Is BAe dumb?

The problem is that Airbus will have to give more workshare to foreign countries for political reasons. See how the Chinese are blackmailing Airbus. This workshare will always be on the cost of some blue-collar people (and potentially white-collar, too, in the long term) in Europe. The position of the British is definitely weakened, while it is not necessarily eliminated. The British government will surely continue to “pure” money in Airbus. A government can’t afford to lose high-tech jobs.

All sorted if the Partnership with Boeing Aerospace comes through.
As sad as it may seem, a military connection for BAe will secure far more jobs than any project with Airbus ever would.
The British government may not need to “pour” money into Airbus as you suggest.

SEMAE,

We may not be cheap but we do a better job than anyone else.

The problem is that Airbus will have to give more workshare to foreign countries for political reasons. See how the Chinese are blackmailing Airbus. This workshare will always be on the cost of some blue-collar people (and potentially white-collar, too, in the long term) in Europe. The position of the British is definitely weakened, while it is not necessarily eliminated. The British government will surely continue to “pure” money in Airbus. A government can’t afford to lose high-tech jobs.

SEMAE,

We may not be cheap but we do a better job than anyone else.

Hello folks!
That’s my question.
An enterprise is selling a 20% share of a company, that has a 40-50% market share in growing market. This market is nearly inpenetratable to any new competitor, and the other competitor is on level with the company.

I know, Airbus has some serious problems, but there are good prospects on the long term.

So, why does BAe Systems now sell its share, especially because it will only get 1.8 billion Euros out of it (after deduction of depts)?

Isn’t that … dumb? Or do I miss important facts?

Perhaps BAE are actually smart? Maybe they see something on the horizon at EADS/Airbus that they don’t like and simply wanted out?
They, as investors will have had a transparent view of whats going on and perhaps disagree with the road Airbus is going down?

One things is for sure, it was not a rash decision. They took their time in considering, evaluating and publishing their decisions.

Do not think for one moment that now that EADs own BAEs stake in Airbus that they will not try and screw as much money out of the British Government as possible. Airbus want to stay competative but will always be subject mainly to German and especially Frence protectionist policies.

The only jobs that will go will be in the UK and the wings etc, etc will end up being made in eastern Euriope.

Our workers are easy to sack and no longer competative so to employ people in the UK anymore in manufacturing has little or no advantage.

As far as BAE Systems is concerned I am just wondering if they are now going to be the next takeover target.

There is the obvious view in the forum that business margins are higher on militry projects and service contracts than for Civil projects. Well that may be true for now but despite the war on terror the USA is also feeling the pinch in Military spending and baulk at the costs of some projects.

In reality I think military spending in real terms is in terminal decline. Civil aviation may have cyclical ups and downs over every ten years but in the long run it has always been on the up.

When the military spending dries up over the next 15 to 20 years and the service contracts die with it I am sure EADs will be there but BAE Systems will not – in any shape or form.

Personaly, companies like RR Aeros I think have much more sense in their startegy. They are virtually in every aero engine field be they military or civil and have service contracts in both as well. To me this makes a company like RR Aeros more secure in the long term as each business stream balances out the highs and lows against each other.

Sure Airbus do have a very big problem with some of their planes but so long as EADs have money coming in from elsewhere, Airbus will survive and the profits will come in in the long term.

A320, not the A330/340/380. And the A320 is being challenged quite nicely already by the 737NG.

There is no challenge , the 737 orders alone this year are more then that for all AIRBUS models combined .

However Although i think that one of the reasons why they sold the stake might be due to the fact they see A going lower before it comes back up but they could need the money for something else (expansions etc ) and thought that in a cyclical environ the high’s wont come before all the lows are realized and as such they didnt want to lock in the money for another 6-8 years before we see a rebound with the A-320 replacement .

Simple, Airbus needs cash that BAe cannot (or does not want to) afford to cough-up, selling now at any price is better than being sucked dry in 2 years time, in an arena which they have little interest in. Basically, the next aircraft or 2 will have to be mostly company funded, which means shareholders being VERY generous.

The A320 replacement is in the works, and will be implemented as and when necessary.

Isn’t that … dumb? Or do I miss important facts?

Yes, you will mis facts. Decisions like these are made at board room levels. The information these guys have, will not be available to the BBC, CNN or some “reputable insider” on the internet. There probably is a very good reason for the sale of the EADS stake, but we do not have all information so can not judge.

However, here are some reasons I can think off:

Reason 1)
Airbus and Boeing share a duopoly in the long haul market, and a lot of the market in the medium haul market (others being Tupolev, Embraer, Bombardier).

Airbus will need a lot of investment if they are to remain in their top position. Remember, the bread and butter is the A320, not the A330/340/380. And the A320 is being challenged quite nicely already by the 737NG. And Boeing is already putting the foundatin in place for a replacement of the 737. Add to that the EMB-190 family and given time perhaps the SuperJet (RRJ) and Bombardier C-series. In short, the A320 will need an update. Maybe even a completely new airplane. And preferably before the new planes come on the market.

The A350 is still a paper plane that has yet to score a mayor victory against the 787. The A380 is late and proving more costly then originally budgeted for. And lately airliners seem to be holding back on orders. They would appear to want to see how the A380 behaves in operational use. Once the A380 has established itself as reliable, economic and appealing no doubt more orders will come in. But how long it will take for airlines to be convinced is anyones guess.

Now in the past this would be no problem. Assorted European nations would lend them money at favourable terms. Sometimes even give the money no questions asked. Nowadays this will be harder with the US breathing in their neck just waiting for a reason to go to the WTO.

The investment would thus have to largely come from the Airbus partners, BAe being a large one would have to pay deeply into the development. Money they either do not have, or think they can use for more profitable projects.

Reason 2)
Building planes is not that lucrative a business these days. The supporting businesses make more money nowadays. Take for example Fokker. The modern day Fokker is a whole lot more profitable then the old day Fokker from when they still made complete planes. The Japanese aviation industry is considered to be right up there with the best of them, even though they have not really made their own planes for a long time (except for some military projects that where almost obsolete when delivered).

Again finance come into play here. Aviation development is highly capital intensive. For a fraction of the cost of designing a plane, Fokker (in collaboration with the TU Delft) designed the composite Glare. That is making them a lot of money.

Reason 3)
It is well known that BAe is changing from a “aviation-allsorts” company into a military company. Gone are the ARJ, Jetstream and ATP. In are the Typhoon, Grippen, JSF, Hawk. And those is just the main fighter types.

Notice that fighter line-up? Every 5th (some would say 4.5th) fighter except for the Rafale is there. As long as noone buys the Rafale, BAe will always make money from new modern fighter sales. Obviously the Typhoon will make them more then the JSF/Grippen since BAe is just a minor player in JSF/Grippen, but still it shows that BAe is not completely stupid.

On top of that, the margins in the military market are better. Let’s face it, airlines pinch every penny since it is THEIR penny. Governments do not mind to spend a few billion on pork since they can easily increase taxes if need be. The money BAe receives just to do research is quite impressive. No positive results required (though recommendable if the money tap is to remain open for future projects).

And the market for the military is quite well. While the aviation market crashes once every 10 or so years, the military market is quite stable. Sure they will sell more when there is a war, but at the moment a unwinnable war on terror is declared so that will keep the moneytrain going. Add to that (potential) hotzones like Israel and the Koreas. A nice extra are assorted African, Middle Eastern and South American nations that have small-dick disease and you got a nice running market.

The largest market of them all (but a huge margin) is the US market. Pity that the US will only use US companies where possible. So BAe has been on a shopping spree lately buying US companies left, right and centre. Big money is required for that. It means shedding some assets, but gaining new assets. Assets, BAe hopes, that will prove to be more lucrative long term.

Hello folks!
That’s my question.
An enterprise is selling a 20% share of a company, that has a 40-50% market share in growing market. This market is nearly inpenetratable to any new competitor, and the other competitor is on level with the company.

I know, Airbus has some serious problems, but there are good prospects on the long term.

So, why does BAe Systems now sell its share, especially because it will only get 1.8 billion Euros out of it (after deduction of depts)?

Isn’t that … dumb? Or do I miss important facts?

The A380 doesn’t have good prospects for long term profitability, the A350/A370 saga continues painfully and there is no clear plan for the replacement of the A320 narrowbodies.

Of course, the real problem is that Airbus is saddled with a low productivity, high wage European workforce. Perhaps the true purpose of Airbus is to employ as many Europeans as possible, not to generate profits for investors.