By Victoria Bryan and Maria Sheahan
BERLIN, Sept 13 Merger talks between Airbus
owner EADS and Britain's BAE Systems highlight
the scramble for defence companies to offset shrinking revenues
from military budget cuts with more commercial civilian
In what could produce the biggest shake-up in Europe's
aerospace and defence sector in more than a decade, the two
companies said on Wednesday they were in advanced talks, just as
global aerospace companies discussed ways to compensate for
elusive defence contracts at the ILA Berlin Air Show.
"The military business is not a growth promoter these days.
There's no growth in military budgets for the next two years,"
Egon Behle, the chief executive of jet engine maker MTU Aero
Engines, said at the show.
That contrasts with a boom in orders for commercial
aircraft, with Airbus predicting that global airlines will buy a
total of $4 trillion of aircraft over the next 20 years as they
seek efficient new models to counter high fuel costs and meet
relentless demand for travel to and from emerging markets.
The switch from defence to civil can be already seen at
firms like MTU Aero Engines and German family-owned supplier
Diehl, which has built up its commercial offering via
"How different the world is for defence companies," Diehl
Defence Managing Director Claus Guenter said at the Berlin air
show on Wednesday after his counterpart at sister company Diehl
Aerosystems spoke of revenues quadrupling and a 50 percent
increase in production rates for his business.
"We find ourselves in a tough competitive environment with
other international companies who are all trying to get sales
outside of their home markets," Guenter added.
A combination of BAE and EADS would certainly help to give
EADS more of a presence outside of continental Europe.
"(The deal) has good industrial logic with BAE now feeling
over-exposed to defence and EADS clearly looking to gain a
foothold in the U.S.," said Edison analyst Roger Johnston.
BAE derives 98 percent of its revenue from defence &
security, and Morningstar analyst Neal Dihora said he estimates
that government contracts account for about three quarters of
the company's revenue.
"With a slowing defence spending environment around the
Western world, it appears to us a sound move to combine forces
and reduce the number of competitors offering similar goods in
the marketplace," he said.
MTU expects military business to make up just 8 percent of
its sales in 2020, down from 14.6 percent this year and a far
cry from 80 percent it accounted for back in 1985.
"The commercial business is growing so fast that the
military business is being pushed down," CEO Behle said.
An EADS-BAE combination would echo the set-up of U.S. rival
Boeing, whose revenue is divided fairly evenly between
$36.17 billion for commercial aircraft and $31.98 billion for
defence, space and security.
Together, EADS and BAE would create a company generating
about 41 percent of its revenue in civil aerospace and 43
percent from defence and security, according to calculations by
Deutsche Bank, with the rest coming from other businesses such
as helicopters and space.
The new company would have about 72 billion euros ($92.8
billion) in sales based on 2011 figures, meaning it would
EADS Chief Executive Tom Enders had earlier in the week
warned that companies may just shift their capacity to the civil
sector, while others had warned Europe risks losing military
Eurocopter's Chief Executive Lutz Bertling said he expects
the industry's focus to be on development for the civil market
in the future, while military orders will be for derivative
versions of those civil helicopters.
Firms in Berlin were also seeking new roles for military
hardware, such as supplying the oil and gas industry with
helicopters or using transporters for humanitarian relief.
Unmanned aerial vehicles currently used in places like Iraq
and Afghanistan could have uses in situations like the Fukushima
nuclear disaster and EADS is pushing the credentials of its much
delayed military transporter, the A400M, in transporting items
such as medical supplies, water purifiers and bringing back
people from disaster areas.
EADS and BAE will likely not be the last to shake up their
businesses, with some analysts suggesting further consolidation
may be on the cards.
"Companies that are very dependent on national contracts
have to adjust their capacities or expand internationally,"
EADS's Enders said.