BERLIN, Sept 14 (Reuters) - A merger between EADS and Britain's BAE Systems could strengthen European efforts to develop unmanned ariel drones, after competition between the two firms allowed the United States and Israel to dominate a growing market.
The attacks on the United States of Sept. 11, 2001 ended official scepticism over the value of drones and Airbus maker EADS has spent years and around 500 million euros ($645 million) working on the Talarion drone in the hope of an order from the project's instigators France, Germany and Spain.
But then France's Dassault Aviation and Britain's BAE Systems stepped up plans for their own drone under a Franco-British defence pact signed in 2010, provoking anger and frustration from EADS.
Earlier this year, EADS threw in the towel because it failed to win firm commitments, and the project has been further hampered by a major shake-up at defence unit Cassidian that has included replacing its chief executive.
However, the efforts by Dassault and BAE to build their own drone so far do not seem to have borne much fruit either, with French Defence Minister Jean-Yves le Drian saying this week he had "major reservations" about the plan.
A combination with BAE would give EADS an opportunity to avoid losing more ground in drones, which are becoming more common in areas such as border control, especially in the United States, disaster investigation and protecting oil pipelines.
U.S. forces have become reliant on them for reconnaissance, including in Iraq, and to kill Islamist militants in Afghanistan and Pakistan, despite public outcries over civilian casualties.
Merger talks between BAE and EADS were unveiled late on Wednesday, but it will take months to get any new company structure in place should a deal go through.
Research funding remains an issue too. Years-long talk of developing a European drone has so far failed to produce a finished product, as national governments hesitate to commit to such a project.
The biggest drone manufacturers are in the United States and Israel - such as General Atomics, which makes the Predator, or Heron-maker Israel Aerospace Industries.
Current worldwide spending on unmanned aerial vehicles (UAVs) is $6.6 bln and market researcher Teal Group has estimated that annual spending on them around the world will almost double to $11.4 billion over the next 10 years.
An unarmed drone usually retails at around $3-4 million.
German defence Minister Thomas de Maiziere said last month Germany, which used unmanned aircraft in World War Two, should deploy armed drones in its military.
Aerospace firms, including former EADS boss Louis Gallois, have long called for European countries to pool resources and cooperate on one programme.
EADS unit Cassidian showcased a reborn Talarion called only European UAS (unmanned aerial system) at the ILA Berlin Air Show this week.
But officials in the German armed forces have pointed out that Talarion would face competition from the U.S. Predator drone, which is widely used in Afghanistan, and Israel's Heron, and have questioned the value of the project.
The biggest challenge remains a lack of concerted investment in Europe, where governments are generally cutting back on defence spending, partly in view of the euro zone debt crisis and the global slowdown, and are wary of big defence projects with spiralling costs and uncertain outcomes.
"Europe is going to get there, but it requires some investment," Teal Group's Phil Finnegan said at the air show just before the EADS-BAE talks emerged. "So far, Europe has really relied on imported technology."
Suppliers in Europe would be at the ready if a new drone ever takes off, but caution that seems unlikely to happen any time soon.
MTU Aero Engines and Italy's Avio Group agreed earlier this year to explore opportunities related to propulsion systems for medium-altitude long endurance (MALE) UAVs and combat drones.
"This is a move forward to demonstrate here we are, we are prepared to do something, but there is no programme, no programme in sight to develop a UAV in larger volumes that requires specific engine technology," MTU Chief Executive Egon Behle said at ILA.
And Diehl Defence, which was at one point hoping to be involved in the Talarion project, is still looking at providing weapons capability for any European UAV project.
"There is no research programme as such, but we are looking at concepts. It wouldn't be advisable to think about it only when the definitive decision has been taken," Managing Director Claus Guenter said.
EADS CEO Tom Enders said this week he was pretty confident some progress would be made in coming years, but for now the German Bundeswehr plans to start using the Euro Hawk, made by Northrop Grumman and EADS's Cassidian.
The Euro Hawk, which was also on display at the Berlin air show, will make its first test flights in Germany later this year, once it has received the necessary certifications, and Enders said he hoped it would come into use in 2013.
The Bundeswehr has leased three Heron drones, which it is expected to keep until 2014 and is considering buying some U.S.-built Predator B drones, which can carry weapons as well as perform reconnaissance. An alternative could be procurement of the Heron TP.
Overall, the Bundeswehr plans to procure 16 UAVs in the long run.