Giant Waiting In The Wings

Mr Jospin was the centre of attention because France is seen by many as the key to unlocking rationalisation of the European industry. The speculation in the company chalets centered on whether he would turn the lock by approving the privatisation of the industry, or leave the door bolted by keeping French companies in state hands.

The choice facing Mr Jospin has profound implications for the whole of the European industry. Frances large industrial partners in the Airbus consortium, Daimler-Benz Aerospace (Dasa) and British Aerospace (BAe), have made no secret of their desire to see the French industry privatised and integrated into the rest of the European sector. Serge Dassault, the chairman of Frances private sector military aircraft maker Dassault, has similarly firm views.

Yet in their pre-election rhetoric, Mr Jospin and his new government were strongly opposed to privatisation. In the particular case of the aerospace industry, this put Mr Jospin in something of a bind. If he follows his instincts, he risks alienating the rest of the European industry, but if he bows to the views of the industry outside France, he may face a domestic backlash.

In the event, Mr Jospin, who spoke at the show, avoided the privatisation issue altogether. This followed his address to the National Assembly last week, in which he had said he would not implement the previous conservative governments pledge to privatise Aerospatiale although he accepted that some adaptations might be necessary to enable the group to co-operate with its European partners.

While prevarication may buy a little time, the basic dilemma for France will not go away: either it moves forward with privatisation and rationalisation or, as his European partners were hinting darkly last week, the rest of the industry will come under increasing commercial pressure to move ahead without the French.

Ironically, the defining moment for the show occurred a little earlier in the week, when BAe signed an agreement with Lockheed Martin to work together on the $100 bn US Joint Strike Fighter (JSF) programme. As well as being a substantial deal, this revealed the outline of a potential transatlantic alliance that could emerge to rival Boeing in the global aerospace industry.

Assuming that the merger of Boeing and McDonnell Douglas receives regulatory approval during the summer, the merged company will have a pre-eminent position in the world defence and civil aerospace market. Boeings turnover will be about $48bn, roughly twice that of its nearest rival Lockheed, which is heavily focused in military equipment.

The emergence of the Boeing leviathan is increasing pressure for consolidation of the fractured European industry.

Both John Weston, joint managing director of BAe, and Manfred Bischoff, chief executive of Dasa, are keen to see Europe respond to the Boeing challenge by forming a single transnational aerospace group, covering civil aircraft, defence, missiles and space.

Once that European aerospace company has been formed, it would naturally start to look across the Atlantic for potential allies. But choices are limited. Boeing is Airbuss deadly rival and can effectively be counted out. Raytheon, the defence electronics group, is not in the military jet or airliner business, and Northrop Grumman has become a niche defence specialist.

That leaves Lockheed, which lacks a civil aerospace business, as the only large potential US partner. This fact must have been on the mind of Sir Richard Evans, BAes chief executive, when he selected Lockheed as a partner for the JSF. Lockheed is also concerned at the scale of Boeings operations, and is likely to be looking to deepen its international links as a response.

Given how fast the US industry has already moved, BAe would like to move swiftly down the road towards a consolidated European grouping, as a precursor to a global company. For BAe, that consolidation starts naturally with Dasa and Aerospatiale of France if it were to be privatised. Such a merged group could then bring in other companies such as Casa of Spain, Alenia of Italy and Saab of Sweden.

However, until recently Dasa mindful of the strong Franco-German relationship has wanted to move more slowly, allowing time for France to privatise and rationalise its businesses.

The UK and German partners also have some differences over how quickly Europes defence companies can be consolidated. But the division of opinion between UK and German executives over the pace of rationalisation is not a complete barrier to progress. Both sides believe the first step towards consolidating the European industry is the reform of Airbus.

If Airbus is to compete against a merged Boeing-McDonnell Douglas, its executives recognise that they will have to drive down costs, shorten the time it takes to bring its aircraft to market and be in a position to respond to airline needs more quickly. The four companies which own Airbus Dasa, Aerospatiale, BAe and Casa agreed that these changes could only be achieved through a change in the consortiums legal structure. They signed a MoU in January, agreeing to convert Airbus from a loose confederation into a limited company.

Yet while the partners have agreed to change their structure, they disagree on how to do it. BAe, which owns 20 per cent, and Dasa, which has 37.9 per cent, have lined up on one side of the argument; Aerospatiale, with 37.9 per cent, and Casa, with 4.2 per cent, are on the other. The dispute is over who should own the Airbus factories. BAe and Dasa believe the new Airbus company should own them. Aerospatiale and Casa want the partners to retain them. The four are edging towards a compromise: the partners will continue to own the factories but the new Airbus will manage them. BAe and Dasa say they will only accept this as an interim solution: eventually Airbus must take over ownership too.

Aerospatiale has spoken hopefully of a matrix management structure, under which factory workers will report both to Airbus and to their own national companies. Underlying the factory ownership dispute, the partners recognise, lies a deeper difference, which goes to the heart of Mr Jospins problem: BAe and Dasa are privately owned companies, while Aerospatiale and Casa are state owned.

As long as that distinction exists, the two sides both accept that they will see the world differently. BAe and Dasa focus on how to cut costs; Aerospatiale and Casa concentrate on how to preserve national assets.

The other Airbus partners are unlikely to make much progress with a state-owned Aerospatiale. Failure to privatise Aerospatiale will also hold up consolidation of the French industry. The previous government had pushed for Aerospatiale to merge with Dassault Aviation, but Mr Dassault said last week that he would not merge with a state-controlled company.

Until the French government can bring itself to renege on its pledge not to privatise Aerospatiale, further reform of Airbus is likely to proceed slowly. What worries the private sector companies is that continued delay will simply add to the USs advantages in the international marketplace. For Mr Jospin, the choice is clear. Either he stays with a state owned French aerospace sector which risks becoming increasingly isolated, or he goes with the British and Germans on the road to a private sector international group. The latter would not be controlled by any one country and might eventually evolve into a global aerospace giant.

Bernard Gray & Michael Skapinker