The proposed Boeing/McDonnell Douglas merger should pass US scrutiny though Brussels may yet act, say Lois Jones and Karen Walker.

The proposed merger of Boeing and McDonnell Douglas could yet cause a major rift between the US and Europe. While US government officials and carriers alike appear to accept the wisdom of the planned linkup, the competition authority in Brussels is set to investigate it, although the continent's major carriers remain split over the impact of the planned union on economics and choice in fleet planning. At the same time, the threat of a single US competitor has helped galvanise the Airbus partners into taking a firm step towards finally incorporating the manufacturer as a limited company.

Boeing's president and chief executive officer, Phil Condit, is happy to play politics to ensure the $13.3 billion merger gets the nod from Washington. 'We play this business out on a global stage. A strong, competitive company is good for America; it keeps jobs in America,' he says. Few can argue with that, especially when backed up by the argument of Condit's new found partner, McDonnell Douglas' president and chief executive officer Harry Stonecipher. 'You have to look at the airline market as a world market. Some 75 per cent of Boeing's commercial market is outside of the USA.'

In this newly polarised environment, Boeing is confident of achieving its goal of taking two-thirds of the global market, thereby 'keeping the Europeans in their place'. Indeed, according to the Seattle-based manufacturer's own figures the merger will easily achieve that goal: in 1996 Boeing took a 64 per cent share against Airbus' 32.3 per cent and McDonnell Douglas' 3.3 per cent. 'Next year we expect to be as good as 1996, if not better,' predicts Ron Woodard, president of Boeing Commercial Airplane Group confidently.

If the deal is approved this year it would give Boeing at least an extra 12 months' head start on its only real rival, Airbus, which has recently speeded up the drive towards full integration as a single entity with a target date of 1999, following the signing of a memorandum of understanding in mid-January. The move will finally give the European manufacturer full transparency over its cost base and hence allow it to compete more effectively with its US rival.

Boeing is not anticipating any serious opposition to the merger, certainly not from within the US. 'I don't sense any negativeness,' says Condit. 'Anyone who knows anything about the business can do nothing but accept this as the next logical step.'

The general consensus in Washington holds that unless there is a particularly vocal protest from the US carriers, which appears improbable, the US Federal Trade Commission is unlikely to stand in the way of the merger. Indeed, on the military side the Pentagon has done everything to encourage the deal.

Officially, the US majors are refraining from public comment while they digest the full implications of the merger. 'I have not heard anyone publicly decrying the merger,' says American Airlines. 'Of course, from our perspective, timing is everything. Just prior to the announcement, we had chosen Boeing as our exclusive supplier for the next 20 years and negotiated our prices.' This groundbreaking deal was placed in doubt in early January, when the carrier's pilots rejected a new contract on which the order was contingent. Northwest Airlines says it has heard some 'mild concern' raised about costs, but United Airlines is typical of all the US majors when it points out that McDonnell Douglas had become such a non-player that its competitive effect on prices was diminished. 'Nobody is coming up loudly against this,' says United.

Given the passive reaction from within the US is likely to mean Washington will allow the merger to ease through, a serious transatlantic row could erupt if the European Commission were to find fault with the proposed linkup. Boeing is diplomatic but confident in the face of such a possibility. 'We understand their interest, but believe we can answer all of their concerns.'

Boeing will hope that its confidence isn't misplaced. The Commission has previously intervened in mergers between non-European Union companies based outside the EU in other industries, where it judged the arrangement would have an adverse effect on the internal market.

Under EU competition rules the Commission is required to investigate mergers involving companies with combined global turnover of over Ecu 5 billion (US$4 billion) or EU sales exceeding Ecu 250 million. Once Boeing and McDonnell Douglas officially notify the Commission, probably in early February, the Commission's merger task force will launch a one-month inquiry, followed by a further four-month review if problems are identified, explains a senior Commission source.

Michael Reynolds, partner at lawyers Allen & Overy, sees 'a clear analogy with the case when the Commission prohibited the merger between the South African mining companies, Gencor and Lonrho', and he makes the point that 'the South African competition authorities cooperated with the Commission'.

While the Commission may yet flex its muscles, Brussels-based consultant André Clodong predicts that it will tread cautiously to avoid being accused of hypocrisy after objecting to Washington's use of extraterritorial powers last year in trying to discourage non-US companies from trading with Cuba. Moreover, Boeing uses a lot of European suppliers and Brussels will want to avoid discouraging the US giant from doing so in the future. John Balfour of lawyers Frere Cholmeley says if anything the Commission will impose conditions rather than prohibit the deal. But he warns that Washington could 'pass a law forbidding Boeing and McDonnell Douglas from complying with the decision of the European Courts.'

As vindication of its power to impose conditions, a Commission source points to a more recent precedent: last year's merger between US companies Kimberley Clark and Scott Paper. Although the US approved the deal, the Commission demanded some divestments in European factories and trademarks before giving the go-ahead.

As neither Boeing nor McDonnell Douglas have EU operations, however, the Commission would have to be more imaginative in applying conditions. Reynolds predicts Brussels may 'put pressure on the US authorities' for guarantees that Boeing would not abuse its market power.

One factor certain to determine the course of the Commission's action is the opinions of European airlines. 'We would certainly ask major airlines' views on the repercussions of the deal,' states a Commission source.

And the European carriers are more outspoken that their US counterparts. Agostino Cassaro, Alitalia's head of fleet development, voices European carriers' generally private consensus on the deal: 'Three manufacturers are better than two . . . from a carrier's position the deal is not good news.'

Kurt Kühne, vice president fleet development at SAS, expresses another common complaint when he bemoans 'a danger of less product variation and rising prices'.

However Rod Muddle, general manager fleet planning at British Airways, counters that the merger 'could help prices if it boosts an efficiency drive'. His opinion mirrors that of KLM and Lufthansa, which are confident that a duopoly will be enough to ensure fierce price competition.

Clodong points out that if prices were to rise, it could create room for a new competitor. David Treitel, chairman of consultants SH&E, underlines the likelihood of an Asian competitor entering the fray.

Some airlines believe there are other positive aspects to the deal, including the strengthening of product support for Douglas aircraft. 'I'd prefer to see a McDonnell Douglas allied with a strong partner, as opposed to a McDonnell Douglas that has exited the commercial sector,' maintains Peter Gysel, head of fleet development at Swissair.

Gysel believes Swissair's days as a major Douglas operator are numbered with duplication between aircraft types creating casualties. 'I have doubts how long Douglas will continue to produce its current aircraft range. Maybe it will produce Boeing aircraft in future,' surmises Gysel.

But Iberia, another major Douglas operator, expects to be hit by the deal. 'We were considering the MD-95 to substitute our DC-9s but are afraid that programme will be stopped now as the aircraft is too similar to the B737-600,' says director of corporate studies, Arturo Penito.

Despite some of the grumblings of discontent, one consultant predicts that European airlines will be reticent to voice their objections formally as claims that mergers reduce competition could be turned against them in the future if they seek further integration.

Perhaps most surprising is that objections are slow to materialise from the company most affected by the deal - Airbus. The European consortium has 'shot itself in the foot' by stating that the merger will not affect competition as 'this would make it harder for the Commission to ask for divestments' from Boeing, says Clodong.

However understated Airbus appears about the deal, the proposal has certainly jolted the company into action. Although a detailed valuation of partner assets will not take place until the end of 1997, the four partners have indicated the holdings in the incorporated company will be in line with today's stakes.

While Airbus says this will strengthen its competitive position, Boeing welcomes the move. 'We have always wanted Airbus to have transparency on their costs,' says Woodard. 'The more privately held they are, the more accountable they are to shareholders, the better we like it. We are very comfortable competing with someone who has to make business decisions on that basis.'

Source: Airline Business