Ruling The Skies

That is why the negative implications of such a merger with regards to a reduction of competition, if it were to be allowed, as well as its legal aspects justify the competence of the European Commission.

Because, just as companies, whatever their nationality, have to abide by US laws when trading in the USA, the European laws, notably the provisions of the Treaty of Rome, do apply to companies, manufacturers or airlines which operate in Europe.

This paper is limited to an analysis of the strategic dimension of such a possible merger: the longer term elimination of any competition in the civil aviation sector.

 

This conviction of mine is first and foremost based on the fundamentals of the aerospace sector which are essentially characterised by the sheer size of the entry fee and the lead-time needed to obtain a significant market share. This renders totally impossible the appearance of new manufacturers capable of acquiring and maintaining a significant market share, in front of Boeing which would, after a possible merger with McDonnell Douglas, have more than 70 per cent of the market and control close to 90 per cent of the existing aircraft fleet. I am even more convinced of this when looking at the benefits Boeing would be able to draw for its civil sector from the merger with McDonnell Douglas military activities.

The entry fee into the civil aviation sector is enormous. Consider as evidence that it took Airbus Industrie 27 years to develop an aircraft family ranging from the A319 to the A340. This family is not even complete yet, as it is lacking a 100 seater as well as an aircraft able to compete with the Boeing 747.

According to a 1993 study by the US International Trade Commission (USITC), the costs and the time needed to enter the aviation market sector are such that these barriers can hardly be overcome. To this, one has to add the benefits of the existing manufacturers advantages in terms of learning curve, economies of scale, and the importance of established commercial relations with the airlines.

Building on technological, industrial, and human know-how resulting from the development of national programmes like Caravelle in France or the BAC1-11 in the UK, or transnational ones like Concorde, financial efforts for over more than a quarter of a century and an investment of some 20 billion dollars were necessary to allow the take-off and success of Airbus in the face of a total domination by the American industry.

As a result, it is totally illusory to expect that new entrants could emerge which would counter Boeings potential abuse of a dominant position. While I have a lot of respect for the aviation industries in Russia, India, and Indonesia, I dont think, however, that these could eventually be a counterbalance to Boeing plus McDonnell Douglas.

The development of a competitor to the Boeing 747 by Airbus Industrie will require an additional investment of some nine billion US dollars, that is twice as much as was needed to develop the initial versions of the A340/A330.

Under these circumstances, how can one reasonably expect new entrants in such a highly capitalistic sector in which the return on investment is so long and so risky?

McDonnell Douglas remains viable and profitable, and could become even more so if it showed a real commitment and determination in the civil aircraft business. Indeed the MD95 was launched under the management of McDonnell Douglas at the end of 1995, with the required development risks and cash-flow covered by the associated partners (Korea, Italy, Canada, Japan, Taiwan and Rolls-Royce/BMW).

McDonnell Douglas focused its efforts solely on an investment programme in order to reduce its costs sufficiently and be profitable despite the low amount of sales and, therefore, throughput.

This they did with some success as was stated by Mr Stonecipher, president and chief executive officer of McDonnell Douglas, on November 6, 1996, just five weeks before the announcement of the proposed merger, confirming the viability of McDonnell Douglas.

As part of this strategy, probably inspired by the McDonnell family as owners of 12 per cent of the capital, the Board of McDonnell Douglas decided in October 1996 not to launch the MDXX project which would have been a competitor to the 747 and which Douglas had promoted to potential customer airlines for several years.

During the very same Board meeting, it was decided to find the least-cost investment in the civil aircraft business. After that events accelerated in the two months following this decision leading to the merger project with Boeing. Furthermore, in order to make the wedding even more attractive to Boeing, it was necessary to ensure that McDonnell Douglas had no chance of success in answering the call for tender of the American government for the Joint Strike Fighter (JSF). This was done in November 1996, when the companys offer was disqualified for not meeting the criteria laid down in the call for tender.

For a company which was the prime and traditional supplier of the Pentagon and which dominated the fighter sector with aircrafts as prestigious as the F15 and F18, the decision caught the worlds aviation experts by surprise.

It should be stressed that, with these two decisions