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It is difficult to look forward to this possible future reshaping of European aircraft and defence manufacturing, without looking back at the British aircraft industry. I should declare an interest here: one of my ancestors founded a company which ended up as a major portion of BAe as it is today.

 

The impetus for the merger is that EADS wants to balance the cyclicality of its civil aircraft business with a greater defence component. Further it hopes that BAe’s existing US sales force will provide a Trojan Horse to boost its airliner sales in North America (44% of BAe's revenues are generated in the US). The benefits for BAe are less obvious. Some questionable decisions by BAe management in recent years have taken it into a nasty corner. The shares are currently 38% below their peak in 1998.

 

The situation at present is that the two groups have until October 10 to decide whether to proceed with the merger. At present they are presumably sounding out shareholders and other (dreaded word) “stakeholders”.

 

In the British way of doing things, BAe is a relatively transparent, plain vanilla company. But EADS is a typically European concoction: 22.35% of its shares are held by Lagardère and the French government. A similar stake is held by Daimler, which is under the influence of the German government. The Spanish government (presumably keen to offload any such trinkets to alleviate a fraction of its yawning deficit) owns 5.45%.  With another little dab in the hands of the French, 50.14% is directly or indirectly in the hands of major European governments.

 

Lagardère is reportedly unhappy about the proposed merger – the 60/40 ownership of the enlarged group is not sufficiently in its favour. The French and German governments are reported as, surprise, surprise, “keen to have significant influence over the enlarged group” (FT, 2 October).  Meanwhile, Hollande is engaging in the widespread industrial manipulation so beloved of French governments, particularly Socialist ones.  His concept of fiscal prudence was revealed in July when he exerted severe pressure on Peugeot not to implement a planned redundancy programme (intra l’Hexagone, naturellement) . Further, Hollande is proposing to enact a law in three months’ time which would ban profitable firms from closing a plant and making redundancies.

 

You can see where this is leading. If the merger goes ahead, the enlarged group will make redundancies to eliminate areas of overlap. These will almost certainly not take place on any material scale in France or Germany, and probably not in Spain either. Which leaves Italy and the UK.

 

BAe is currently in the process of turning Brough, formerly one of its major manufacturing plants, into a housing estate. If the merger goes ahead, EADS (BAe division) will become more of a property developer than an aircraft manufacturer.

British governments, of every hue, have a solid track record of taking decisions which have eroded the country’s position of being a (once) leading aircraft manufacturer. If it had any bottle, the current one would be making delicate noises in the right ears to ensure this deal is kicked into the Atlantic Ocean.

 

BAe & EADS - Jonah & the Whale

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