Airbus v. Boeing, Round 43

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.

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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.