The shape of the industry is changing radically
Chris Jasper/LONDON
The face of aerospace manufacturing has been transformed over the past few years by rampant merger activity, but in 2000, the industry may at last be prepared to take a breather as companies concentrate on extracting value from the consolidation that has already taken place.
Although further "mega-mergers" will be difficult to pull off at prime level, the activity that will take place - from the reorganisation of Airbus to the internal restructuring inevitable within newly expanded companies - will do much to determine the shape and focus of the industry for years to come.
Towards the end of 1998, the biggest project around aimed to create a single European aerospace and defence company (EADC) as the continent sought to attain the critical mass to compete with US giants Lockheed Martin and the merged Boeing/McDonnell Douglas.
The European plan centred on a British Aerospace/DaimlerChrysler Aerospace (Dasa) merger but, when the deal fell through and was superseded by a BAe takeover of GEC's Marconi Electronic Systems (MES), the scheme seemed to have been derailed. Despite this move and the all-French merger of Aerospatiale and Lagardère's Matra Hautes Technologies, Flight International suggested "national" consolidation was an important precursor to bigger deals.
That theory was proved correct by the announced mergers first of Dasa and Spain's CASA, and then of Dasa with Aerospatiale Matra. The three companies together will create the new European Aeronautic, Defense and Space (EADS) company, so that Europe goes into 2000 with two huge multinational players - the new BAE Systems having a stake in Sweden's Saab, parts of Italy's Alenia secured via the MES takeover and a major foothold in the USA.
So are further mergers likely over the next 12 months? The big target for primes in Europe and the USA is a deal securing a true global presence and giving access to key markets on either side of the Atlantic. But, while transatlantic deals may look attractive, they will be difficult to pull off in the near future, with US regulatory constraints presenting a major barrier.
Major mergers spanning the Atlantic may have to wait until after November's US presidential election. A delay may be valued by some US players; at present, the market capitalisation of some European companies outstrips that of potential US partners, so that mergers could effectively amount to (unacceptable) takeovers.
Struggling Lockheed Martin and Raytheon are committed to restructuring and face uphill tasks. The pair may shed certain businesses which could become merger material, although hardly on a strategic level. In 2000, the big US players must also face the key question of whether to retreat to core activities as they bid to rescue profits, or look to the future and expand into new and potentially profitable sectors.
Space and telecommunications, for example, promise huge returns, but will require enormous short-term expenditure to secure market position. Failure to follow the right path could mean the difference between aerospace giants evolving into major players in new sectors and themselves becoming targets for ambitious upstarts. Analyst Kevin Lynch of Roland Berger & Partners says Boeing "hasn't hit the pain threshold" and may to continue to stall on key decisions. Debby Hopkins' appointment as chief financial officer in 1999 promised a new broom, but little has been swept away - and some projects, like the 717, may not yet be safe.
In Europe, merger speculation will continue, with the future of Finmeccanica Alenia to be determined. The resurrection of the EADC ideal through an EADS/BAE Systems merger seems unlikely, however, with both groups keener to secure the elusive US tie-up - and otherwise focused on internal housekeeping.
Europe's industry is doing well, but began from a weaker base than that of the USA and is only drawing level in terms of key indicators, so that the extraction of maximum value from the recent round of mergers will be a vital concern.
EADS will struggle to match BAE and the US majors for competitiveness, so that cost-cutting will be important over the next year, with French and German job losses - and perhaps industrial unrest - a distinct possibility.
In Europe and the USA, the processes of post-merger restructuring will make one fact increasingly clear by the year ahead: that the core expertise in aerospace manufacturing at the primary level is overwhelmingly that of systems integration. Paradoxically, manufacturers are moving away from "making" and focusing on "integrating" to turn a profit. Significantly, it was BAe's systems capability that was most advanced by the MES deal. Saab's planned merger with Celsius will improve it further - making the new "BAE Systems" tag logical.
Although the focus may be on housekeeping at primary level, merger activity will continue down the aerospace hierarchy. As primes retreat from metal-bashing and become systems integrators, first and second tier players are themselves presented with opportunities to be had via consolidation. First tier suppliers need to offer subassemblies that primes can bolt-on intact - hence AlliedSignal's initial opposition to a BFGoodrich-Coltec merger making possible combined landing gear/brake offerings.
AlliedSignal, in turn, pulled off the biggest deal of the supplier-level consolidation so apparent in 1999 by teaming with Honeywell and boosting its avionics abilities. The trend will continue, although less dramatically, in 2000, while down the hierarchy - away from the household names - the number of mergers is likely to increase as a ripple effect takes hold.
A development that all observers expect next year is the restructuring of Airbus. The four-partner path to single corporate entity (SCE) status was rendered redundant by the Dasa-CASA and Dasa-Aerospatiale Matra deals, so that the transformation of the consortium is now a matter to be solved by EADS and BAE.
The path to an SCE should now be smoother, but hurdles remain. BAE's 20% holding in the business makes it a junior partner, but having decided to remain in civil manufacture despite its defence bent, the UK company wants to secure a larger holding to reflect the value of its wing operation. Should that aim be thwarted, it is possible that BAE could exit Airbus, selling its stake to become a "super-contractor".
Militarily, Europe needs to tackle outstanding fighter questions. Eurofighter is the key project, but with ownership split between BAE and EADS, control of Alenia's stake could be vital. Two other fighter offerings - the Saab/ BAE Gripen and Dassault's Rafale - complicate matters further, especially with Dassault questioning its Aerospatiale link, post-EADS.
In the longer term the Joint Strike Fighter programme will have major implications for manufacturers, with engineering, manufacturing and development selections due in 2001.
Source: Flight International
