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Friday, 29 October, 1999, 16:06 GMT 17:06 UK
Aerospace industry
hawk
British Aerospace is famous for its RAF Hawks
It's a familiar dilemma for the UK: to become an active European or to side with our natural linguistic partners across the Atlantic.

The world's defence industry is in the midst of a major overhaul.

And caught between the two opposing options is British Aerospace, the UK's largest exporter and, effectively, the UK's entire defence industry.

The merger of DaimlerChrysler's aerospace arm Dasa and France's Aerospatiale-Matra, with an invitation to BAe to begin talks about joining them, has heightened the uncertainty for the company.

The relations between the big world defence players is a complex one - and looks set to become more entangled before it becomes simpler.

Forcing a merger

European governments have for some time been urging defence companies to merge, creating one big European aerospace and defence company (EADC).

After the end of the Cold War, with demand for defence falling everywhere, they feared the individual national companies could not survive alone.

They also wanted the Euro giant to be big enough to compete against US counterparts - Boeing, Lockheed Martin and Raytheon.

strike fighter
Boeing, which makes strike fighters, makes more sales than BAe
The American government has had more success in urging defence companies to merge, resulting in the three giants becoming dominant players.

Historically, there has been much UK-US defence collaboration. At one stage, GEC even considered a tie-up with American companies.

On the other hand, European companies already co-operate in building Airbus commercial planes, and Eurofighter and Tornado military jets.

Getting cold feet

BAe originally advocated the single European aerospace and defence company. BAe chiefs and observers feared that European companies could be swallowed by their larger US rivals keen to expand in Europe unless they pooled their resources.

Only European in-fighting and national pride has prevented the tie-up from happening.

airbus
The Airbus is the proud creation of the European consortium
Each country wanted to keep its own companies, partly out of patriotism, partly as a safety net for fear of further wars.

BAe was reluctant to merge with France's Aerospatiale, fearing that Aerospatiale - largely state-owned - would put national interests before those of the new group.

Just before Christmas, BAe seemed set to merge with Dasa, the defence and aerospace arm of German group DaimlerChrysler.

Instead, in January, British Aerospace merged with the defence arm of its UK rival GEC, Marconi.

The decision angered Dasa, which wants to be the driving force in any Europe-wide defence alliance.

The German group was still looking for new alliances, so a tie-up with BAe was not ruled out. But the UK giant appeared to show little interest.

Looking towards America

Then four months ago, BAe effectively scuppered the dream of a pan-European aerospace group, by announcing that the way forward was through alliances with US companies.

Chief executive John Weston said BAe would be "very well-placed to build a bridge between the European and American markets and take forward the global aerospace company".

He also dismissed any merger between all the European groups, saying: "This is not about creating fortress Europe."

jumpjets
Harrier jumpjets also come from BAe
So the latest invitation to join the emerging Euro group will no doubt leave BAe chiefs in a tricky situation.

The company is still way behind the US rivals in terms of sales so it needs to do something.

Executives will have to bear in mind that questions are now being asked about the success of the US mergers, to which they have aspired.

Some of the American big names could be in trouble: Raytheon has issued a profits warning and the Boeing-McDonnell-Douglas merger has been problematic.

The Airbus conundrum

Then there is also the question of Airbus, a consortium between Germany's Dasa, France's Aérospatiale, the UK's BAe and Spain's Casa (although Casa has been taken over by Dasa).

airbus
Building an Airbus: the consortium must be more commercial
Although Airbus has become a huge commercial success, European governments are keen for the plane-making consortium to become a lean, privatised fully-fledged company before it receives any more development subsidies. It wants $10bn to develop a new super-Jumbo to rival the Boeing 747.

But the merger of Aerospatiale and Dasa gives the two 80% control of Airbus, leaving BAe in a weak position if it does not enter a full merger.

The irony is that amid the consolidation of European companies, Airbus is actually looking to America - where it sells a large number of aircraft - for new partners. And BAe is unlikely to mind that.

See also:

06 Apr 99 | Business
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19 Jan 99 | Business
15 Oct 99 | Business
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