April 2000 Newsletter

Dear Esteemed Readers,

Topping last month’s news, Italy’s Alenia, which went from mustachioed spinster to highly-courted maiden, finally made its mind up and went with EADS. In addition to a joint combat aircraft venture with the German/French/Spanish firm, Alenia will probably get a 5% role in the new Airbus Integrated Company. For some reason, this event resonated with me. I was in the UK while it happened, and while I didn’t actually witness the process, I felt sympathetic towards the spurned BAE Systems executives. I suspect they went home depressed, and stayed in their rooms eating chocolates and watching daytime television, contemplating their next move. Very sad, but far from hopeless.

Without the aid of fact-checking or serious research, but with extensive use of boldface, I will now attempt to explain the recent history of European aerospace restructuring. Sort of a Guide for the Perplexed.

Our story begins a few years ago, when European industry watched America consolidate. Up to that point, European dinosaur-like companies’ biggest worries were steering clear of tar pits and watching out for small mammals that would eat their eggs. But it was now clear that large US companies would be at an advantage in a price-sensitive market.

BAe and DASA cleaned up their acts first, rationalizing their horrible regional aircraft operations. This process was somewhat painful—DASA had invested heavily in Fokker, and would have been better off promoting a lottery-ticket paycheck withholding program for its employees. Meanwhile, BAe found that it was set to lose over one billion pounds on the 146 jet program, largely because most 146s had been leased to a guy named Fred who “promised to return them when the lease was up, next November.”

But by 1995, BAe and DASA were through with carnage, and were in pretty good shape. BAe (now BAE) managed to initiate an alliance with Saab, eventually taking a 35% stake in the Swedish company. The next step was convincing French industry to privatize. This was the tricky part, and it still isn’t done yet, but the state sold its share in Aérospatiale to Lagardère, and accomplished the rest with low-level coercion, selective procurement halts, and a large pit bull. The remaining problem is Dassault, which, while fully private, plays by its own rules (even for a French company, which says a lot).

The next step is best described as the spinster-courting phase. DASA outbid everyone for CASA, alluring the marginal Spanish player with truly meaningless promises of an A400M final assembly line. But it gave DASA the biggest share in Airbus, bigger than even Aérospatiale, which does much of the high-value work.

DASA’sCASAsemi-triumph was followed up by the two surprise shock events of 1999: BAe/GEC and EADS. The received wisdom held that DASA and BAe, having the most in common because they were fully private “Anglo-American” style companies, were going to walk off into the sunset, leaving the semi-socialist French in the lurch. But somehow, the two companies grew apart. BAe merged with GEC Marconi, creating BAE Systems, a vertically-integrated national champion of the kind that everyone used to agree should never be created. DASA went from Anglophile to Anglophobe, a move the French did not need to be persuaded to make. The result was EADS, with Germany securing promises that the French Government’s role would be tiny. In a sign that things are changing in Europe faster than any American believed possible, the French Government looks like it will keep this promise.

Then came Alenia. Not to make the whole thing sound like a life-size game of Risk, but it now appears that Italy, Germany, France, and Spain, with de facto allies in the Netherlands and Belgium, are arrayed against Britain, which is allied with part of Sweden. And, BAE looks set to be marginalized in the centerpiece of Euro aviation, Airbus. Rather grim, from the UK standpoint.

BAE, of course, publicly maintained that Alenia’s decision didn’t actually mean anything. To those familiar with Britain, it was the usual story: “Fog on Channel. Continent cut off.” Besides, the greatest crime in Britain is to be seen as someone who tries hard to do something, so the appearance of failure is not an option.

Actually, those cheesecake-eating, Oprah-watching depressed BAE executives have a point. The sad truth is that only Britain is spending more than a few trillion lire on defense, so the value of the mainland companies is uncertain. Only BAE can count on a robust home market, which will buy anything local, including, curiously, more Tornado ADV upgrades.

What’s next? Unsurprisingly, Dassault is promoting itself as Kingmaker. While apparently ensconced within EADS, the company says it can drop out anytime, and forge an alliance with BAE and Saab. Dassault is looking for the best terms it can get (and it is Europe’s crown jewel in the fighter department), but an alliance with either EADS or BAE gives Dassault’s Rafale the same chance as a Pelican (the bird) against an AMRAAM (the missile). And Dassault can’t stay independent forever.

Again, for BAE, things are far from hopeless. It is looking to the US for growth, which is very smart since theUKis the only foreign country allowed to buy US companies, so it’s a bit like hunting slow marsupials with a state-supported high-caliber gun. And, the US, like the UK, actually still has a defense budget. But a rumored Boeing/BAE merger is probably out of the question, since F/A-18E/F and Eurofighter are direct competitors.

Enough current events. Next month will include the Business Jet overview scheduled for this month. Sorry for the delay, and again, let me know if you want an advance copy. I’ll also update the World Rotorcraft Overview, plus reports on the A300, A310, C-130, Hawk, SH-60, UH-60, and others. Let me know if you need anything else, and enjoy your Cinco de Mayo.

Yours, Until The Printer Runs Out Of Boldface,

Richard Aboulafia