Business View: BAE knows how to fly, and it's not with Airbus

By Jason Nissé, Business Editor
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The Independent Online

Warren Buffett once said that if a capitalist had been at Kitty Hawk when the Wright Brothers took their historic first fight, he'd have "shot the damn thing down". The Sage of Omaha was speaking after he had lost money in one of the many US airlines that has enjoyed Chapter 11 bankruptcy protection.

But this lack of fiscal rectitude, which caught out one of the world's greatest investors, is not confined to American airlines, or indeed the airline sector. It is quite possible to lose your shirt all over the aviation industry.

I like to recount, in idle moments, all the airlines with which I've flown that have gone to that great hangar in the sky. DanAir, Debonair, Braniff, Pan Am, British Caledonian and Eastern can no longer take me where I want to go. Similarly, we've lost plane makers such as McDonnell Douglas, Hawker Siddeley, DeHavilland and Fokker, so that we are left with only two real forces in world civil aircraft manufacturing, Boeing and Airbus Industrie.

Boeing, though valued at over $60bn (£35bn), is not a model of financial health or responsibility. It has been riddled with scandal, is still potentially facing massive litigation, and is accused of breaking World Trade Organisation rules by using subsidised research for its defence programme to produce materials for its civil aircraft. Indeed, the feeling on Wall Street is that making 747s and the like is a big drag on Boeing's main business, military contracting.

Part of the reason for this poor showing is that Airbus is giving the US group such tough competition. It is easy to forget amid the hoo-ha surrounding the success of the European plane maker that it is now 36 years old, and has struggled to make a genuine profit in almost all of those 36 years. Indeed, it has eaten up billions of pounds, francs, deutschmarks and euros in investments, subsidies and soft loans en route to its current "healthy" financial position. And while it might be delivering a clean profit at last - that is, profits not obscured by depreciation or exceptional items - it is still heavily dependent on grants and "loans" from its sponsoring governments in Paris, Berlin and Westminster.

The company used to be owned by these governments. But the privatisations of the 1980s and 1990s, followed by the mergers of the Nineties and Naughties, left it in a strange hybrid position. Four-fifths of Airbus is owned by Eads, that Franco-German pudding of defence operations, while the last fifth is owned by our own military concoction, BAE Systems.

For a long time, BAE has wanted to remedy this by, well, flogging its fifth to EADS. But when a willing seller has only one buyer, it is hard for it to get a good price. BAE has now officially started the process of selling the stake - but its valuation and what Eads is willing to pay seem a billion quid or so apart.

If BAE can get anything like what it is hoping for, this would seem like good business. It would get out of a volatile operation it cannot control, and could use the money to invest in a few volatile businesses it can control, probably in the US.

Selling out of Airbus would also remove one of the barriers that has prevented BAE from achieving what it has been trying to do for the past five years - which is to merge with a big US defence contractor. BAE sees the big money on the other side of the pond, arguing that Europe is too disjointed and parsimonious (or should we say careful) to pay the big bucks for big-ticket defence procurement.

Northrop-Grumman, General Dynamics and even Boeing will suddenly be linked with BAE all over again. Warren Buffett would be pleased.

j.nisse@independent.co.uk

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