Two years of talks to merge the military aircraft and aerostructures businesses of EADS and Finmeccanica have collapsed.

EADS now hopes to secure a deal with Finmeccanica's Alenia Aeronautica subsidiary focusing on just military aircraft. However, the failure reopens the door to BAE Systems, which lost out in the original bidding.

The problem between the two sides is understood to have been the valuation of the civil aerostructures and modification side of the business, particularly after the events of 11 September undermined an already weakening civil market. About 30% of the merged businesses' turnover would have been accounted for by civil work.

Despite the civil business seemingly being pushed to one side, EADS denies the new negotiations are a fight for dominance in the European military aircraft industry. However, with a 21% stake in the Eurofighter project against BAE's 37% and EADS46%, Alenia has become the key to control of the project. The Italian company also has extensive interests in other military activities, such as strike aircraft, trainers and airlifter projects.

"We are continuing with the European Military Aircraft Company project, trying to integrate the combat and trainer aircraft activities of Italy, Germany and Spain. We are confident of reaching an early deal," says EADS.

Two years ago, Finmeccanica turned down BAE in favour ofEADS, amid speculation that EADS' greater civil aerospace role through Airbus and aerostructures had tipped the balance (Flight International, 18-24 April 2000).

"The problem is that the value of Alenia's civil aerospace activities is not as positive as before 11 September. Boeing was hit harder than us and Alenia as a supplier of Boeing was hurt," says an Airbus source. With civil aviation in deep trouble and Alenia keen to concentrate on military aircraft, the way back could be open for BAE, which has a much stronger defence portfolio than EADS. "There are now two options. One is to continue talks with EADS and the other to renew talks with BAE," says a Finmeccanica source.

BAE denies it is negotiating with Finmeccanica but admits it would be open to an approach.

However, potential partners will probably be awaiting a decision by the new Italian government on who is to run Finmeccanica. The main contenders are chief operating officer Giuseppe Bono, president Alberto Lina or an outside manager.

Source: Flight International