BAe battles Treasury for £450m Airbus aid

British Aerospace is at loggerheads with ministers over government aid for the 600-seat super jumbo, the A3XX, which the European consortium Airbus Industrie plans to launch next year.

British Aerospace is at loggerheads with ministers over government aid for the 600-seat super jumbo, the A3XX, which the European consortium Airbus Industrie plans to launch next year.

The company, renamed last week as BAe Systems, has applied for about £450m in launch aid for the aircraft, which is expected to cost a minimum of £7bn to develop.

While the French and German partners in Airbus have been promised state aid, the Government is haggling with BAe over the terms on which it will make funding available. BAe has a 20 per cent stake in Airbus.

BAe is eligible for up to one-third of the development costs of the A3XX under the Large Commercial Aircraft Agreement signed between Europe and the United States eight years ago.

The company has asked for 25 per cent of the launch aid at government rates of borrowing, meaning that it would repay the funding with interest charged at the base rate. The remainder would be charged at 1 per cent above the base rate.

However, the Treasury is understood to have vetoed these terms, insisting that taxpayers get a bigger return for their investment in what even BAe accepts is a huge and risky programme. Airbus estimates the market for the A3XX at between 1,300 and 1,500 aircraft, but its American rival Boeing puts the demand at fewer than 400 aircraft.

If Airbus goes ahead with the programme, the A3XX would be formally launched in the middle of next year and scheduled to enter service in 2006.

Last week BAe stepped up its lobbying campaign to be granted the aid on terms that it deems commercially acceptable by highlighting the sales successes of the earlier Airbus programmes. The company said that when the final repayment is made later this month of the launch aid for the A320 aircraft, the Government will have received back twice the £250m it originally provided. In addition, the Exchequer will continue to earn a royalty on each aircraft delivered from now on.

BAe, which manufactures the wings for all Airbus aircraft, also pointed to the huge boost the programme brings to the UK economy, adding £1bn a year to the balance of trade and supporting 62,000 jobs in 400 companies.

Part of the government conditions for providing support will be an undertaking that Airbus converts to a single corporate entity before the A3XX programme goes ahead. Progress towards this goal has been held up by the merger of BAe's three Airbus partners into one new grouping, the European Aeronautic, Defence and Space company (EADS).

The British company is also seeking an increased shareholding in Airbus in return for relinquishing its power of veto over any decisions that the consortium wished to make.

Given that EADS is seeking to float 40 per cent of that group on the stock market by May next year, BAe believes it is in a strong position to push through the corporate restructuring of the Airbus consortium on advantageous terms.