CHRIS JASPER LONDON
The European aerospace industry that will present at this year's Paris air show has completely transformed itself over the last decade
All industries undergo change, but in the aerospace sector the last five years have seen revolution replace evolution. A frenzy of merger activity has witnessed old rivals combining forces, familiar names being swept away and established companies propelling themselves into new and unfamiliar activities.
This transformation began in the USA, but in recent times it has been most marked in Europe, where governments and major aerospace players have responded to the pace of change across the Atlantic by embracing a wholesale restructuring of their own.
So complete has been this upheaval that on view at this month's Paris air show will be a European aerospace landscape almost unrecognisable from that of only a few years ago. Gone are the old "national" champions such as British Aerospace in the UK, Aerospatiale and Thomson-CSF of France or DaimlerChrysler Aerospace (Dasa) of Germany, to be replaced by new pan-national behemoths able to rival the US giants in size (see table on page 104).
This transformation had its origins in the end of the Cold War, which led to a collapse in defence spending and made a thinning of the supplier base inevitable. At the same time, the capital costs of military programmes have continued to increase, causing a scramble to attain the critical mass necessary to pursue such projects.
Though the merger process has been fuelled by such defence-side factors, its impact on the civil sector has been dramatic. The formation of EADS (European Aeronautic Defence and Space) may have been continental Europe's response to earlier US moves by Lockheed Martin, Northrop Grumman, Raytheon and Boeing, but its most important consequence was to accelerate the transformation of Airbus into a single company.
EADS, it should be remembered, arrived almost by accident. Forged last June from the union of Aerospatiale-Matra - itself the result of a merger between state-owned Aerospatiale and the Matra Hautes Technologies wing of the La Gardère media empire - Germany's Dasa and CASA of Spain, EADS came about only because Dasa was able to swallow its pride and do a deal with Paris after being snubbed by British Aerospace. The UK group had instead taken over Marconi Electronic Systems to form BAE Systems.
Forced or not, the formation of EADS meant that a single company now owned 80% of Airbus, making it relatively simple to establish the airframer as an integrated company after bilateral talks with BAE. Those talks occurred earlier this year.
Airbus has already shattered Boeing's dominance of the airliner market, and its new structure should allow it to cut costs and improve profitability. Aerospace analyst Neil Hampson of Roland Berger believes the launch of the A380 ultra-large airliner, which also came earlier this year, may be the icing on the cake, in that it at last gives Airbus a full product portfolio.
"Airbus has an equal or leading product in every market now for the first time, and that's very important," he says, adding that Boeing's Sonic Cruiser - which the US company claims will cater for an ever-more complex point-to-point market ignored by Airbus - is in reality "an admission that in a large area Boeing has lost the battle". These confrontations notwithstanding, the airliner sector is now a comfortable duopoly, so that the enmity between Boeing and Airbus should not be overplayed; both will ultimately be happy with a stable 50% of the market.
Regional markets
Things have been quieter in Europe's regional aircraft sector. BAE has pressed ahead with its RJX, and Fairchild Dornier remains pledged to challenging the dominance of the (heavily subsidised, it claims) "big two" - Bombardier and Embraer.
European turboprop manufacturer ATR, a joint venture between EADS and Italy's Alenia, may point the way towards consolidation, however. ATR plans to follow the Airbus blueprint towards integration, but is at the same time finalising a marketing alliance with Embraer. The Brazilian company in turn hopes that its marketing agreement with Toulouse-based ATR might allow it to get closer to Airbus, to the end of providing the bigger company with a sub-100 seat capability.
Europe's three primary manufacturers - EADS, BAE and Thales (formed after France's Thomson-CSF bought the UK's Racal) - are now of such a size that they can look their US rivals squarely in the eye. Hampson regards this as Europe's second major achievement.
The three have staked out very different territories: EADS is the self-styled European champion, diversified but focused on Airbus; BAE, primarily a defence systems integrator (with a stake in Sweden's Saab, which in turn purchased one-time rival Celsius), continues to dream of a big US deal; while Thales, Europe's defence and civil electronics heavyweight, has established itself as the number two contractor in the UK and French defence markets (Europe's largest) and is seeking to establish a foothold in the US via a joint venture with Raytheon.
Hampson suggests the three will have to wait a few more years before embarking on further major moves, although the process of tidying up around the edges continues. MBDA, which folds the missiles interests of Alenia Marconi Systems into Matra BAe Dynamics, is poised to launch. Meanwhile, EADS and Alenia are tying up the lose ends of their European Military Aircraft Company alliance, which will control the Eurofighter programme. Though these are defence ventures, Hampson argues that they are important from a non-military perspective in that they give Europe an indigenous capability "which provides a stable revenue base for those companies that produce civil products". Technology transfer from military to civil lines remains important, he adds.
Further down the tree, Europe is also faring well. Profitability has generally improved across the board, with specialist suppliers such as UK companies Cobham, Meggit and Smiths Industries (which has purchased TI Group) now reporting higher margins even than their US counterparts.
In the engine sector, Rolls-Royce continues to dominate, having consolidated its joint ventures (including BMW Rolls-Royce, now R-R Deutschland) and pushed its naval and power generation sectors. However, the future success of its aeroengines business seems less secure with the planned takeover of Honeywell (previously AlliedSignal) by General Electric - a deal that will give GE a top-to-bottom aeroengine capability. Complicating matters is the Engine Alliance venture linking GE with the third major engine producer - Pratt & Whitney. This partnership could act as a buffer to prevent R-R from establishing its own alliance with the United Technologies subsidiary.
In France, Snecma has entered the merger fray, having taken over Labinal (which brought with it Turbomeca and Microturbo). Snecma also bought Hurel-Dubois and merged it into its Hispano-Suiza nacelles and structures division. Other European moves with the likes of Volvo and Fiat have also been mooted, although the future of the top end of the engines market inevitably lies with GE and the CFM International venture.
Avionics impact
GE-Honeywell will also impact the avionics market. European market leader Thales Avionics (formerly Sextant), protected by its position on Airbus and European military projects, is keen to spearhead further consolidation. Rockwell's decision to establish avionics specialist Collins as a stand-alone entity also raises the possibility of transatlantic moves.
Not everything in the European garden is rosy however, and Hampson identifies three areas which give cause for concern. Firstly, he says, the aerospace sector there has been slow to embrace the potential of value-added service provision as an alternative to simple sales. "Everyone is talking about it but no-one is doing it," he says, arguing that the service-oriented approach runs counter to prevailing political philosophies.
Secondly, European research and development spending remains pitifully low, he states, running at around a quarter of that in the USA. He warns that this fact threatens not just programme development, but technological advances in areas such as propulsion and aerodynamics. Thirdly, he says, the failure thus far of the tier-two supplier base to consolidate and take on e-business solutions in areas such as supply chain management leaves it dangerously exposed.
These areas pose challenges, although for the moment Europe should perhaps be allowed a brief excursion into self-congratulation. It has, after all, carved out a brand new aerospace industry for itself.
Source: Airline Business
