Source: EURLEX
Language: en
Format: md

**COMMISSION OF THE EUROPEAN COMMUNITIES**

Brussels, 24.09.1997
COM(97)466 final

COMMUNICATION FROM THE COMMISSION

TO THE COUNCIL, THE EUROPEAN PARLIAMENT,

THE ECONOMIC AND SOCIAL COMMITTEE

AND THE COMMITTEE OF THE REGIONS

### **The European Aerospace Industry** **Meeting the Global Challenge**

###### **_The European Aerospace Industry - Meeting the global challenge_**

I. Introduction 1

II. Facing the challenge 2

1 US strategy 2

2 Situation in other countries 5

3 EU fragmentation 5

4 Significance of the European Aerospace Industry 7

III. Scenarios for the future 8

1 National solutions 9

2 Partial integration 10

3 The need for European groupings 11

3.1 Sector-specific groupings 12

3.2 Multi-sectoral groupings 12

3.3 Overall integrated grouping 14

IV. Priorities 14

1 Accelerate restructuring 14

2 Accompanying measures 15

V. Conclusion 17

I. INTRODUCTION

The world aerospace industry is undergoing dramatic changes. Momentous recent events
such as the merger of Boeing and McDonnell Douglas and the proposed merger of Lockheed
Martin and Northrop Grumman have been driven by a recognition that the structure of the
industry will only allow for a small number of world-class prime contractors to sustain
competitiveness and commercial success through the integration of capabilities in a broad
range of inter-related aerospace disciplines. In the light of these events, this Communication
sets out to assess the situation of the European aerospace industry as a whole focusing on a
range of possible scenarios for its future development.

 - Markets

In terms of **large civil aircraft** the Airbus share of the market grew steadily throughout the
1980's, as its aircraft range increased, but has remained essentially stable since 1989 and its
share of the backlog stood at around 30% in 1996. Boeing's market share decreased
somewhat in 1989 but grew again over the past few years to around 64% in 1996, whilst the
McDonnell Douglas share of the civil aircraft market has been consistently decreasing
throughout the 1980's and 90's to around 6% in 1996. Since the acquisition of McDonnell
Douglas by Boeing, the European aerospace industry faces one dominant competitor with
around 70% of the total order backlog.

While the market for civil aerospace products is clearly a world-wide market, **military**
**aerospace** markets are constrained by differing national defence and procurement
regulations. An illustration of recent market shares on the open international market can be
provided by looking at the fighter aircraft contracts awarded between 1992 and 1996, where it
is believed that in terms of value 15-20% went to European producers while nearly 80% went
to US producers.

In the world **civil helicopter** market the European share decreased throughout the 1980s but
has stabilised in the 1990s and in 1996 stood at around 28% (unit deliveries of EU-design
origin helicopters), whilst in the **militai*}' helicopter** market the European share has been
constantly decreasing, particularly after the end of the cold war and now stands at around 8%
of the world market.

In **regional aircraft** (jet and turboprop), where the number of manufacturers is far greater but
has been diminishing over the years, European companies held a majority share of the market
for a long time (over 70% in 1994). More recently, however, rapidly increasing competition
from Canadian, Brazilian and Asian producers combined with the collapse of Fokker and the
sale of Dornier to Fairchild has resulted in a dramatic reduction in European market share
whilst the Canadian industry now holds 40% of the regional jet market.

The position of the European industry in the world **space** markets varies between a market
share of 5% or less in some categories of ground equipment, 20-25% in the satellite
manufacturing sector and more than 50% in space launch services as a result of the Ariane
programme, albeit only in markets which are effectively open to competition.

In the **civil aeroengine** market the level of co-operation between US and European
companies is greater than within Europe (e.g. Snecma and GE produce the CFM engine,
whilst MTU of Germany participates in Pratt and Whitney engines) however intra-European
co-operation is the norm for **military aeroengines** such as Eurojet. Because of these levels
of EU-US co-operation it is difficult to compare market shares. However, the turnover of the
two largest US aeroengine producers is roughly double that of the two major EU producers.

The **equipment** sector is growing in importance and complexity (it represents an ever greater
part of an aerospace system's value and 30% of the total employment in the aerospace sector)
but without successful European platforms its long term future would be compromised.

II. FACING THE CHALLENGE

Despite enormous and painful efforts over the last 10 years, the European aerospace industry
suffers from the increasingly acute effects of the continued partitioning of its industrial
structures. Previous Communications have addressed issues relating to different areas of the
aerospace industry [1] . By now taking a global approach to this industry three'factors are
apparent from the current situation:

  - The ever greater complexity of aerospace products has led to spiralling development
costs and financial risks which have long outstripped the resources of even the largest
European companies and have led to ever fewer new programmes being launched.

  - No single Member State can come close to matching the large home market for defence
equipment or the level of RTD support provided to the US industry. National markets
can no longer provide a sufficiently strong base to support a full-range independent
aerospace activity.

  - Few individual firms in Europe have been able to balance risks and maximise benefits
from developing activities in a broad range of aerospace businesses. Those that have are
too small to enjoy the economies of scale of the US mega-companies which now
dominate the business.

It is apparent that any further delay in responding to the changes which have taken place in
the aerospace market will jeopardise the future of the European aerospace industry and the
hundreds of thousands of jobs it provides.

**Boeing** **McDonnell** **Douglas** **#**
**Lockheed** **Martin Northrop** **Grumman** **#**

**Raytheon** **Co. #**
**British Aerospace**

**Aerospatiale**
**United Technolgies** **(P&W)**
**Daimler** **- Benz Aerospace**
**General** **Electric** **Co.** **(Aero-engines)**

**Thomson-CSF**

**AlliedSignal**
**G EC-Marco ni**

**Rolls** **Royce**
**Mitsubishi** **H.I.**

**GM** **Hughes**
**Finmeccanica** **(Aerospace)**

**Alcatel**

**Textron**

**Snecma**

**TRW** **Inc.**

**Bombardier**

# Post Merger Estimates

**1.** US **Strategy**

```
                 Turnover in $M.

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

```

By far the largest competitor on the world aerospace market is the US industry with up to
58%o of the world aerospace business (in terms of consolidated turnover) while the EU stands

1 "The European Aircraft Industry: First assessment and possible Community actions", (COM(92) 164 Final) "The challenges facing the European defence-related industry, a contribution for action at European level"
(COM(96) 10 Final) - "The European Union and Space: Fostering applications, markets and industrial
competitiveness" (COM(96) 617 Final)

at 29%. The US is the market leader in both civil and military aerospace and has a highly
developed administrative structure to support its position.

The recent history of the US aerospace industry has been one of consolidation. From over 20
companies involved in the design or production of aerospace systems in 1980 the industry is
now concentrated in the hands of three prime suppliers: Boeing, Lockheed Martin (which has
recently announced plans to merge with Northrop Grumman) and Raytheon. Of these three
companies, only the first produces large civil aircraft, and only the first two military aircraft.
However, all are active across a wide range of aerospace activities in order to balance their
risks, increase their ability to cope with market cycles and take full advantage of technology
and skill transfers between the different sectors.

##### Mergers & Acquisitions.

**General Dynamics**
**Lockheed**

**Martin Marietta**

**Loral**

**Ford Aerospace**
**LTV Missiles**

**IBM-Federal Sys** **.**
**Unisys**

**LTV aircraft**

**Northrop**
**Grumman**

**Westinghouse**

**McDonnell Douglas**
**Hughes Helicopters**

**Boeing**
**North American**

**Raytheon** **jBi**
**Beech Aircraft** **—** _**" ^**_ **'**

**BAe Business Jets** **J—**

**TI-Defence**

**Hughes Aerospace -**

**& Defence**

**Estimated**

**Turnover**

**Lockheed Martin**

**1980**

_Merger process in the US_

```
1985 1990 1992 1994 1995 1996 1997

```

This consolidation process has been facilitated by US government's stated policy to
_"maintain the superiority_ _"_ of US aerospace and ensure that federal investments are focused
and effective to strengthen the public-private partnership to promote continued US leadership
in aerospace and aviation through a clearly set out national aerospace policy to support its
industry.

- **Research and Development**

The US government invests massively in both civil and military aerospace research and
technological development. On the civil side, the Federal Aviation Administration has an
annual aeronautics budget for R&D which exceeds $2 billion. Moreover, in civil aircraft
alone, according to estimates carried out for the EU, about 70% of NASA's annual $1 billion
aeronautics spending can be classified as support to the US large civil aircraft industry or

around four times the total large civil aircraft RTD support provided by the EU and its
Member States combined

Whilst support for military aerospace is difficult to estimate accurately since much of it falls
into the so-called "black budget", publicly available Department of Defense figures show that
its aerospace research, development, test and evaluation budget averages $20 billion per year.
This investment has strengthened the technology base upon which the industry relies to
develop both military and civil products

Moreover a strong emphasis has emerged in the US on a number of well-funded and highly
co-ordinated or programme-specific technology acquisition projects many of which have
dual-use applications such as the High Speed Civil Transport (HSCT) and Integrated High
Performance Turbine Engine Technology (IHPTET) projects.

- **Civil/military**

Contrary to the situation in Europe, the promotion of a dual-use approach has been a major
element in US research and procurement policies for many years now and is leading to an
increasingly integrated defence-civil technology and industrial base. The promotion of
technological synergy between civil and defence activities optimises the use of RTD
resources and encourages the restructuring and consolidation of the industry. For example,
on the industrial side it is doubtful if a commercial space industry could ever have come into
being without the benefit of defence programmes as a springboard for commercial
applications. Conversely, the military sector can also benefit from civil technology standards
and practices as can be seen in the field of transport aircraft.

- **Single regulatory framework and market**

The US industry obviously benefits greatly from being heavily supported by one single
government while the European aerospace market remains fragmented because of national
boundaries and separate research and defence policies. European undertakings such as
Airbus, Eurocopter, Eurofighter or Arianespace must address themselves to a number of
different governments with all too often differing priorities.

The US Aerospace industry also benefits from the fact that US government procurement has
mostly been directed at US companies and at ensuring the continued well-being and
supremacy of the US industry. In addition the amount dedicated to military equipment
procurement (including RTD) in the US is, at around $80 billion per annum, almost double
the combined military equipment procurement and RTD budgets of EU countries. Within
these figures, the amounts dedicated exclusively to military RTD represents annually at least
$35 billion in the US versus $12 billion in Europe. Such significant differences in RTD
spending risks marginalising the European technology base.

Similarly, NASA's space budget ($12 billion in 1995) combined with the Department of
Defense space budget ($10 billion in 1995) is about ten times that of Europe's space budgets.

- **Advocacy Center**

Consolidating the US policy of lobbying on behalf of US companies, the Advocacy Center
was established within the Department of Commerce. The Center is at the core of the US
national export strategy and works in co-ordination with the 19 federal agencies of the
congressionally mandated Trade Promotion Co-ordinating Committee (which include the
Department of State, the Export Import Bank, and the Department of Defence). The aim of
the Advocacy Center is to expand US exports and assist US government personnel, including
US embassy personnel, in approaching foreign governments on behalf of US commercial

interests. By doing so the Advocacy Center fulfils its stated aim of pursuing deals on behalf
of US companies from start to finish through "hands-on" support.

Although the Center is not an aerospace-specific facility, in the increasingly global and
competitive aerospace market it has been proving widely beneficial to US aerospace
companies and the Advocacy Center is vocal in highlighting its contribution to the sale of US
built aircraft.

**2** **Situation in other countries**

The **Canadian** aerospace industry (the bulk of which has been brought into one single
company by Bombardier) is strongly supported by both Federal and provincial governments,
and is extremely active in the regional aircraft market with both aircraft and engine
production. Bombardier's share of the world regional aircraft market was up to 40% in 1996
and is likely to increase further with the demise of Fokker and the recent successful launch of
the new Canadair 70 seat jet.

The aerospace industry in the ex-USSR was long one of the largest producers in the world, it
has however, been hard hit by the post-1989 events and is currently struggling and having to
downscale massively. The **CIS** aerospace industry, apart from the space launcher segment, is
thus not currently a major competitor on the world market but could in a relatively short
period of time become an active player in both civil and military aerospace if appropriate
financial and restructuring steps are taken. Indeed signs of a re-emergence are beginning to
appear, in particular through competitive offers in export markets for combat aircraft and
missiles.

While the **Japanese** industry has designed and produced its own aircraft, spacecraft and
launchers, its has developed a role as high tech subcontractor to foreign (essentially US)
aerospace companies.

China's aircraft industry is still in its early stages, however the Chinese together with the
Singapore aerospace industry entered an important agreement earlier this year to jointly
produce a 100-seater aircraft with Airbus and Alenia. In the space field, China is pursuing a
policy aimed at becoming one of the world's foremost launch providers and also has strong
aspirations in the satellite field.

Embraer of **Brazil** produces regional aircraft (with 10% of the world regional aircraft market)
and is involved in a number of minor military aerospace co-operations. **Indonesia** is also a
competitor in the regional aircraft market, and from producing small turboprops in cooperation with other companies, it will now launch its own N250 turboprop regional aircraft.

3 EU **fragmentation**

In comparison with the US, the pace of consolidation in Europe has been dramatically slow.
With much smaller home markets and overall shares than their American counterparts, there
are still 6 civil aircraft producers (1 in the US), 6 combat aircraft companies (2 in the US), 3
helicopter manufacturers (3 in the US), 12 missile producers (4 in the US), at least 6 major
producers of defence electronics (4 in the US) and 5 satellite prime contractors (4 in the US)
in Europe.

**• Industry structure**

Very few European companies have the scale and the range of interdependent activities of
their US competitors. Even the largest European aerospace companies, British Aerospace,
Aerospatiale and Daimler-Benz Aerospace, are only between one-quarter and one-fifth of the
size of their larger US competitors.

_Size/range comparison of major EU/US companies_

The period of sustained development which was enjoyed by the European aerospace industry
in the 1970's and 80's was badly dented in the early 1990's, firstly because of the fall in
defence-related activity following the end of the cold war and secondly because of the slump
in civil orders which accompanied the massive losses experienced by the airline industry in
the first four years of the decade in the aftermath of the Gulf War.

These difficulties served to highlight the fact that the European aerospace industry still has to
cope with structural adjustment problems. In recent years, the European aerospace industry
has lost ground to that of the restructured and revitalised US industry and in certain niche
markets it is facing increasing competition from third countries' manufacturers.

In defence-related aerospace where Europe is handicapped by small, partitioned home
markets, exports are crucial to the health of the European aerospace industry. Yet it is now
exporting less than half as much as the US industry as the latter's export performance, thanks
also to the political influence exercised on its behalf, started to benefit under the increasingly
stable international political conditions of the current decade.

- **National focus**

Historically, Member States have viewed aerospace as a national industry, primarily for
reasons of national security. This means that policies affecting this industry have been
pursued with a national focus. National research policies, procurement decisions and
decisions on direct support have been measured solely in terms of their impact on the
"domestic" industry. Even the regulatory framework in terms of product certification, export

credits, company law and so forth is either non-existent or under-developed at a European
level.

An exception to this national focus of the aerospace industry arises in the numerous
collaborations within the Community's Research Framework Programmes where for many
years now, the aerospace industry has participated along with research centres in pursuit of
transnational goals and objectives. The Commission proposes to reinforce these efforts in the
5th Framework Programme.

However Europe spends much less than the US on RTD support and despite the transnational
collaboration in Community RTD programmes, the difference is accentuated by the still very
important duplication of spending by different Member States in pursuit of "national"
aerospace objectives. Thus the objective of maintaining capabilities and competitiveness
compared to other aerospace industries inside Europe is undermining the position of the
European industry as a whole.

**4.** **Importance of** **the** **Aerospace industry for Europe**

This situation is all the more critical given the huge potential of the European aerospace
industry which employs over 370 000 people directly and many times that number indirectly;
and creates high quality jobs as well as critical and pervasive technologies that fuel the
development of many other industries. The aerospace industry sustains the capability for an
independent defence and it involves some 700 firms (many of them SMEs) with an estimated
70 000 suppliers operating in all Member States in the Union.

_Estimated_ _EU_ _Aerospace turnover breakdown_
_by final system level (source:_ _A EC_ _MA)_

- **Trade and Competition:**

The European aerospace industry is a
diverse industry which produces
complete systems covering all
aerospace applications: large civil jet
aircraft, regional aircraft (jets and
turboprops), military aircraft,
helicopters, missiles, satellites and
launchers, as well as engines and
equipment. The chart illustrates the
estimated distribution of the turnover.

The significance of a strong Aerospace
industry for Europe as a whole is
manifest not only because it is one of
the top 15 industrial sectors by
employment, but also because:

In 1996 the value of aerospace exports was put at over 15 billion ECU which represents
almost 3% of total EU exports. Although EU aerospace exports and imports have remained
broadly in balance over the last 10 years, Europe has consistently been a major net importer
of aerospace products from the United States. It should also be remembered that in a market
such as large civil aircraft (estimated to be worth around 1 000 billion ECU over the next 20
years) it is only the existence of the European aerospace industry's products that prevents the
current dominance of Boeing from becoming an absolute monopoly.

**• Independent defence capability:**

The aerospace industry accounts for approximately 50% of the defence-related industries
(including electronics for aerospace). Without the ability to develop and produce efficiently
the necessary aerospace products, autonomy in the formulation of an independent defence
policy would be significantly diminished. There are thus important foreign and security
policy considerations in the maintenance of a healthy and competitive aerospace industry.

 - **Technology transfer to other sectors:**

With around 15% of its turnover spent on Research and Technological Development, the
aerospace sector is among the most research intensive sectors of the economy. It is not only
strategic in itself but is also a driver for the development of a wide variety of technologies
which are critical for innovation in other industries. It stimulates technological development
in high-tech supplier industries (e.g. materials and electronics) and plays a leading role in
technological innovations which diffuse to other sectors (e.g. energy and automotive). A
weakening of the technological dynamism of the aerospace sector would therefore undermine
European innovation and competitiveness much beyond the sector itself.

 - **Space applications:**

Satellites, it is now recognised, will be fundamental in bringing the opportunities of the
global information society to many parts of the world [2], complementing and replacing
terrestrial infrastructure. Global satellite navigation is also becoming a cornerstone of civil
transport systems and other applications (in the same way as it has already become for the
majority of defence systems) and the EU is currently reliant on US and Russian militarybased systems.

- **The air transport system**

The public demand for air transport is growing at around 5% per year. The aerospace industry
has to meet this demand not only with new aircraft but also with associated air traffic control
and avionics systems which will enhance the efficiency and safety of operations

- **The Environment**

The European aerospace industry has made considerable progress in developing quieter and
cleaner aircraft. However the continuing rapid growth of air transport and the increasing
importance of environmental aspects for competitiveness, means that these efforts will have
to be enhanced in future so as to meet both local and global concerns. Local as in the case of
noise annoyance around airports, or regulation on access to individual airports based on
environmental targets. Global as in the case of the debate on climate change and greenhouse
gases, such as C02 and NOx. Measures, at a global or EC level, need to be taken to control
the environmental impact of air transport in terms of noise and gaseous emissions, including
support for further substantial investment in environmentally related RTD by the European
aerospace industry.

**III.** SCENARIOS FOR THE FUTURE

An efficient, strong European industry should not be seen in opposition to the US industry,
but as complementary to the US industry in the global market. If Europe wishes to be a real
partner for the US with American companies participating in European programmes in the

2 See the recent Commission Communication "EU action plan: Satellite Communications in the Information
Society" European Commission(97)91 final

same way as European companies participate in American programmes, the European
aerospace industry must be able to compete in terms of financial and technological resources
as well as with attractive, commercial programmes. It is in the interest of the whole European
Union and of customers from all countries, that the European aerospace industry should be a
credible counterweight to the very real threat of a US monopoly in the aerospace business.

The particularities of the aerospace market determine to a very great extent the nature of the
required response. The production and sale of aerospace products are marked by massive
entry barriers, huge costs of programme development with commensurately long pay-back
periods and ever greater technological complexity, but above all by increasing returns to scale
and important benefits of scope. There are few if any, other industries where size is as
important as it is in aerospace. Large civil aircraft for example require a production run of
several hundred just to break even and it has been estimated that every doubling of
production reduces costs by around 20%.

It is not the Commission's intention to propose, much less decide, the eventual shape of the
European aerospace industry - such decisions should only be taken on commercial and
economic grounds by those with a direct stake in the success or failure of the venture whilst
respecting the Community policies on competition and other relevant areas. Nevertheless the
Commission can outline the scenarios facing the industry and attempt to gauge them against
the broader European interest.

**1** **National Solutions**

One scenario would entail maintaining the current system of one or more aerospace industries
separately in each Member State. Of course there are already a number of cross-border jointventures and alliances, but sustaining such a network of national champions would mean
continuing with companies which are too small to enjoy the economies of scale of the US
mega-companies. National markets can no longer provide a strong enough base for a fullrange aerospace activity, and growing development costs of the aerospace industry have long
surpassed the resources of even the largest European companies.

Within Europe the industry in certain Member States has come to appreciate the benefits of
size and has gone through a process of consolidation on a national level. An example is the
aerospace industry in Italy which through the 1970s and 1980s consolidated into one major
aerospace group, Alenia, which is active in civil aircraft, airframe components, military
aircraft and space applications. Alenia's parent company, Finmeccanica, also includes the
helicopter producer Augusta. On the other hand the industry in some other Member States is
still fragmented even at a national level. The short term advantages of national groupings are
open to debate, but this lack of coherence in the different Member States only accentuates the
differences and partitionings of the European aerospace industry.

Most analysts concur that maintaining isolated national companies is not a viable option for
the future. There is an urgent need for increased cross-border business and progress towards
the creation of a European defence procurement regime so as to overcome the problems
arising from the current fragmentation. Even where there is agreement on the need for
transnational integration, the companies and their shareholders must recognise that the pace
of restructuring is too slow and acknowledge that another difference between the various
aerospace companies in Europe is the ownership structure.

Any restructuring requires agreement between companies who have to take due account of
their shareholders' interests as well as the commercial environment in which they operate. In
the European aerospace industry we are currently faced with three main types of

shareholding structure: private and dispersed, private and concentrated, and public and
concentrated. However, certain private companies have expressed a reluctance to propose to
their shareholders that they enter a company with a major state holding. This would be seen
as engendering weakness because of a perception that state companies can lack clarity on
commercial objectives, suffer from political sensitivity of decisions and have insufficient
speed of reaction. In addition it can be the case that state owned companies are
undercapitalised compared to their private sector counterparts. Even where private
companies are concerned, there can be a fear that without adequate safeguards, a concentrated
minority shareholding could be used to exercise effective control for the benefit of that
shareholder alone.

The slow pace of integration and the problems relating to the different corporate structures
could lead to a scenario whereby a number of European aerospace companies form a sectorspecific or multi-sectoral grouping but which does not include all the main European
aerospace producers and Member States, in other words a partial integration.

**2** **Partial integration**

Such a scenario entails some of the benefits of consolidation, in particular economies of scale
and increased market base, but would also single out one or more of the European aerospace
companies thus running the risk of isolating them.

These companies might decide to enter into mergers or alliances with US or other nonEuropean firms. In certain sectors of the aerospace business such alliances, transatlantic or
otherwise, could entail the loss of managerial control and of control over defence
requirements and ultimately could see European firms becoming subcontractors or niche
players with a limited technological base. This would not only split the European industry
but could also call into doubt the advantages of a strong European aerospace industry and,
more importantly, the question of political priorities in terms of a strong and independent
technological base in the area of defence. Moreover, in space for instance,
telecommunications are a vital link in the global information society, so control of that sector
has wider implications in terms of cultural identity and access to information and services.

Regardless of these considerations, even such partial integration groupings would need to
address a number of issues such as efficient organisation and corporate structure. Experience
with joint ventures has shown that they can be no more than a first step towards meeting the
competitive demands facing the industry. They have inherent structural weaknesses in speed
of decision-making and component sourcing, and they do not eliminate duplication of
facilities or capabilities. Moreover, joint ventures are generally organised around a single
product and thus cannot enjoy the benefits of technological spin-offs or offsets.

These inherent disadvantages and rigidities are also shared, albeit to a slightly lesser extent,
by the GIE (Groupement d'intérêt économique) structure used by Airbus Industrie amongst
others. Unless such transnational undertakings are able to adopt more agile and efficient
corporate structures, they will be handicapped in raising the ever greater levels of finance
needed and in concluding the risk and revenue sharing partnerships which are essential for
spreading the risks associated with new product development and improving market access
for exports. For example Airbus Industrie plans to develop a new very large passenger
aircraft, the A3XX, whose enormous development costs (up to $10 billion) will require the
participation of risk-sharing partners from third European and non-European countries.

In terms of organisation, whatever route industry decides to take in its restructuring, real
progress will depend on any transnational European aerospace company being a fully
independent commercial entity, responsible for programme decisions and raising its own

**10**

finance. The companies and Member States involved have recognised that the GIE structure
which was well suited to the start up phase of Airbus Industrie, is no longer adapted to current
needs and the business has to be transformed into a single corporate entity. But although this
objective has been agreed for some time, a great deal of detailed work remains to be
accomplished. Indeed even Trade Union representatives, fully aware that this will entail
some degree of rationalisation, have urged the managerial level to accelerate the restructuring

process.

At the same time moves to charge Airbus with the development of the FLA (Future large
military transport aircraft) are a positive first step in creating a large integrated European
aerospace producer. These tentative first steps should be built upon by the incorporation of
other activities and there should be parallel developments in other parts of the business to
increase competitiveness by unlocking the full benefits of size and scope mentioned above.

If the aim is to create an integrated European aerospace industry, then it must be capable of
maintaining industrial and technical capabilities in the Member States which will continue to
be the primary source of support for the foreseeable future, while organising itself on a
competitive and economic way. This argues in favour of the greatest degree of multi-product
and civil and military integration since this provides each Member State involved with the
opportunity of having an economic and efficient centre of excellence without recourse to
narrow blinkered "juste-retour" policies within each system segment.

**3** **The need for European groupings**

Given the specific factors which apply to aerospace, the full benefits of restructuring would
only be realised if all the major aerospace producers and Member States are fully involved.
Thus it is also important that a way is left open to bring in those companies which are unable
to join from the outset.

It is possible to imagine a variety of configurations for European aerospace companies. There
could be a single enterprise for almost all aerospace activities, a company built around aircraft
and another around electronics, or perhaps a separate company for space related activities or,
indeed, any of many differing combinations of sectors.

_**Examples of**_

_**Multi**_
_**Sectoral**_

_**WE**_

**3.1** **Sector-specific groupings**

Sector specific groupings would have the advantage of bringing together companies from
different Member States, thus increasing size, but would also entail having different
companies in all the different sectors of production. The experience of Airbus has shown that
even within a single sector, only if the current fragmented structures can be superseded by
larger undertakings which are unimpeded by individual policies based on national borders can
the European aerospace industry hope to remain competitive.

However, while sector-specific groupings might be appropriate for certain segments, in most
other areas of the aerospace industry, one can wonder whether sector-specific groupings can
provide sufficient scale and capabilities to compete in the world market. The particularities of
the aerospace market demand a market base, a know-how and financial and industrial
capabilities such that the balance of advantage lies with the giant US producers currently
present on the market with a broad range of aerospace products.

A multi-sectoral European dimension, on the other hand, would encourage the development
of competitive new products by allowing investment at a European scale not feasible for any
single firm or Member State, nor probably for most sector-specific groupings, and enable the
creation of industrial structures capable of efficient operations and at an economic scale. It
could also give rise to a regulatory environment that encouraged competitive products and
services to be created and lead to the development of European standards which make for
efficient co-operation,

**3.2** **Multi-sectoral groupings**

Industry and governments have to use their limited resources for RTD as a basis for as many
products as possible. One of the reasons why the most successful firms are present in many
areas is that each RTD action has potential applications in 2 or 3 branches of activity.
Another is to allow companies to take advantage of benefits of scope where economies can be
realised from applying similar techniques and incorporating the same basic elements across a
number of closely related products.

Only industry itself can evaluate these benefits but it is instructive to note that in recent
merger cases in the US, the benefits in terms of cost reductions accruing to the merging firms
have been estimated to be worth several billion dollars.

In most branches of aerospace there is a close relationship between the civil and military sides
of the business. Technologies, procedures, components and equipment are often identical or
nearly identical in civil and military applications. From a business viewpoint, the
combination of civil and military activities also helps to overcome cyclical market
fluctuations and spreads exposure to risks.

Another important issue in civil/military integration arises out of the role of offsets in
aerospace trade. Although limited by international agreements with respect to civil aircraft,
the ability to conclude direct and indirect offset arrangements can be a determining factor in
gaining access to certain foreign markets. Such offsets, including bundled sales of a range of
civil and military aerospace products are facilitated in practical terms by flexible and fullyintegrated civil/military aerospace companies.

**12**

The complexity of the links between the different aerospace sectors is shown graphically
below.

Most aerospace companies have major defence interests and are reliant on government
procurement and technology funding. However while some of the major European aerospace
companies are striving to reduce their dependence on domestic defence-procurement
contracts the US companies appear to be doing the opposite. One of the main stated reasons
for the Boeing-McDonnell Douglas merger was the wish to combine the military capabilities
of MDC with the civil capabilities of Boeing. The advantages of a merger such as this are that
the possibilities for flexible pricing, bundled sales, and allowing the new merged company to
benefit from the Department of Defence's procurement contracts are increased.

The nature of the aerospace market is such that in many, though not all, sectors it will only be
possible for one entity to remain viable in Europe. For example, many commentators have
suggested that in the medium to long term there is probably only room for one major civilmilitary producer of airframes in Europe. Such a suggestion need not necessarily give rise to
competition problems if, as was the case with the Messier-Dowty landing gear merger, there
is a fully functioning global market with strong foreign competitors.

In the case of defence markets which do not function globally for political reasons, since
Member States have already shown a willingness to accept a situation at national level where
there is only one producer, this could also be envisaged at European level. In any event some
kind of reference framework could be provided by US competition in export markets and
competition would be reintroduced if a stronger and more unified defence market in Europe
could help persuade the US to open their market and allow the development of a true
transatlantic market in defence goods.

European transnational restructuring is already beginning in some business sectors through
the creation of companies like Messier-Dowty, Matra-BAe Dynamics, Eurocopter and Matra
Marconi Space. However market imperatives of technological cross-fertilisation, economies
of scale and scope, synergy and risk-balancing argue strongly in favour of the development of
European companies producing a broad range of aerospace products.

**13**

**3.3** **Overall integrated grouping**

It could be said that since multi-sectoral groupings would not benefit fully from the synergies
between all the different sectors of the aerospace industry, another option for a European
grouping is a scenario where all the companies from all Member States consolidate into one
single European Aerospace company.

One could imagine that in such a scenario all the benefits of consolidation would be
magnified. Moreover while it must be highlighted that even the largest US aerospace
companies are not so disparately multi-sectoral as a single European Aerospace company
would be if it were to exist, it must also be stressed that such a company would still be
smaller than Boeing, the largest US competitor.

Nonetheless, it must also be recognised that the problems associated with restructuring would
be amplified to such an extent that a swift transition from today's situation to an overall
integrated European aerospace grouping is not very realistic. Thus in the short term, the most
promising way forward appears to be through multi-sectoral groupings.

**IV.** **PRIORITIES**

**1** **Accelerate restructuring**

The need for restructuring is clear and urgent, regardless of which scenario is deemed most
appropriate. It is also unquestionable that the present pace of integration is too slow and that
it is necessary to press ahead beginning with the already agreed conversion of Airbus
Industrie to a single corporate entity. The extra difficulties of restructuring in the defence
sector should not serve as a pretext for delaying restructuring in the civil sector.

The need for Europe-wide consolidation in the field of aerospace and the reality that no
Member State can any longer retain complete autonomy in its aerospace capability have to be
acknowledged through the acceptance of true interdependence within Europe in the interest of
the continued well-being of the European aerospace industry as a whole. This restructuring
must also take into account the necessary interdependence between aeronautics and space and
the strong technological links with other sectors. The pursuit of competitiveness must also
encompass the numerous subcontractors of the aerospace sector, especially SME's which
play a major role in job creation and in the development and diffusion of technologies.

Although the primary responsibility for restructuring falls on industry itself, aerospace is and
will remain one of the most politically sensitive industries. The role of governments is
crucial for restructuring and it is essential that the Member States take all practical steps to
encourage and assist the creation of truly European companies. Even where there is no direct
state shareholding, state influence arises from its role of major client, financer of RTD,
provider of launch aid, export control authority, certification agency and so forth.

Member States can act by adapting their support structures to facilitate restructuring.
Governments must be willing to balance a narrow view of national sovereignty with the
overriding objective of industrial competitiveness. Those Member States which have a direct
shareholding in aerospace companies must adapt that shareholding or manage it in such a way
that the restructuring process can advance. Industry must be given sufficient commercial
freedom and support to make the required changes. The management of enterprises must be
guaranteed maximum commercial flexibility in operational terms. This is not to negate the

**14**

vital role of governments but to propose that this role be exercised in ways that do not hinder,
but promote the necessary changes.

Bearing in mind the possibilities permitted by the Community framework for state aid for
research and development, Member States should also be ready to judge launch aid and RTD
support decisions against the overall impact on the European aerospace industry as well as
against national technological and employment benefits taking into account the global
dimension of a large part of this industry. Co-ordination of RTD on both national and
Community level will therefore be essential and, given the existence of a number of dedicated
aeronautical research programmes and facilities, new strategic planning and management
functions, including technology foresight, which take account of existing co-operative
arrangements, will have to be developed so as to support an integrated European approach.
Such co-operation will stimulate synergy between applied and fundamental research, and
dual-use technologies and will increase the impact at all levels of the supply chain.

**2** **Accompanying measures**

The diversity of the critical success factors means that no single initiative can address the
challenge of building for the future - many separate, phased and related actions will be
needed to accompany the industry restructuring if success is to be achieved. Nonetheless it
must be stressed that without restructuring, the impact of any public measures would be
severely limited. However, if industry is willing to take the difficult decisions which the
market demands, the Commission and the Member States should also be ready to make
further efforts in areas such as the following, which are of great importance for aerospace.

**RTD support** for aeronautics which has been increasing since the 2nd framework
programme, should continue to be a major factor contributing to the co-operation both
between individual aeronautics firms and between the different sectors of the industry airframers, engine producers and equipment suppliers. In the 5th framework programme, the
Community research effort should be centred around the proposed key action "New
Perspectives in Aeronautics", while the industry will also benefit from other FP5 activities,
e.g. the creation of a user-friendly information society, generic activities for the development
and support to research infrastructures, activities in favour of SME's, the improvement of
human potential and international co-operation. In line with the recommendations of the
"New generation aircraft" Task Force, the research activities should focus on the strategic
objectives identified at European level including technology integrator platforms at the
required scale supporting the competitiveness of the aeronautics industry and the
improvement of the air transport system, e.g. environmental, safety and operational factors
which are also key elements for competitiveness. Also in the domain of space technologies
and space applications the Commission will ensure a coherent approach in its RTD actions
under the different specific programmes of the 5th Framework Programme, as well as a
reinforced co-ordination with the national space agencies' and the European Space Agency's

programmes

**Defence procurement issues** should be addressed as a matter of priority. With escalating
costs and budget restrictions, ever fewer new programmes will be launched but the
programmes will be of such importance and last so long that they will effectively structure
the industry for the next 30 years or so. The Commission proposed the establishment of a
European defence procurement regime which could lead to the creation of a European
domestic defence market and harmonisation of procurement requirements, schedules and

**15**

procedures in its 1996 communication on the Defence-related industries. This must be
accompanied by the necessary harmonisation of technical and operational specifications by
the appropriate bodies.

The new Article J. 7 on the Common Foreign and Security Policy in the draft Treaty of
Amsterdam makes a special reference to the field of armaments. This creates further
possibilities for new initiatives and actions in support of this process.

The report of the "Davignon Group" on the **European Company Statute** opens new
perspectives for political agreement on employee involvement in the European Company in
the months ahead. If this hurdle can be overcome it could lead the way to the adoption of the
Statute by the accelerated procedure foreseen in the Single Market Action Plan agreed at the
Amsterdam European Council of the European Union. This restructuring tool should be put
at the disposal of the aerospace industry as an efficient means of blending the European and
national identities of restructured companies.

Another subject of high priority is the creation of a **European Aviation Safety Authority**
that would complement the single market by the establishment of a single legislative
framework and a single certification process for all aeronautical products. This will not only
reduce the regulatory cost borne by the European industry but also facilitate the world wide
promotion of European safety standards. It is therefore essential that the Council acts quickly
on the Commission recommendation for a Council Decision authorising the Commission to
start negotiations with a view to establishing a European organisation responsible for civil
aviation safety. [3] .

It is also recognised that diminishing airspace congestion and increasing the efficiency of **air**
**traffic management** will contribute to expanding the air transport market and ensure a
sustainable growth to the manufacturing industry. In this spirit the strengthening of
EUROCONTROL and the adhesion of the Community to this organisation, as proposed by
the Commission will contribute to the acceleration of the development of new tools and
concepts, giving a European edge in this field.

As far as satellite navigation is concerned, the Commission will bring forward an action plan
for a European approach to the development of a global satellite navigation system based on
public-private partnership.

In order to maximise the benefit of the internal market and in view of the current tendency
world-wide and in the US to move from military to civil standards, it is of the utmost
importance for Europe to strengthen its own **standardisation** activity in aerospace so as to
avoid a _de facto_ US monopoly.

- **External trade aspects:**

International rules exist both at the multilateral as well as the bilateral level to limit the

distortion of trade due to government intervention especially with regard to subsidies. The
1992 EU-US bilateral Agreement on trade in large civil Aircraft is based on a trade-off
between limiting direct (development) support, which is mainly granted on the European side,
and limits on indirect (RTD) support granted by the US government. However, the
implementation of the Agreement by the US has been heavily criticised by the EU and its
industry. In March 1997, the Commission, with the support of the Member States and the
industry, launched a review of the agreement. This process, which has not been concluded
yet, has to be reviewed in the light of the new situation created by the Boeing/McDonnell

3 SEC (96) 2152 final

16

Douglas merger and of the conditions imposed by the Commission's merger decision some of
which are of the same type as issues addressed under the review process. Furthermore the
Commission will remain vigilant with regard to any market access problems which may arise
in the aerospace sector of third countries. If necessary, in close co-operation with the
Member States, this includes taking action under the dispute settlement mechanism of the

WTO.

As far as **export promotion** is concerned, the Commission is fully aware of the importance
of ensuring that aerospace purchasing decisions are made on the basis of fair and objective,
commercial and technological factors and that European products receive due consideration.
Accordingly the Commission, working in close co-operation with the Member States, will
respond positively to industry requests for action in line with the above position and will
itself ensure that the above message is conveyed to all relevant authorities wherever and
whenever appropriate.

V CONCLUSION

Sustaining growth and competitiveness against increasingly intense world competition will
not be achieved by a single factor nor in a single Member State. In the European context it
will require a number of separate objectives to be secured. Some of these will be secured at
the level of individual firms. Their relative success or failure will determine their growth and
survival. Nothing accomplished at a European level can substitute for excellence at the level
of the firm. But individual firms cannot create the entire picture - even excellence across all
the firms currently engaged in aerospace will not be enough. Over and above superior
performance by individual firms, Europe will need to provide the context in which these
firms can flourish in the massive collaborative endeavours which constitute modern aerospace
products and the myriad of systems and supporting services which they need.

European aerospace in the next century will, however, depend upon a vision not only for
aerospace but for Europe; yet time is not on Europe's side. The integration of action by the
industry, Member States and the European Union in the remaining years of this decade will
decide whether these visions can be realised in the next century. Continued inaction will
probably condemn the European aerospace industry to a lingering death.

The Council is therefore invited to support the thrust of this Communication and to recognise
the urgency of restructuring of the European aerospace industry. The Council and the
Member States are also invited to support the required Community actions and to take the
other appropriate initiatives needed to facilitate and encourage this process of restructuring.

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###### ISSN 0254-1475

## COM(97) 466 final

# **DOCUMENTS**

#### EN 15 10 14 07 Catalogue number : CB-C0-97-492-EN-C ISBN 92-78-24853-3

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