Chris Jasper/LONDON
When the world's aerospace manufacturers last gathered in Paris, the fulfilment of Europe's grand aim of gathering its major aerospace players under one umbrella seemed just around the corner. Yet two years on, as the attention of the aviation world once again turns to Le Bourget, it is hard to resist the conclusion that European consolidation has advanced hardly at all, and that, according to some measures, it has receded.
The planned merger between British Aerospace and GEC's Marconi Electronics division dealt a hammer blow to the cause of pan-European consolidation when it was announced in January. The all-UK deal killed off a potential merger between BAe and Germany's DaimlerChrysler Aerospace (Dasa), and was agreed following the collapse of negotiations between GEC and France's Thomson-CSF. The deal thus represented the triumph of national consolidation over alternative mergers which would have better advanced the cause of European unity. In France, too, consolidation has progressed along national lines, with Lagardère agreeing the transfer of Matra Hautes Technologies to Aerospatiale.
While the drive towards the foundation of a single European aerospace and defence company (EADC) has spluttered out, the goal of reforming the multi-national Airbus consortium into a single corporate entity (SCE) likewise seems equally distant. Though the two aims do not need to be pursued in tandem, there is no doubt that the BAe-GEC deal and its impact on prospects for the early formation of an EADC had a knock-on effect on SCE moves, with France dragging its heels as it mulled over an unexpected twist in the merger process.
Yet as the dust settles on the two mega-deals - both of which are set to get the green light from the regulatory authorities - there is evidence to suggest that the cause of European unity has not been fatally damaged.
The position of France is particularly crucial to further progress, and while French sensibilities were offended by BAe's machinations, the collapse of the UK giant's deal with Dasa at the same time gave Aerospatiale and other French players vital breathing space. Rather than falling further behind the game, France has therefore been able to play catch-up, with restructuring by companies including Thomson and Alcatel complementing the merger activity.
The Aerospatiale-Lagardère deal has also been accomplished with minimum fuss, allowing France's industry leader to be moved towards privatisation while retaining an element of state ownership. State involvement in French manufacturers may still be too great for some to swallow, but Paris has nevertheless pulled off a difficult balancing act, leaving Aerospatiale in a far stronger negotiating position should the EADC process be revived.
There is also growing feeling that France is now prepared to talk seriously about consolidation, having been shaken out of its complacency by events which finally forced home the point that the rest of Europe would not wait for it to catch up.
"In both Europe and the USA, progress has been stalled and one of the chief effects is to give the French a chance to re-evaluate how they are playing the game and what their role should be," says Kevin Lynch, a partner with IPG Consulting. "While the Germans were clearly annoyed at the rebuff from BAe, the French were surprised that anything could happen without them. That has changed the French point of view and their willingness to enter into serious negotiations. There was nothing really on offer from France, but now it seems there is."
The fly in the French ointment remains Thomson-CSF. Having failed to pull off the Marconi merger, the company - Europe's fourth-largest aerospace manufacturer last year - must plot a careful course. Notwithstanding Thomson's US ATC affiliate, Wilcox, Lynch points out that Thomson is "just not plugged in to the USA". This is considered a major concern given the market represented by the research and development budget there: some $60 billion compared to Europe's $15 billion.
"The issue is where Thomson's technology goes," he says. "It does not fit into America in any shape or form and it's difficult to see it playing the American game. So how Thomson plays this is the difficult thing."
The negative impact of the stalling of European consolidation has also been diminished by a period of relative inactivity across the Atlantic.
Both Boeing and Lockheed Martin are preoccupied with internal concerns as they attempt to turn around their financial performance, having completed their own mega-mergers a few years ago - Boeing with McDonnell Douglas and Lockheed with Martin Marietta. One analyst points out that Lockheed Martin's share price suffered even before its failed bid for Northrop Grumman (thrown out by the US Government), partly as a result of market disappointment with the integration of Martin Marietta, and he suggests that its ability to do "serious deals" is still in question because of the US Government's refusal to allow any further integration among the major US players.
Boeing and Lockheed Martin must also tread carefully because of uncertainty over the Joint Strike Fighter contract, the award of which will in theory bring a huge potential windfall for one and an uncertain future for the other. The analyst says: "The two big US players are not in the game at the moment, while Raytheon isn't interested and Northrop is for sale. Which leaves Europe to its own devices."
Neither is the SCE picture necessarily bleak. While Airbus should already be a single company according to the original timetable, Lynch suggests the important question is whether or not Europe is agreed on the SCE's ability to deliver value - and he believes that that unanimity already exists.
"It's not just a question of cost synergies but strategic synergies," he says. "Cost is only part of the rationale. It's worth money, but all mergers are really about strategic position and market position. I don't know any chief executives who look at a deal and think only that they can make 'x' amount."
Lynch believes Airbus is potentially healthy enough to act as a vehicle for wider European integration. Airbus' $525 million profit for the business as a whole in 1998, as disclosed by managing director Noel Forgeard, made it more profitable than Boeing, and from a lower turnover, not withstanding the loss taken by BAe, Aerospatiale, Dasa and Spain's CASA via the consortium's central legal construct, which sets aircraft prices.
Airbus can really only be transformed in two ways: through the planned spin-off of its individual elements into an SCE, or through a BAe-Dasa, BAe-Aerospatiale or Aerospatiale-Dasa merger, which Lynch contends would "focus the mind of the other player, causing the whole thing to happen" via a round-about route.
One of these roads, he adds, is likely to be followed over the next couple of years, with the first - and more conventional path - not necessarily the more difficult to follow.
The future of the A3XX project may also be a key determinant in the future of European integration. While the launch of such an expensive project would represent a major gamble for Airbus, the European airframer may be ultimately forced to compete with the Boeing 747, especially if the Seattle giant revives plans for stretched versions of the make type.
The A320 family already offers tough competition for the 737, with Boeing's Next Generation models essentially stretch versions and not, as one analyst puts it, "flying fully into their envelope", so that Boeing may even be forced to launch an all-new 110/190-seater. Yet profits on smaller airliners remain so marginal that Airbus will find it hard to ignore the lure of the super jumbo.
"The A3XX can't be delayed forever," says Lynch. "They have to do the A3XX and if they get it right, then there are big rewards. If they want to provide a product in that market they have to do an SCE."
Synergies
Lynch believes the financial case for the SCE is compelling and could add $3-4 billion in extra value to the current business through the synergies it would offer, providing a more than adequate middle-term reason for doing the deal.
In terms of the valuation of the Airbus partners' assets - a task begun late last year, but now stalled and waiting to get under way again - Lynch believes the figure will be very high. "What you're saying is: 'Here's 40% of the world aircraft market, how much is it worth?'. The answer has to be 'very valuable'."
Based on Forgeard's $525 million profit figure, Airbus could expect to be making $1 billion profit in 10 years' time. Taking into account synergies of size, together with growth in demand and increased market share, this could be nearer $2 billion. A price-to-earnings ratio of 10:1 would therefore suggest a valuation of $20 billion.
Despite this rationale, the SCE - or at least a version of it, given the confusion sown by Aerospatiale president Yves Michot as Flight International closed for press - still seems likely to happen as part of a wider consolidation. While the ultimate goal of EADC establishment remains elusive, progress on the periphery is likely, with Spanish and Italian companies eager to get in on the action. Spain's CASA has attracted interest from Europe's bigger players - and from Italy's Finmeccanica, which is itself manoeuvring for position, having held talks with BAe.
For Dasa, the future is complicated. The company is not a prime contractor and cannot afford to be left out on its own, while its future within DaimlerChrysler seems precarious, despite protestations to the contrary. Were the automotive giant to spin off its subsidiary, the EADC process would certainly be given a new lease of life.
One area in which takeover activity seems possible is that of transatlantic mergers among secondary players. The US market continues to expand rapidly and European companies must establish US ties to exploit these opportunities - Marconi Electronic Systems' takeover of Tracor having been prompted by such concerns. From a US point of view, programme-based deals with the likes of Smiths Industries, Racal and even Cobham appear attractive because of the UK's public-private finance initiative model for defence outsourcing.
Despite the current lack of pan-European merger activity, the weight of the evidence suggests that consolidation is in hiatus, not a dead end. While all the major players have growth potential individually, as Lynch says, "ultimately they are really only waiting for the right girl to come dancing. And the ball is still on."
European aerospace integration along national lines may ultimately prove to have been a necessary phase. With hindsight, national moves were always likely to precede wider ones, and with US merger activity halted at four major players, France's reduction to two and the UK's to just one are reasonably radical. By this measure, consolidation has not really been stalled.
Source: Flight International