Europe's defence firms get March merger deadline

The defence and aerospace industries of Britain, France and Germany were yesterday given three months to produce a concrete action plan and timetable for merging their respective interests. Shares in British Aerospace, which has been in the forefront of rationalisation moves, shot up by nearly 5 per cent. Michael Harrison reports.

In an unprecedented move, the leaders of the three countries set a deadline of 31 March next year for Europe's aerospace sector to come up with firm restructuring proposals designed to cover both civil and military activities.

The statement, signed by the Prime Minister, Tony Blair, his French counterpart, Lionel Jospin, President Jacques Chirac and Chancellor Kohl of Germany, commits the three governments to support the restructuring by implementing the "necessary measures in national policy".

This is taken to mean that competition issues will not stand in the way of cross-border mergers. Consideration is also being given the the creation of a European defence procurement agency. This would give the integrated defence industry a single large supplier to deal with, meaning economies of scale but also heavy job losses that a major rationalisation programme would entail.

George Robertson, the British Secretary of State for Defence, described the signing of the joint statement as "an historic occasion" adding: "The message here today is rationalise or die, it is as blunt as that."

The three governments believe that by consolidating their activities, Europe's leading defence firms such as BAe, Daimler Benz of Germany and Aerospatiale of France, will produce a powerful grouping equal to the likes of Lockheed Martin, Boeing-McDonnell Douglas and Raytheon of the US.

They also held out the prospect of other nations, such as Italy, Spain and Sweden, joining in the consolidation process.

Neither Mr Robertson nor Margaret Beckett, President of the Board of Trade, would be drawn on whether they would sanction a merger between BAe and GEC as part of the restructuring moves. But Mr Robertson added: "Purely national solutions are no longer commercially sustainable."

Despite the political will on display yesterday, defence analysts said major obstacles remained to be overcome if the vision of an integrated European defence industry was to become a reality.

Chief among these is how to deal with the highly sensitive issues of job losses and leadership of the merged companies and the role of the French government, which still controls large swathes of its defence and aerospace sector.

BAe's chief executive, Sir Dick Evans, welcomed the statement. But one defence analyst said: "This is a Euro-fudge which basically enables the French state to retain a very, very substantial holding in the whole thing and threatens to emasculate BAebecause it gets subsumed into a big amorphous European mass."

The statement said that European integration would have to be based on "balanced partnership" although the details of this were hazy. The statement also stressed that it was primarily for industry to work out the necessary structure.

Britain's aerospace and defence industries alone support 400,000 jobs and bring in export orders of pounds 4bn a year. It is certain that mergers on a grand scale would mean heavy redundancies. But Mrs Beckett said the three governments were still a long way from addressing what that would mean for employment. "We will have to look at the proposals made and the implications they have," she added.

One of the models the restructuring could follow is Airbus Industrie, the four-nation commercial aircraft manufacturer that is in the process of being converted into a single corporate entity with its own assets and a proper capital structure.

The four Airbus partners are BAe, Aerospatiale, Daimler and Casa of Spain. The French government is proposing that Aerospatiale merge with the privately owned French military aircraft maker Dassault. But defence electronics manufacturers like GEC and Thomson CSF would also need to be brought into the restructuring programme.