BAe proposes grand European defence strategy

British Aerospace is spearheading attempts to create a single European commercial aircraft and defence grouping by the turn of the century to compete with the might of the Americans.

The hugely ambitious strategy would see BAe disappear as an independent company over the next five years through a merger with one or more of its counterparts in Germany, France, Italy and Spain.

BAe has not ruled out a merger of its military aircraft and missiles business with GEC as a forerunner to the creation of an all-embracing European aerospace holding company.

The aim of the strategy would be to establish a grouping with the scale resources, technological know-how and marketing power to take on the likes of Lockheed Martin and Boeing of the United States.

Senior BAe executives liken it to the creation of an aerospace version of Royal Dutch Shell or Unilever.

One said: "The case for Europe getting together is overwhelming because if we don't have consolidation across Europe the Americans will win. If British Aerospace still exists in its present form in five years, then we will have failed."

The Deputy Prime Minister, Michael Heseltine, yesterday backed the calls for the further restructuring and consolidation of the European defence industry to match developments in the US.

He told delegates at the Farnborough Air Show: "Europe faces the same dilemma and we haven't moved with sufficient speed."

The restructuring of Europe's aerospace industry is already under way. The four partners in the civil aircraft manufacturer Airbus Industrie - BAe, Aerospatiale of France, Germany's Daimler-Benz and Casa of Spain - have agreed to transform the consortium into a single corporate entity by 1999. Separately, BAe and the Franco-Italian group ATR have merged their regional aircraft businesses through a joint venture called AIR.

BAe is also seeking joint ventures for its own military divisions. Its missiles business was merged last month with Matra of France and the combined group intends taking a stake in the French defence electronics business, Thomson, when it is privatised later this year.

BAe now envisages bringing other partners into the process so that in time Europe has just one manufacturer of civil aircraft, military aircraft, military engines and missiles.

Rival aerospace groups such as Aerospatiale and Dassault in France, Daimler in Germany, Alenia in Italy and Casa would pool resources to create a single dominant supplier.

Overseeing this would be a European holding company in which each of the big aerospace companies had equity stakes.

The plan is being actively supported by the British government. Representatives of the Ministry of Defence and the Department of Trade and Industry sit on the National Defence Industry's council, the body which is co-ordinating moves towards European consolidation.

Nevertheless the strategy faces some daunting obstacles.

The creation of single European suppliers would raise immediate anti trust complications by robbing governments of competition for defence contracts other than from US manufacturers.

Unlike its US counterpart, the European Aerospace Industry is structured to accommodate national defence procurement programmes of different countries.

BAe is also under no illusions that issues of national pride, jobs and technological leadership will also need to be addressed.

There are already concerns that the restructuring of Airbus will involve job losses of up to 20 per cent along the 30,000 workers directly involved in the consortium.

There is also likely to be as huge battle over the assets that each of the four partners puts into the new company and how they will be valued. Privately, senior BAe executives believe that the timetable set for signing a binding memorandum of understanding by the end of this year will be difficult to meet.

On the domestic front, BAe appears to have ruled out an acquisition of a fighting vehicles business such as Vickers, maker of the Challenger tank, or GKN, which owns the helicopter manufacturer Westland and also makes the Warrior armoured vehicle.

But the prospects of a merger with GEC Marconi which specialises in defence, electronics, radar and weaponry, is bound to be heightened by the arrival next week of George Simpson as GEC's new chief executive.

Mr Simpson, a former deputy chief executive of BAe intends to carry out a fundamental re-evaluation of GEC strategy and could, insiders believe, be the man to forge an alliance with BAe. GEC and BAe held unsuccessful merger negotiations 18 months ago but could not agree terms. However, there is still strong support within the BAe boardroom for a deal: "My own view is that BAe and GEC should have happened years ago," said one BAe board member.