Airbus v. Boeing, Round 43

Steven Pearlstein
Columnist September 22, 2012

As Washington stories go, they don’t get much bigger or more interesting than the proposed merger between Airbus and BAE Systems.

It’s not just that London-based BAE has a significant presence in the United States, providing many of the armored vehicles for the Army and electronics for many of the Air Force’s most advanced fighters, but also in the Washington region, where it provides software and other services for the Pentagon and a variety of intelligence agencies.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

Just as significant, the proposed merger opens yet another front in the decades-long political and economic blood feud between U.S.-based Boeing and Europe’s Airbus, the duopolists in the global market for large commercial jets. Ever since Airbus was launched four decades ago by a consortium of European governments, Boeing has kept up a steady drumbeat of political and legal challenges to the government subsidies and preferential treatment Airbus receives from European governments, defense ministries and government-owned airlines.

In response, Boeing has used its considerable political and legal muscle to limit Airbus’s access to the U.S. defense market, most recently by using a rigged competition to effectively prevent the Air Force from buying a new fleet of refueling tankers from Airbus.

It is hardly coincidental that the proposed merger is coming against a backdrop of declining military spending in the United States and around the world. Consolidation is natural response to a shrinking market. Up to now, however, the Pentagon has indicated that it would oppose more consolidation among its top contractors to preserve competition in the defense industrial base.

If the U.S. government allows BAE and Airbus to join forces and create the world’s largest aerospace company, it will be taken as a green light by giants such as Lockheed Martin, Northrop and General Dynamics — along with their fee-hungry investment bankers — to go scouting for mergers and acquisitions.

In addition to economic issues, an Airbus-BAE merger will raise significant national security issues. In the United States and Britain, BAE is involved in some of the most sensitive and classified military and intelligence programs. And in both countries, there have been long-standing concerns about France and its willingness to do business with hostile countries if the commercial benefit is large enough. Given the French government’s role as a controlling shareholder in Airbus, the Airbus-BAE merger will almost surely raise questions about sensitive technology falling into the hands of China and Iran — particularly once Boeing starts beating the political tom-toms.

In Europe, meanwhile, back-bench politicians and labor unions are already demanding that approval for the merger be withheld unless the companies provide assurances against layoffs and plant closings. Although this is what you would expect in Europe, it takes on added urgency because, as part of the merger, Airbus is proposing a restructuring of its governance that will substantially reduce the government ownership and operational control in the new company.

In Britain, the merger also has fed into a noisy debate about whether to push toward deeper political and economic integration with continental Europe, or pull back and strengthen the historic relationship with the United States. Euroskeptics, who have come to dominate the backbenches of the Tory and Labor parties, are horrified at the thought of BAE, the country’s largest industrial company and a technological crown jewel, would be stolen away by the continentals at Airbus.

For the companies themselves, the short-term rationale is fairly straightforward.

After a series of expensive acquisitions during the Bush-era buildup, BAE is left with little cash and no capacity to borrow even as the prospect of a shrinking defense pie has depressed its stock price. In short, it needs to be able to call on a stronger balance sheet if it wants to participate in the consolidation and make the leap to the top tier of military contractors.

By contrast, EADS, the parent of Airbus, is rolling in cash thanks to a boom in sales of its new line of fuel-efficient commercial jets. But EADS would like to have what Boeing has — a vibrant defense business that can keep it healthy during the inevitable downturns in the commercial airline cycle. Unfortunately, its defense business has never been able to break out of the largely captive European market and make inroads in the much larger U.S. defense market. Because of the high regard BAE is held in by the government and other prime contractors, it offers Airbus its best hope of breaking into the U.S. market with its fighter jets, missiles, rockets, satellites and helicopters, and competing head-to-head with the U.S. defense giants.

The deal as envisioned by BAE and EADS is mind-numbingly complex — legally, financially, but most of all politically. The governments of France and Germany, along with their corporate proxies Daimler and Lagardere, are being asked to reduce their equity shares and give up most of their operational control. Each company will continue to have separate directors, with separate share listings in London for BAE and Europe for Airbus. In order to satisfy U.S. security concerns, BAE’s U.S. operation — as it is now — will be a third entity, entirely owned by BAE but with yet another board of directors and elaborate rules to prevent the transfer of sensitive technology.

For the U.S. government, the key decision of whether to allow the merger will fall to a little-known committee made up of the secretaries of eight Cabinet departments and supervised by a staff at the Treasury. The CFIUS process is so secretive that the committee and its members are not even supposed to acknowledge that a matter is under review and are barred from communicating with anyone other than the companies applying for approval. But for controversial cases — as when the investment arm of the government of Dubai tried to take over management of several U.S. ports, or when a Chinese-owned company bid for Unocal — these deals can turn into orgies of special-interest pleading and political grandstanding in the news media and on Capitol Hill, all of which can’t help but affect the thinking of Cabinet members or the president, who by law make the ultimate decision.

My own opinion is that while there are legitimate security concerns from Airbus’s takeover of BAE, they can be handled by strengthening the current special security arrangement that governs BAE in its classified programs.

And although I generally root for the home teams, as taxpayers we should welcome the arrival of a strong new competitor to the market at a time when the defense industrial base is shrinking. In return, however, the United States should be able to wrest new assurances from European allies that they will stop favoring their own firms in the awarding of military contracts.

You can bet a plane ticket to Seattle that Boeing will complain that profits and technology from BAE’s defense work will be used to give Airbus an unfair advantage in the commercial airplane competition, thereby costing American workers their jobs. To that, one only need reply that turnaround is fair play. Americans can’t insist that European countries stop favoring their national champions if, whenever it really matters, we continue to treat Boeing as if it is ours.

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