By the end of this year, the die will have been set for the future shape of the European aerospace industry. If all goes well, plans will have been agreed for Airbus Industrie's transformation into a standalone company and the groundwork laid for cross-border consolidation in the military aircraft and defence electronics sectors.
Just how far and fast Europe actually goes, however, depends in large part to the restructuring now taking place in French industry. France, with its flair for managing grands projets, can already take much of the credit for establishing such European institutions as Airbus, Arianespace and Eurocopter.
The next step is to create what the French Government likes to call "poles" of excellence within France around which to focus the next wave of European consolidation.
The privatisation of Thomson-CSF and the merger of Aerospatiale with privately owned Dassault Aviation should also bring a new commercialism to an industry that has been dominated by state ownership.
The talks over turning Airbus from a consortium of partners into what is inelegantly described as a single corporate entity (SCE), are a case in point.
It has long been inevitable that Airbus would eventually have to take the step, if it is to fulfil its destiny of becoming Europe's largest industrial company and compete on equal terms with Boeing. That has only been underscored by the Boeing's own dramatic growth. With the Rockwell defence and space acquisitions sealed and the McDonnell Douglas merger due to be completed later in the year, as well as booming airliner deliveries, Boeing will emerge with sales of around $48 billion. That is more than five times the current size of Airbus.
Much has been made of the need for Airbus to sharpen up its cost controls. While it is true that the consortium structure burdens the consortium with a political dimension over workshare and that decision-making can, in reality there are few signs that Airbus is noticeably lagging in terms of manufacturing performance.
What Airbus certainly does need is a better grip on suppliers, spares and support. At present, design authority is spread throughout the partner companies, creating a potentially a labyrinthine process to see through aircraft modifications and updates.
Airbus also needs access to new sources of financing which an SCE could bring, perhaps eventually including listing on equity markets. The need to spend upward of $10 billion on the A3XX project has helped concentrate minds.
At the very end of 1996, the partners at last signed up to the idea of pooling their Airbus assets into a new SCE, pledging to put a detailed plan in place by the end of 1997.
The process was never going to be easy given the national sensitivities of the four partners. Not least is the question of just how much of their assets the companies would be willing to let go. For Aerospatiale the issue has been crucial. Around 40% of its sales and nearly one-third of its workforce are committed to Airbus work. Talks are also taking place about giving design and even production autonomy to the Aero International (Regional) (AI(R)) venture with Alenia and British Aerospace.
Aerospatiale at the core
The consortium's other lead partner, Daimler-Benz Aerospace (Dasa), is also heavily committed to Airbus work. Dasa, however, is just part of the Daimler-Benz industrial giant, whose board could well relish the chance to devote more management time to its core cars and trucks business.
BAe, with only 20% of the consortium, is perhaps the least dependent on civil work, which makes up only 20% of sales.
Privately BAe and Dasa concede that a solution to the Aerospatiale question is fundamental to the Airbus restructuring process.
The French Government has already obliged, by forcing through its long-standing ambition to merge its state-owned aerospace champion with Dassault Aviation. That process, due to be concluded by mid-year, would leave the newly combined group controlling virtually all of the French industry's aircraft production including fighters and corporate jets.
Tense negotiations are still go on over valuation, never an easy issue in any merger and not eased by the fact that Aerospatiale also faces a second tough set of talks over asset values within the Airbus industrial grouping.
In practice, little real progress is expected on the Airbus valuation until the Dassault merger has been tied up. Even then there is evidence that the Airbus valuation will not be easy.
An early exchange has already taken place between Germany and France, with Edzard Reuter, former Daimler-Benz boss and chairman of the Airbus supervisory board, threatening to resign if progress is not made.
Pooling assets
The issue of which assets are to be pooled and the basis for their evaluation is at the heart of the debate. Dasa and BAe could stand to gain if that is made on a measure of profitability, given the returns now being recorded by their newly slimmed-down Airbus divisions.
Aerospatiale seems to be preparing to argue for a broader view of the long-term value of its extensive design, assembly and aerostructures capabilities.
It is worth noting that it took the best part of three years for privately owned Matra and BAe to agree on a joint venture for their missiles businesses, eventually settling on a sliding scale of compensation for Matra depending on how its potential orderbook actually shaped up.
Suspicions also still linger over whether state-owned Aerospatiale has yet gone far enough to cut its cost base and increase its cost base.
The private view within Airbus, however, is that the talks will be made to work even if they go to the wire on the year-end deadline.
Their success will not just determine the outcome of Europe's civil-aerospace industry. The Dassault/Aerospatiale merger also unlocks the potential to bring wider issues over defence consolidation to the negotiating table.
Just how directly the defence issue will be addressed remains open to negotiation. While BAe and Dasa may be unwilling to risk over-complicating the discussions and so delaying progress on the Airbus SCE, they acknowledge the importance of now being able to talk to a French group able to trade on both military and civil aircraft.
BAe, Europe's leading defence player, has made clear for years that it sees the Airbus resolution as a blueprint for military consolidation. That will need to sidestep the inevitable sensitivities over losing control of national defence capabilities to a new European grouping. The current thinking appears to lean towards creating a an overall cross-border umbrella grouping, bringing together what would still essentially be "national" subsidiaries in France, Germany, Spain and the UK.
A similar solution was used for the Franco-German Eurocopter venture. Although it has common products and shared resources, the merger has been achieved by a cross-shareholding arrangement which leaves France and Germany with identifiable defence-helicopter capabilities.
A further twist to defence consolidation comes from the pending privatisation sale of Thomson-CSF. A French Government decision between the rival bidders - Lagardère and Alcatel/Dassault - is due in mid-year.
The arguments between the bidders have been well-rehearsed. Lagardère would merge Thomson-CSF with its Matra subsidiary, which already has Anglo-French joint ventures in space with GEC and missiles with BAe.
Alcatel and Dassault Industries, bringing with it the Dassault Electronique business, would also share out the acquisition to shore up interests in space and defence electronics. Aerospatiale has been barred from a direct participation in the Alcatel bid - avoiding the potential embarrassment of a privatisation sale only succeeding in putting Thomson-CSF straight into the hands of a state-owned company - but the group is still attached to the bid.
Such a move would again help Aerospatiale to open new options in the wake of the Airbus SCE. If it came away with strengthened space and missiles interests, that could tempt back Dasa to the talks, which finally ran out of steam in 1996.
Whatever the outcome, it is certain that the privatisation will open up the whole of the European defence-electronics sector for a rapid consolidation.
Defence interest
Meanwhile, the major defence groups continue to circle. Ahead of the decision, Siemens has put its defence arm back up for sale, with GEC , Dasa and BAe among the interested partners. GEC is also carrying out studies with Alenia Difesa over strengthening its Italian alliance. Dasa has signalled that it is keen to resolve the issue of its loss-making missiles arm, but has equally dropped hints that one option is a tie-up with the Germany's privately owned Diehl group rather than a disposal.
These strategies come against the background of a massive wave of US consolidation, which over the past six months alone has seen the sale of the defence and space divisions of Rockwell, Hughes and Texas Instruments, as well as the massive Boeing/MDC merger.
Europe needs to create its own giants not only to compete in world markets, but also to help it negotiate potential transatlantic tie-ups from a position of strength. Lockheed Martin, which is being courted by Airbus as an A3XX partner, has already opened discussions over future military transport/tanker projects in Europe, either with Airbus or individual partners. Further such talks seem likely as the US giants run out of merger partners at home.
In short, European consolidation is a complex multi-dimensional game, but if France and Europe can pull it off, the region may at last have some answer to the emerging US giants lurking across the Atlantic.
Source: Flight International