BAE: the time is right April 2006

BAE Systems has probably made the right choice in putting its one–fifth stake in Airbus up for sale at this time, a decision announced in early April. The alternative would be to wait for the next peak of the aircraft ordering cycle, which could be at least five years away. From last year’s peak of about 2,200 orders, the trend has only one way to go: down.

Meanwhile, Boeing’s share price is in the stratosphere, approaching three times where it was a few years ago when it was lagging further and further behind Airbus and was beset by scandals on its defence side. BAE’s stake in Airbus is probably worth between £3bn and £4bn (€4.2 — €5.6bn), and EADS, which owns the remaining 80% of Airbus has first refusal on the shares.

The sale has long been flagged by the BAE Systems’ chief executive, Mike Turner, who has made it clear in recent years that the company was managing its stake purely for shareholder value. In other words, BAE was ready to sell when the time was ripe to get the best return on the £2bn or so invested in Airbus when it became a commercial company rather than a consortium back in 2001.

Exiting now means BAE will avoid a round of heavy investment that Airbus is going to have to undertake. The reality is that piling some €12–15bn into the A380 programme is far from enough to secure its dominance of the widebody market. After more than five years leading Boeing, thanks to its A330 model, the Americans have been catching up fast with the later versions of the 777, notably the -300ER, and the well–received new 787. The Airbus riposte, the A350 is moving rapidly from being a re–vamped A330 to looking like an entirely new plane.

With two big customers, ILFC and Emirates, stating publicly that they want further improvement to the planned model, the development cost could soar from under €5bn to more like €9bn. A key issue is whether to go for a wider fuselage to compete with the 787. It would be strange for Airbus to balk at this: one reason for the attractiveness of the A320 family has been the wider cabin it still enjoys compared with the 737 New Generation aircraft, which are in fact more modern than the A320s.

So BAE is selling off its stake in Airbus and baling out of commercial jets (apart from some regional legacy products) just as the competition in the duopoly becomes vicious. Both Boeing and Airbus are being forced to bring out new models that compete to some extent with older products: for instance, competition from the A350 is forcing Boeing to come out with a larger version of the 787 that will, in effect, also compete with some versions of the 777.

Scare stories about Airbus jobs disappearing from the UK seem wide of the mark: for one thing, with production at a peak and so much invested, both financially and in terms of engineering resources, Airbus needs everything to hand to keep up with the boom in production. It will also need the continuing source of launch aid from the British government, which will not be deterred by an absence of British voices on the board of Airbus. The proceeds of the Airbus sale will certainly be spent in the US bolstering BAE Systems' position in the world’s largest defence equipment market. Ever since BAE acquired the defence side of the old GEC, the balance of its business growth has tilted towards the US.