DBEA55AED16C0C92252A6554BC1553B2 Clicky DBEA55AED16C0C92252A6554BC1553B2 Clicky
May 25, 2024
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The proposed combination of EADS and BAE Systems could lead to a fully ‘commercial’ company, based on information as we understand it. By ‘commercial’ company, we mean one that is largely free of government interference.

As we understand it, the management structure of the new company would be devoid of government requirements to rotate between French and German executives every five years. (We hope this understanding is correct.) We also understand that the Board of Directors would be free of government representatives. (We hope this is true, too. But maybe not. Another link.) There is no disputing that the current government shareholdings of the French and indirectly the Germans will be diluted. This is certainly a good thing. We don’t like government ownership, though the US bleating over government ownership of EADS and Airbus has, in our view, been overstated.

What will a new structure mean for government launch aid, a practice that drives US politicians and Boeing batty? We suspect this practice will still be available in the future as long as jobs are tied to the program. We don’t like launch aid, nor do we like any corporate welfare, but let’s face it: culturally, Europe simply takes a different view on this than does the United States. Whereas corporate welfare is plentiful in the US in the form of tax breaks, land deals, fee waivers and the like–all of which is available to Airbus as well in Europe and in the US–launch aid is simply something that is foreign to the thinking in the US.

(We won’t get into the topic of defense-style and NASA aid to Boeing; it’s not our intent to re-litigate the WTO rulings in this brief post.)

Launch aid is now required to be on commercial terms, rather than at below-market rates, so in principal what’s the problem?

The problem is that the governments become a source of cash available to Airbus in capital markets that might otherwise be restricted. Boeing certainly doesn’t have this resource available to it. On principal, we don’t feel Airbus should either. But we also recognize that the political and social culture in Europe is far different than that of the United States, and it’s pretty arrogant of the US to attempt to impose its culture elsewhere.

More to the point, the US is also incredibly hypocritical. The Chinese and the Russians–and even the Japanese–are subsidizing their new airplane programs, the COMAC C919, the Irkut MS-21 and the Mitsubishi MRJ, with direct government aid. The US remains silent about these unfair practices. (Of course, Boeing outsources a lot of work to China and Russia and it has a partnership of cooperation with Mitsubishi, as well have benefiting from government largess to the Japanese Heavies in the 787 program.)

Regardless, we hope the EADS-BAE merger goes through and government influences are eliminated.

What does the merger mean for EADS and Airbus and the competition with Boeing?

EADS and BAE are largely in defense segments that are different to each other and to Boeing. The combination will diversify EADS’ reliance on Airbus for revenues, cash flow, profits (and losses). EADS also is thrust into a major contractor to the US defense establishment rather than being a bit player. For BAE, which once owned 20% of Airbus, selling this stake to EADS in 2006, re-diversification into civil aerospace comes at a time when defense budgets in the US and Europe are under pressure.

For Boeing, the move doesn’t mean much–today. But five or 10 years from now, when the KC-Y USAF tanker competition begins, EADS will be far better positioned to argue it is a major US employer and contributor to the US economy than it was in the KC-X bidding. And if our understanding of the management and board structure is correct, EADS will also be able to argue that government influence is minimal at best.

1 thought on “EADS-BAE merger could lead to ‘commercial’ company

  1. Nice analysis and great to see a move in the way of thinking.
    RLI are not a problem as long as they are based on sound definitions. Boeing could consider an assembly line in Europe and try to tap that resource. This would become interesting.

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