Airbus: what's happening to the SCE conversion? December 1998
Just when everything seemed to be going swingingly for Airbus, it has run into problems with its conversion from a French–style consortium, known as a $1’interêt é$2, into a proper company. This was supposed to coincide with the introduction of the euro in January 1999. Now most observers think it will be a miracle if it happens in time for January 2000. The reason is that Airbus has become caught up in the grindingly slow gearwheels of the reorganisation of Europes aerospace and defence industries. After years protesting that Airbuss conversion into a Single Corporate Entity (SCE) was a related but essentially different process, now even Airbuss British and German partners accept that the two can no longer be held apart.
They have little choice but to accept reality. Airbus is being used as a high card in the game of poker the British, Germans and French are playing over defence and aerospace reorganisation. Ever since the US reduced its 18 defence contractors to four, with the help of some White House nudging and federal pay–offs for layoffs, Europeans have been agonising about how to something similar. The fear is that the heavily export–oriented European defence contractors will be outgunned by the new powerful American groups such as Boeing McDonnell Douglas and Lockheed Martin. Only three European groups (British Aerospace, GEC and Thomson) feature in the worlds top ten, and the world leader Lockheed Martin has defence revenues ($18bn) twice the size of BAes.
British Aerospace and DASA, the aerospace end of Daimler- Chrysler, the car group, would like to merge, combining their shares in Airbus to make a dominant 58%. Their defence interests would also form the core of a European Aerospace and Defence Company (EADC). Publicly the two companies insist that they would like the widest possible shareholding structure for this group.
Up to a point this is true; but there are two big caveats. One is that neither the British nor the Germans want their French Airbus partner, Aerospatiale, involved until the last vestige of state ownership has gone. The second is that they would really, really like to do their own bilateral deal so that they can then admit a subservient French shareholder at a later date. There is also a suspicion that they would like to keep the French at arms length so that they could make themselves as a duo more attractive to American partners. The American defence contractors, to say nothing of the administration, suspect the French (echoes of the independent nuclear policy of General de Gaulles force de frappe).
The French government sees all this going on, and has realised that Airbus is its big card to hold back or to play to ensure it gets its way. The trouble is that the French are not quite sure how best to play the card. Meanwhile, the government has encouraged Aerospatiale to suspend the work on the conversion to the SCE. Officially the partners will say that much progress is being made on various technical issues. But in reality that is a discussion of the (continued on page 2) entertainment programme on the Titanic, while an ominous white mass looms ahead.
In truth, the critical issue in the SCE negotiations is the exchange of valuations of the assets devoted to Airbus production by the various partners. The French say that this has had to be frozen because of the impending privatisation of Aerospatiale through its absorption into the private Lagardere/Matra defence company, which in turn is assuming the states controlling interest in the semi–private Dassault company. So the French case is that value of the Aerospatiale Airbus assets has to be reviewed in the light of this wider consolidation within France.
A wider role
Airbus has another fundamental role in the reorganisation of the wider aerospace and defence industry. One is that its success — it has won about half the market from Boeing by the measure of net new order intake in the past two years and its unit costs may now be below those of Boeing — inspires emulation for a military aerospace grouping. The other is that it might prove a counter–balancing civilian business as a division of EADC.
The French know they hold this big card, but they are divided on how to play it. Ever since the first U–turn by the socialist administration in July, when they signalled they would start to privatise Aerospatiale so that it could join in the wider Euro–game, they have been making eyes at the Germans and British to attract their attention. These flirtations have been spurned by the stuffy northern Europeans, partly because they know the French may cede yet more. The latest French ploy was for their defence minister to signal through the press that the state would be prepared to head for a small stake of around only 15% in EADC (through a 30% holding in Aerospatiale) plus a golden share of the type that the British government has held in BAe ever since it was privatised in the mid–1980s.
When this flopped, prime minister Lionel Jospin called a special meeting of ministers to discuss what to do next to safeguard French interests. From this meeting two schools of thought emerged. Most of the French companies involved would simply like the government to clutch the Airbus card close to their chests and block the SCE conversion as a way of forcing the German and the Brits (both of whom are desperate to see Airbus converted) to be kind to the French view on the wider EADC.
The other French view is that the government should be more pro–active and meld all the big French defence companies together in a rush — i.e. put the Thomson defence electronics group, in which the state holds a big stake, together with Aerospatiale, Lagardere and Dassault. The Alcatel electronic engineering group could become an associate member of this, and the UKs GEC — variously involved with some of the partners in civil and defence joint ventures — would be bound in too. This would create a weighty French base in defence aerospace that would win respect from the British and Germans and force them to integrate it as an equal in an EADC.
What has spurred French manoeuvres is the speed with which the Germans and the British forged a partnership to dominate the European equity markets, with a virtual partnership between London and Frankfurt that has left Paris struggling to catch up. The difficulty the French face is that in addition to holding their end up with the British and the Germans they have to be able to square the unwelcoming Americans.
There was a time a few years ago when Lockheed was interested in joining Airbus as a risk–sharing partner in key programmes such as the proposed A3XX 550–seater. But on pure defence matters there is a huge gulf of suspicion between France and the US, which is largely historical and cultural (some Americans have never forgotten De Gaulles withdrawal from active Nato involvement at the height of the Cold War). And both the British and the Germans — i.e. BAe and DASA — are quite keen on some transatlantic involvement in any EADC. Indeed there is good industrial logic in this, in the sense that the US is a huge market and America holds sway in many third–country defence markets. All of which explains why Airbus is being sucked into a morass. Its new director–general Noel Forgeard tries to put a brave face on things, but in reality he is highly frustrated at the trap Airbus has been snared in.