After years of merger talks and political manoeuvring, the aerospace groups of France, Germany and Spain have finally merged their businesses, launching EADS (European Aeronautic Defence and Space) onto the world stage and the stockmarket on 10 July. In the process, they have effectively giving Airbus a new majority owner.

In the end, the launch proved a little disappointing. Despite a grand build-up to the share sale (representing nearly 30% of the company)the EADS shares began trading at 20% below forecasts. In part that reflects a general cooling by investors to an aerospace sector was at that they feel may be past the peak of its business cycle. In part too there is concern over the cost of the A3XX programme, which was officially launched by Airbus only two weeks before.

The tangle of aerospace groups that make up EADS include the three Airbus owners: Aerospatiale Matra, DaimlerChrysler Aerospace (Dasa) and CASA. That leaves the group holding an 80% stake in Airbus, alongside BAE Systems still outside EADS with the remainder. Airbus will account for at least half of the $22 billion a year revenues that EADS now commands and a good slice of its 92,000 employees.

The formation of EADS was also the cue for the long-awaited transformation of Airbus from a co-operative into the standalone Airbus Integrated Company (AIC) which now launches next January. In turn, that helped trigger a decision to go ahead with the A3XX.

Despite some investor jitters, Airbus remains upbeat about the prospects for the A3XX. Commercial director, John Leahy, claims that the programme "will be the most profitable in our history. It will account for 10% of aircraft sales but 25% of value".

The consolidation around EADS and the creation of the AIC are also being promoted as opportunities for significant streamlining. EADS has targeted cost savings of c500 million ($470 million) a year by 2004, of which c350 million is being targeted from the restructuring of Airbus. That is due to come from slicker procurement, reduced production overheads and the elimination of duplication in manufacturing. However, investors remain to be convinced over how fast EADS will be able to move.

The new AIC will be registered in France and governed by a seven-member board, with five representatives from EADS and two from BAE Systems. The chairman will be Reiner Hertrich, EADS co-chief executive, and the day-to-day management team will be headed by Noel Forgeard, current Airbus president.

BAE Systems had been concerned that its minority stake in AIC would undervalue the worth of the assets it will contribute to the new company. To meet these worries, BAE will have the right to "enhanced dividends" on deliveries of A340-500/600 aircraft above an agreed rate between 2003 and 2012. This dividend is expected to yield up to €237.5 million to BAE.

With BAE's blessing, meanwhile, EADS has offered part of its holding in AIC to Alenia, allowing the Italian company to take a 5% stake after years on the outside of the Airbus fold.

EADS has moved to establish a US presence via relationships with US companies. An agreement has already been signed with Northrop Grumman.

Having in seven months achieved a merger, a flotation and a restructuring agreement for Airbus, a period of consolidation is in prospect in which EADS will focus on achieving the detailed operational integration crucial for cost savings, while at the same time moving to realise the growth potential by which it sets so much store.

Source: Airline Business