British Aerospace chief executive Sir Richard Evans, has conceded that the group, which confirms that it has again held talks with GEC, may be forced to consider vertical integration, depending on the outcome of defence restructuring in France.
"We're talking to everyone in Europe at the moment, and that includes GEC. We would prefer to look at a horizontal integration," he says, but adds that there are "changes taking place" in Europe which may push the group towards linking with a systems supplier rather than a platform house.
A critical factor will be the outcome of the renewed bidding for Thomson-CSF, now restarted in France. Although BAe is linked, through its Matra missiles joint venture with Lagardère, which won first time round, there is growing interest in a rival Thomson-CSF bid from a grouping led by Alcatel Alsthom which brings in Aerospatiale and Dassault, which are themselves on course to merge.
If Alcatel emerges as the winning bid, it seems likely that the grouping could tie up German involvement in missiles and space operations, potentially creating a series of new options for European aerospace-industry consolidation.
A possible response from BAe would be to link up with GEC, with its $5 billion sales in defence electronics and systems. Evans, however, stresses that this is not a preferred option and says that talks with GEC are just one of a series of discussions taking place.
Sources within GEC suggest that the defence-electronics group itself is waiting to see the outcome of the Thomson-CSF bidding before making a move.
Meanwhile, BAe's own financial performance has continued to forge ahead. The group's sales grew by 12% in 1996, to reach ú7.4 billion ($12 billion), led by the core defence business, which delivered 20 Hawk trainers over the year as well as the first of 48 additional Tornados for Saudi Arabia.
Profits before tax and provisions grew by more than one-quarter, to ú456 million, and the year-end order book reached an all-time high of ú19.4 billion. That includes the RAF Nimrod 2000 upgrade award, but excludes the UK's selection of the Matra-BAe Dynamics Storm Shadow missile and new Hawk orders from Australia and Qatar, which will go into the 1997 order book.
The group's main black spot remains the Jetstream turboprop operation at Prestwick, Scotland. Continuing losses from the business pushed BAe's commercial aerospace business into a loss of ú78 million, despite profits from Airbus work and the fact that the Avro regional-jet business is close to break-even. Although the profit figures for regional aircraft are not broken out, BAe gives a guide by revealing that the unit had negative cashflow of ú125 million.
BAe says that the J41 line, now producing ten aircraft a year, is under review and new work is being sought for Prestwick, but adds that there are no plans to cease production of the turboprop.
Source: Flight International
