Consolidation in the aerospace and defense industry in Europe has historically trailed the contraction in the United States by about [18 to 24] months. This trend is heavily dependent on the pace of European governments’ desire to have an indigenous industry able to compete with the large U.S. systems integrators in selected segments. In the UK, for example, there is the emerging concern about the political environment as BAE Systems continues to struggle with contract vagaries on the new aircraft carrier, the Nimrod, and the JSF. Clearly, the recent decision to use a European consortium for the turboprop engine on the A300M provides a strong indication the European governments will flex their muscles when necessary. Similarly, UK and European companies are watching U.S. reaction closely given the hardened political positions over Iraq.
On the commercial aircraft side, the debate continues over the respective strategies of Boeing and Airbus, and whether the expected increase in point-to-point flying will play out with Boeing’s new mid-sized, fuel-efficient aircraft or with Airbus’s large, wide-bodied aircraft. Access to capital may also be a major factor as well, particularly given the substantial write off of U.S. airline leases and enhanced ETCs. Clearly, the outcome will have a substantial impact on respective component suppliers; with the exception of aerostructures and engine companies, most subsystem manufacturers have aligned themselves with either Boeing or Airbus with little crossover.
Quarterdeck believes there will be a continued uptick in European/cross-Atlantic transactions as market sentiment continues to improve. Key factors will be the continued consolidation on the components segments driven by both industrial strategy and economics. As the large European multinationals shed assets, financial sponsors will continue to be active consolidators, broadening their platforms and searching for value in new segments. U.S. companies will continue to search for ways to penetrate the insular Airbus family, recognizing that acquiring an entrée is preferable to slow organic growth. However, the global defense market may experience a hiatus as the lessons from Afghanistan and Iraq are evaluated in terms of existing and further weapons programs.