumman for the KC-30 Tanker and Eurocopter with Sikorsky for the Light Utility Helicopter (LUH) programme. The year 2006 marked a key milestone, as the U.S. Army selected Eurocopter to act as prime contractor for its LUH programme, with a potential total life-cycle value of over $2 billion.

China has been the pioneer country for the implementation of EADS’ long-term industrial approach, with industrial cooperation progressively increasing over the past several years. Besides signing an agreement with a Chinese consortium to establish an A320 final assembly line in China during 2006, EADS worked on implementing the key strategic agreements it had signed with Chinese partners in prior years. For example, Eurocopter and AVIC II began joint development of the EC 175, a new multipurpose helicopter. The Group is committed to its long-term strategic partnerships in China in order to sustain its leadership in the commercial aircraft market.

In South Korea, Eurocopter and KAI are in the development phase of a brand-new, 8 ton, helicopter for military transport. This project is expected to serve as a strong foundation for further expansion of EADS’ position in the country.

India has already proven to be a strong growth market for commercial opportunities (accounting for approximately 7% of total EADS backlog), and in September 2006 the Group decided to develop a technology centre in the country. This will allow EADS to expand its local presence and at the same provide support to its customers. The current challenge is to build on these efforts in order to gain a foothold in defence, which represents the largest share of India’s market potential.

The development of Russia’s economy is promising, and the Russian aerospace and defence industry has grown stronger as it restructures and consolidates. EADS has a 10% stake in Irkut, which is a key player in the future industrial landscape of Russia. EADS has also formed a joint venture for a freighter conversion in Russia. Finally, EADS and leading Russian aerospace industry executives have formed a strategic committee in order to coordinate their mutual interests going forward.

Improvement – Delivering EADS’ backlog on-time and at optimal cost levels, with a focus on quality and customer satisfaction

Transforming the Group’s record backlog of €262.8 billion into benchmark profitability will depend on the Group’s ability to improve operational performance, measured in terms of time, cost and quality, both within EADS and at its key suppliers.

Management has prioritised the successful implementation and execution of improvement plans and projects throughout the Group. Improvements in operational performance will require real-time visibility of the status of all operational parts and data flows with EADS and its key suppliers. These efforts will be supported by the integrated planning and execution of closed-loop collaborative processes and tools designed to support effective decision-making and to enable the launch of early recovery actions.

Development of the A380 has indicated the need for change and improvement. Accordingly, Airbus will seek to integrate its own internal processes and, at the same time, make itself a more integrated part of the EADS Group. Airbus is currently implementing a new competitiveness programme: Power8. This programme looks at all aspects of the company to make it leaner, more integrated, more efficient and more productive. The need to improve is all the more imperative due to a marked weakening of the U.S. dollar against the euro. Power8 is the prerequisite for helping to ensure success and profitability in the future.

Successful implementation and execution of improvement plans and projects throughout all divisions and corporate departments will therefore be given the highest priority in the years to come.