The trouble with league tables is that they usually either tell you what you already know, or confirm what you already suspect. Occasionally, however, they tell you what you didn't want to know. If you work for a state-owned aerospace corporation which is trying to establish itself in the new commercial environment, the league table in this issue may be one of these latter.

As the Flight International Booz Allen Hamilton ranking of the World's top 100 aerospace companies shows, there is a great difference in the financial results of those companies which are state-owned, and those which are not.

State-owned aerospace groups (if they make profits at all) are typically showing returns on capital employed of less than 5%. Private-sector companies are typically returning double that. It may seem a small difference on the surface (even though the best of the private-sector companies have returns of better than 20%), but what it points to is a fundamental difference in corporate culture and organisation.

State-owned corporations are not intrinsically bad businesses. Indeed, by some measures they can perform better than their private-sector counterparts. They typically spend more on research and development - an area in which many private-sector companies suffer, due to the shareholder pressure for short-term returns, but which is vital to the long-term viability of a technology-based company. Contrary to many expectations, state-owned companies can be high- ly productive - some large French state companies have far higher outputs per head than private-sector equivalents in the UK for instance.

What the state-owned companies lack, however, is the crucial commitment to providing profits for their owners. Whether the pursuit of shareholder value is or is not a worthy goal is largely beside the point.

However far the state-owned corporations go in brushing up their accounts (and many of their annual reports are now much smarter commercial documents than they were), their values are by definition fundamentally different, bound up with issues of preserving employment and skills bases or serving national interests.

This attitude gap is not merely an academic observation: it matters in the real world, not least because of the potentially insurmountable difficulties it puts in the way of consolidation. It becomes near impossible for a profitable private-sector company, which has already gone through the pain of restructuring, to jeopardise its hard-won profits by merging with a state-owned company which is still in the midst, or even at the start, of recovery.

Differences over valuation have killed many otherwise worthwhile mergers between privately-owned companies. Add the issue of state ownership, and the differences quickly become unbridgeable.

As a result, vast geographical parts of the aerospace industry are effectively precluded from the mergers and acquisitions which are transforming the rest of the industry. In the short-term the state-owned corporations could become increasingly restricted to their home markets because they are unattractive (or unattainable) partners.

Even if they do eventually emerge as more normal commercial entities, there is no guarantee that their potential merger partners will still be there waiting for them.

The aerospace industry is, according to the generally accepted signals, approaching one of its cyclical peaks. Sometime in the next three years, growth will reverse. The present climate of optimism will disappear and with it the prospect of making a decent return on a corporate investment before the next downturn

The time for an acquisitive company to buy during this cycle is fast running out, and the bottom of the trough which signals the beginning of the next buying cycle may be five years away. So the private-sector companies which are keen on strengthening themselves through consolidation are looking away from the state-owned enterprises of Europe and towards the more familiar corporations, like those in the USA, for their last moves of this century.

The message for all those state companies and their political masters must be that no matter where you are in the league table, the biggest danger of all is being left on the shelf.

Source: Flight International