Avio under the microscope part 2
Board gets pay bump as union demands answers
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Avio board gets 14% pay bump as union demands answers
On 5 April, Avio CEO Giulio Ranzo held an all-hands meeting entitled Avio Next at the company's factory. According to Ranzo, the meeting was "a great occasion to meet and exchange with almost 800 Avio employees and discuss how to approach the challenges of securing flight worthiness, preparing for higher production volumes, and continuing to develop new technologies." This statement was taken from an update shared by Ranzo on his LinkedIn profile. There were, however, no official recordings or a press release regarding the contents of the discussions shared.
However, thanks to a letter sent to Avio management by union representatives seen by European Spaceflight, it is clear that not all in attendance were as enthusiastic about the Avio Next meeting. The letter was sent to management on 27 April with a list of grievances and a call to supply answers to questions raised by an Italian politician through parliamentary channels.
The questions were directed to the Chamber of Deputies to the Prime Minister, Giorgia Meloni, and to the Minister of Enterprise, Adolfo Urso by deputy of the Partito Democratico (PD) and former Minister of Labor, Andrea Orlando. The former minister referenced the Europe in Space Avio Under the Microscope investigation and asked about elements of Avio’s operations relating to several issues, including if cost-cutting schemes and quality control issues caused a pair of Vega failures. Additional questions covered Avio share buybacks, CEO compensation, and the conflict of interest arising from the CEO’s founding and major ownership of In Orbit S.p.A., which is a major Avio shareholder.
The letter to Avio management (full text here) was sent by RSU (Unitary Union Representation), which is made up of 16 representatives elected by Avio employees. The union represents all Avio employees regardless of whether or not they are paid members.
In the letter, RSU outlines a company culture that rewards executives with huge bonuses and lavish perks who then fain financial dire straits when employees request even the most modest pay increases. And that’s not to mention fault for failures. Although Avio CEO Giulio Ranzo is good at publicly accepting responsibility for failures, behind the scenes, he continues to receive huge bonuses year after year while the responsibility to bear the financial, physical, and mental burdens of returning a vehicle to flight is placed squarely on the backs of the company’s employees.
During Ranzo’s speech, he compared the challenges faced by Avio to those faced by Shackleton and the crew of Endurance during his expedition in the early 1900s. As a reminder, Endurance was trapped in the ice while attempting to cross the Antarctic continent via the South Pole. Shackleton and five other crew members embarked on a perilous months-long journey in a lifeboat to reach civilization and mount a rescue effort to recover the rest of the crew. This comparison could not be less apt.
Firstly, comparing returning a rocket to operational flight when it appears to have failed because of cost-cutting and poor quality control to a life-and-death fight for survival is more than a little unhinged. However, I’ll give Ranzo the benefit of the doubt and allow a level of hyperbole that managers with little knowledge of the plight of the average worker often tend to utilize to “motivate”. Here’s the thing, though. Avio employees are clearly not motivated by this rhetoric, as indicated by the union’s letter. Ranzo also seems to forget that Shackleton was on the lifeboat that went for help. With Ranzo still receiving bonuses that seem detached from the financial performance of the company, a more apt interpretation would be Ranzo staying at a five-star Antarctic hotel after sending his employees out to find a solution to a problem he and his management team helped cause by selecting cheap wood for the throat insert of Endurance.
In addition to the union letter to management, I have also received information that reveals that Avio conducted an “internal climate survey” at the end of 2022. The survey called on Avio employees to provide an anonymous assessment of Avio’s internal climate and the contributions of the management team. The results of the survey, which were presented at the Avio Next meeting, clearly demonstrated that employees had a negative few of the company’s internal climate and that there was little confidence in the current management structure.
Another allegation presented in the union letter is that Avio management is subverting a deal struck with the union for a hybrid working arrangement. Under the agreement, a select number of Avio employees are permitted to work from home for four days each month. Avio has, however, continuously subverted that very reasonable agreement in a manner that doesn’t explicitly violate it, which would be against the law. An example shared with me is that when an Avio employee makes a request to work from home on a Friday, the employee’s manager would schedule a progress meeting that would require the employee to come into the office. Although this doesn’t directly violate the union agreement, it certainly goes against the spirit of the agreement.
In a late development, as I was preparing to publish, I received information about an email sent by Avio senior management on Friday 5 April to employees who receive a variable bonus based on the results of individual assessments. This group mainly includes middle to low management. In other words, the line managers who actually have a significant impact on the day-to-day operations of a company but who see little in the way of reward for that responsibility. The email outlines a new individual assessment method that will be implemented. The new assessment has five key components with the fifth component being the one that really stood out for me. It relies on a level of corporate doublespeak that introduces a level of subjectivity to what should be an objective review process. This component outlines the employee's need to adhere to a set of "behavioral pillars" that were introduced during the Avio Next presentation. Thanks to the photos shared by Ranzo on LinkedIn, we know what those pillars are: Be Generous, Be Accountable, Speak Up, Kill Variability, and Team Up. What's most entertaining about this is that I would hazard a guess that very few Avio senior managers would live up to these "behavioral pillars". It is not hard to see how subjective metrics like this could be used to reduce the number of variable bonuses Avio will be required to pay each year. The other four components of the assessment are as follows:
Assignment and measurement of individual targets and performances (present in previous assessments).
Horizontal feedback - Instead of what has occurred in the past with all evaluations being only supplied by direct managers, feedback will now be sought from employees that most often work with the employee.
Meritocracy - This one is not fully explained but appears to state that performance evaluations should be given based on merit. This seems rather self-explanatory and obvious but is equally threatening in its vagueness.
Mid-year performance evaluation (present in previous assessments).
The fantasy of Avio-set timelines for PNRR-funded projects
Avio has been awarded nearly €400 million in European Union funding for three projects. The first is for the methane-powered M60 first-stage engine (€120 million), the second is a two-stage demonstrator powered by the M60 and M10 engines (€217.5 million), and the most recent is for a green liquid propellant engine for in-orbit servicing and space logistics applications (€55 million).
All three projects would, under normal circumstances, have a multi-year development roadmap that would mature in the latter half of the 2020s. Unfortunately, due to the fact that the projects are being funded through Italy’s National Recovery and Resilience Plan (PNRR), the instrument which the country utilizes to distribute European Commission NextGenerationEU Covid recovery funds, all three projects are required to be completed by 2026. Even under the most ideal conditions, this would be a tall order. These, however, are not ideal conditions.
According to a source within the company, high levels of turnover have meant that many vital positions are held by newcomers with little to no experience. This turnover is a side effect of the souring company culture and a management team that seems unwilling to assist its workforce through this tumultuous period. The result is that although the company has mastered the technology required to build and deliver Vega and Vega C, it is struggling to find the resources to devote to the PNRR-funded projects that are necessary to even come close to the ambitious 2026 deadline. Nothing I have seen over the last few weeks makes me believe that Avio is on its way to rectifying these issues. This begs the question, what happens when Avio misses the deadline? Will the Italian taxpayer be required to step in to reimburse the European Commission with the nearly €400 million in funding?
For its part, the European Commission appears to be aware that some or many of the deadlines being set by the Italian government to deliver on PNRR-funded programmes are fanciful. In March, Reuters reported that the European Commission opted to freeze a €19 billion tranche of NextGenerationEU funds to Italy. The commission requested clarification over Rome's efforts to meet the "targets and milestones" needed to unlock the money.
Board member remuneration
These things always have innocuous names. In this instance, the Board of Directors' Motion on Item 3.4 on the Agenda. So, what is it? Well, it’s a motion to increase the base pay of the chair of the board of directors by 8.3% and the base pay of each director by more than 14.2%. Now, let me remind you that, according to the company’s own remuneration report, the average pay of an Avio full-time employee has risen by effectively 0% in four years. In 2019, Avio employees were paid on average €46,347. In 2022, that rose to €46,534 amid record-breaking inflation. So, Avio employees have essentially taken a pay cut for the last four years.
The board proposed that its own base pay for each director be increased from €35,000 per annum to €40,000 per annum. The chairperson of the board of directors also had an increase from €120,000 to €130,000 per annum. And this is before additional compensation due to directors "holding special offices". For instance, Letizia Colucci and Raffaele Cappiello were each paid €15,000 on top of their base pay in 2022 for their contributions to the “Member Control and Risks Committee”. That meant that Cappiello and Colucci were paid €45,000 each, which is pretty close to the €46,534 average pay for full-time employees at Avio. And that's before the increase. In 2023, the pair will be earning approximately €3,500 more than the average Avio employee. And let's remember that board members serve Avio on a part-time basis. Cappiello, for instance, is a partner at the Italian law firm Libonati-Jaeger and also services on the boards of B&C Speakers and Mediaset. He is also the Director of the Pension Fund S.I.A.E and a member of the Consultative Committee of the Tessalo Fund. And this is just what Avio displays on its website. The tiny sliver of time he dedicates to Avio is somehow worth more than a full-time employee of Avio. I feel like I'm taking crazy pills here!
Now, there’s got to be a justification for the increase, right? Well, the board does supply a few. Firstly, the board commissioned an “independent external expert” to conduct a benchmark analysis against which the board member’s pay was compared against “listed Italian companies comparable to Avio S.p.A (“Avio”) in terms of size.” The report produced by this independent expert is suspiciously absent. I also think it’s interesting that they examined listed companies comparable in terms of size. This does seem to suggest that industry type and financial performance were not considered or maybe they were and the results were inconvenient. The other reason given for the increase is a “need to secure the contribution of outstanding professionals who can devote to the performance of their function the time necessary.” It’s almost like the exact rationale one would use to advocate for employee pay increases. I wonder why that argument works when it comes to board members but not when pay increases for the people actually working on the rockets are being negotiated.
There are a few details that should be kept in mind when evaluating the board’s pay increases. Avio board members have been paid €35,000 per annum since 2016. Additionally, the new €40,000 base pay will be in effect for the next four years. However, when you consider how the average employee pay has risen by effectively 0% since 2019 (the first year this figure was reported by Avio meaning that it may extend further back than 2019) the board member increases are still egregious in my opinion.
A tale of two incentive plans
Avio introduced two stock-based incentive plans. On the surface, it appears that one is for employees and one is for management and that the employee plan offers a chance for employees to cash in on the success of the company. That is, however, until you read the fine print.
Let’s first take a look at the stock-based incentive plan for senior managers. A total of 130,000 shares have been made available for this incentive plan. By current Avio stock prices, that equates to just over €1.2 million. The plan awards stocks to the CEO, senior executives, and other managers with strategic roles if key performance targets are achieved. The targets in question and their weighting are mostly stated with the company being required to increase cumulative three-year reported EBITDA and the average return on invested capital. These indicators count 42% each to the total. The company is also required to improve key environmental, social, and corporate governance indicators across gender diversity, gender pay gap, waste management, and employee training. Each of the four indicators counts 4% of the total. The minimum and maximum performance levels for each indicator can be found in the table below.
As you can see, the key financial indicators do not have a predefined target. If the target is based on the company's 2022 financial performance then the reported EBITDA baseline is just €21.4 million. For reference, Avio reported EBITDA figures of €42.6 million in 2019. So, an 80% increase in 2022 reported EBITDA figures wouldn't even return the company to 2019 levels. And over the next three years, the company is expected to ramp up the production and operation of Vega C and the P120C boosters that will power both Vega C and AraineGroup's Ariane 6. And that's before we include its growing defence orders. It's not hard to see how the EBITDA targets could be easily surpassed.
Then we get to the employee stock-based incentive plan. On the surface, things look good. A total of 300,000 shares have been made available for this incentive plan, which equates to approximately €2.8 million. The Plan is for Avio Group employees who play a key role in achieving Avio's strategic goals.
The plan does state that the company’s CEO and senior executives are not eligible for this incentive plan. This is, however, a misdirect. The statement in the introduction plainly states that the CEO and senior executives will not be eligible. However, under the beneficiary section, it states that “Directors of Group subsidiaries are included if they are employees of Avio.” Now, who do you think is more likely to play a key role in achieving Avio’s strategic goals: an Avio employee working on the line constructing rockets or a director of a group subsidiary?
If an ordinary employee does manage to secure shares, however, the plan has terms and conditions. Firstly, there is a 36-month vesting period. That means that an employee will have to wait and be employed at Avio for three years after receiving the shares to actually receive them. In the event of an employee leaving the company early, two options can be enforced. The first is for a “Bad Leaver” with any employees falling into that category forfeiting all shares. The second is for a “Good Leaver” who will receive a pro-rata amount of the base number of shares.
A ”Bad Leaver” is fairly self-explanatory and although it definitely does leave the system open to abuse by Avio management, it’s understandable. The fine print of the “Good Leaver'' allocation is, however, not. The pro rata amount owed to a “Good Leaver'' is not based on months worked. Instead, it is based on “the Board's sole discretion.” The more egregious condition for me, however, is that death is no excuse. If an employee passes away during the vesting period, his or her heirs will only receive the board-approved pro-rata amount. Illness or injury is also only acceptable if it keeps the employee out of work for less than eight months. Anything more and that employee is shit out of luck and will only recieve the board-approved pro-rata amount. It might just be me, but this feels like a shockingly callous way of doing business.
I will admit there was a time when I celebrated and defended Avio. That is no longer true. Every decision I look into and every Avio employee I speak to proves to me that this company is sick and in desperate need of a cure. Avio management has identified its own employees as being responsible for the rot, a tendency that is so often adopted by ineffective leadership. My diagnosis points instead to leadership. If Ranzo truly held himself accountable for the failures of Avio over the last few years, he would have stepped down by now. This begs the question, can Europe really rely on Avio under its current leadership to deliver on the continent’s sovereign launch needs?
A request for comment was sent to Avio but as of writing, no statement has been returned. If a statement is received, it will be added here.
Come one, come all, Latitude is hiring - Latitude announced that it had launched a major recruitment campaign to support the development of its Zephyr launch vehicle. According to the French launch startup, it hopes to fill 100 new positions across a range of fields including propulsion, systems, avionics, systems integration, finance, sales, communications, HR, and project management. With less than 100 employees currently employed by the company (according to the company's LinkedIn page), the drive is a significant step forward for Latitude.
A glitch in the matrix - Netherlands-based aerospace and maritime composites' manufacturer Airborne announced that it had completed the first composite upper stage tank as part of the ENVOL project. ENVOL, which stands for European NewSpace Vertical Orbital Launcher, is a consortium-driven project led by Norwegian aerospace and defence company NAMMO. The project received €3.9 million in Horizon 2020 European Commission funding under the Innovative launch system for small satellites initiative, a project that is scheduled to come to a conclusion this month. The vehicle is envisioned as being capable of delivering 200 kilograms to low Earth orbit by as early as 2024. However, there are currently no plans to actually offer the rocket as a commercial service.
A heavy-lift future - ESA has awarded contracts to ArianeGroup and Rocket Factory Augsburg to conduct studies that will assess the feasibility of reusable and cost-effective heavy-lift transportation. The studies will also identify key technologies needed to develop the launch system. The two studies are expected to be completed by September 2023. The project has one of the more tortured acronyms with PROTEIN standing for euroPean Reusable and cOsT-effective hEavy lift transport InvestigatioN.
They got the land, now what? - PLD Space has signed an agreement with the City Council of Elche and the Generalitat Valenciana for the development of a new rocket manufacturing plant. The agreement included the transfer of land to the Spanish launch company. PLD Space has committed to investing €85 million into the 40,000 square metre plant which will employ over 300 people. I am not sure where PLD has that 85 million stashed, but it definitely doesn’t have anything approaching that currently on hand.
The most beautiful image ever captured? - The European Organisation for the Exploitation of Meteorological Satellites (EUMETSAT) and ESA released the first image of Earth captured by its Meteosat Third Generation Imager-1 satellite, and it is breathtaking. The image, captured by the satellite’s imager at 11:50 UTC on 18 March 2023 at an altitude of 36,000 kilometres, shows much of Northern and Western Europe and Scandinavia cloaked in clouds, with relatively clear skies over Italy and the Western Balkans. The satellite was developed and built under EAS leadership and was launched aboard an Ariane 5 in December 2022.
It’s bikini weather - The Exploration Company has successfully completed a vacuum chamber testing campaign for its Bikini capsule demonstrator. The objective of the test was to evaluate the adhesion of the thermal protection in a vacuum environment. The demonstration capsule is a scaled-down version of the company’s robotic Nyx spacecraft that will host payloads in orbit and return them safely to Earth for evaluation. The Bikini capsule will be followed by a second demonstrator before a full-scale Nyx spacecraft is launched. It is expected to be launched aboard the maiden flight of Ariane 6.
Dude, we can take my van - French launch aggregator RIDE! Space has signed an agreement with in-orbit logistics startup Exotrail. Under the agreement, Exotrail will be able to access RIDE!'s launch-on-demand digital platform for the company's spacedrop services. The Exotrail spacedrop service will utilize the company’s spacevan orbital transfer vehicle to offer launch services.
By your powers combined - A group of European space and telecommunications companies has announced a partnership to respond to the European Commission's call for tenders to deliver on its IRIS2 (Infrastructure for Resilience, Interconnectivity and Security by Satellite) communications constellation. The consortium will be led by Airbus Defence and Space, Eutelsat, Hispasat, SES, and Thales Alenia Space. The consortium will also rely on the core team of Deutsche Telekom, OHB, Orange, Hisdesat, Telespazio, and Thales. Now all we need is a similar consortium made up of NewSpace players, and we'll be ready for an interesting bidding process.