The Sky's The Limit

Dec. 21, 2004
John Weston aims to pilot British Aerospace even higher in the aerospace-defense industry's global restructuring.

Its name is British Aerospace PLC (BAe). Its headquarters is in Farnborough, England. Its logo incorporates the Union Jack. Its chief executive, John Weston, was born, raised, and educated in Britain, still lives there, and has a decidedly British accent. But not much else about British Aerospace or John Weston is particularly British. Quite the contrary. The company, a manufacturer of a bewildering array of aircraft and electronics components for both defense and commercial markets and a partner in the Airbus Industrie consortium, is the exemplar of a global corporation. Last year 89% of its $14.29 billion revenue came from outside Britain. Upon completion of its pending merger with Marconi Electronic Systems Ltd., the defense arm of Britain's General Electric Co. PLC (GEC), the firm will be the world's No. 2 defense contractor and No. 3 aerospace manufacturer, employing no fewer than 100,000 employees in nine nations. It already operates 29 collaborative partnerships spanning 72 countries. And Weston, who is so un-British that he shuns tea in favor of American coffee during a late-afternoon interview, plans to make BAe even more global. That became apparent when he engineered the $12.42 billion purchase of Marconi, a giant defense company that also has a worldwide presence. Announced in January, the deal is expected to receive final governmental approvals soon. The acquisition, says Weston, "is a huge leap toward making British Aerospace the kind of international entity that will mark the global industry of tomorrow." Note Weston's use of the words, "international," "global industry," and "tomorrow." In only his second year as BAe's boss, he clearly has his eye on the future. He clearly regards the company's already-formidable internationalism merely as a work in progress. And he clearly expects the firm to be a dominant player in the global restructuring of the aerospace-defense industry that he sees as both inevitable and necessary. BAe's pickup of Marconi was especially significant because it set in motion the newest phase of that global restructuring -- consolidation of the industry in Europe. As if on cue, the BAe-Marconi deal was followed a few months later by the proposed merger of German-based DaimlerChrysler Aerospace AG (DASA) and Spain's Construcciones Aeronauticas SA (CASA), a firm spurned by BAe as a merger partner. Upon its completion, also expected soon, the DASA-CASA merger will create the first transnational aerospace-defense company. Reflecting on the industry's restructuring, Weston observes that the process "now is largely complete in America" following a wave of mergers, notably those of Boeing Co. and McDonnell Douglas Corp., Lockheed Corp. and Martin Marietta Corp. (now Lockheed Martin Corp.), and Northrop Corp. and Grumman Corp. (now Northrop Grumman Corp.). "We [European aerospace-defense companies] have been watching with interest what has been happening in the U.S. during the last few years," he says. "We've been performing a ritual dance on how to respond. Now we're seeing movement." Ultimately, Weston foresees two or three large, robust aerospace-defense companies emerging in Europe, just as they have in the U.S. But the industry's emerging consolidation in Europe, he cautions, "does not mean we're creating a Fortress Europe to do battle with Fortress America in the international marketplace. What we're seeing is a series of moves that eventually will result in a global aerospace and defense business led by two or three entities, much as the U.S. is led by two or three today." When will this industry-wide consolidation be complete? "We've got to have a trans-Atlantic merger for that to happen," Weston says. "It could take place in only two or three years or as many as nine or 10." The timing, he indicates, "very much depends on the political and security environment -- especially on how fast the U.S. adjusts to the idea that dealing with an international company has advantages over dealing with a strictly national one." He's encouraged that the U.S. Dept. of Defense, which earlier had opposed further industry consolidation by killing Lockheed Martin's attempted takeover of Northrop Grumman, recently has given signals that it now would favor trans-Atlantic mergers. The benefits are apparent. Not only would such mergers enable economies of scale and encourage standardization of military equipment for NATO allies (the importance of which was demonstrated in the Kosovo air campaign), but they also would help to "maintain healthy competition," Weston insists. It's better for customers, he explains, to have two or three large U.S.-European firms battling one another than to have monopolies on each side of the Atlantic dominating their own markets. BAe is sure to be in the thick of any trans-Atlantic action. Although the firm isn't expected to swing any Marconi-scale deal in the near term, "it clearly remains the objective of the company to be a key part of the world No. 1 or No. 2 defense company over time," indicates Nick Cunningham, a defense analyst in the London office of Salomon Smith Barney Inc. "This objective can probably only be achieved via a large acquisition or merger." For his part, Weston confirms only that the company is mulling additional individual program partnerships in the U.S. Tellingly, however, in a recent speech to Britain's Royal Aeronautical Society he described America as BAe's "next great adventure." Apart from the fact that 22% of its sales come from the U.S., the company already has a strong production presence in the nation. Upon completion of the Marconi merger, BAe will have 18,500 employees in the U.S. and 1,600 BAe employees based in Canada. As a result of its existing 29 partnerships on both sides of the Atlantic, BAe is well positioned to expand its global leadership. The company is an old hand at collaborations, dating back to the participation of one of its predecessors, British Aircraft Corp., in developing the Concorde supersonic transport some 30 years ago. Currently BAe is one of four owners (with France's Aerospatiale Matra, DASA, and CASA) of the Airbus consortium, Boeing's lone competitor for large commercial jets, and builds wings for Airbus aircraft. It also is a partner in the Eurofighter consortium that is developing the next generation of fighter aircraft for the UK, Germany, Italy, and Spain. Among other alliances, BAe long has been paired with various firms in building fighter aircraft. For example, it is part of a consortium that has delivered more than 950 Tornado fighters (a program now ending). It coproduces the Harrier fighter with Boeing. It has part ownership of Sweden's Saab AB, with which it builds the Gripen fighter. It is teaming with Lockheed Martin in a bid to develop the U.S.' multiservice Joint Strike Fighter. It is a partner in a contract to supply the Goshawk trainer to the U.S. Navy. In other examples, the company partners in the production of guided missiles, radar equipment, and space hardware. And it is involved in a joint venture as part of a new emphasis on its defense systems-integration business. Weston obviously is a fan of such alliances. "They let you spread development costs, provide economies of scale, share technology, and enable you to learn how other companies operate and to observe their organizational cultures," he says. "They're rewarding, and worth the effort." Still, Weston admits that partnerships "are not the smoothest, easiest way of doing business. They require a lot of senior-management time and attention and often need motivation to get over problems." Nor does he see them as a substitute for trans-Atlantic merger activity that he believes is necessary for true global consolidation of the aerospace-defense industry. Because they cover only individual programs, he says, "Alliances are hit-or-miss." But Weston regards additional partnerships as central to BAe's strategy. "We plan to do more of them," he says, suggesting that they will be key to capitalizing on three growth areas he foresees for his company:

  • Civil aircraft. This area is booming not only because of the increased market penetration of Airbus, but also because of the explosive growth of jet aircraft for regional airlines.
  • Defense systems. Customers increasingly are demanding a more integrated approach to their defense needs and are placing responsibility for complete-system solutions onto industry as a prime contractor.
  • Life-cycle support activities. Increasingly, defense customers (Saudi Arabia's air force and navy, for instance) are contracting out logistics, training, maintenance, and other support functions that they once performed themselves. BAe estimates that as much as 80% of the profit it makes on a product comes from such support activities over the product's life cycle. Significantly, Weston plans to keep BAe primarily a defense-related company. This may seem surprising: In response to declining military budgets, most aero-space-defense companies have been striving to reduce their dependence on defense revenues. "Despite the budget cuts in defense, we've trebled the size of our defense business in the last 10 years," Weston points out. "We're now 75% defense. I'm comfortable with that [percentage], although we have no corporate target on our mix of defense and civilian business." One reason Weston isn't rushing to shed BAe's defense business: Defense budgets soon may rise again. The Kosovo air campaign, analysts note, is spurring renewed interest among western governments in beefing up their military spending that already had reached dangerously low levels. In the U.S., notably, both Congress and the Administration have been advocating a step-up in defense preparedness. Weston, however, declares himself "not as euphoric" as some observers about any sharp boost in defense outlays in the U.S. As for NATO as a whole, he sees "a zero-sum game," with some nations increasing their military budgets, others decreasing them. In the Middle East, he anticipates budgets holding steady unless there's a sharp boost in oil prices. In Asia, he suggests that the market could grow, especially as the region recovers from its recession. If a worldwide resurgence in defense spending should occur, some observers fear that aerospace-defense firms, slimmed down after several years of downsizing and industry consolidation, won't be able to meet the demand. But Weston isn't particularly worried. The industry, he says, "has sufficient plant and equipment capacity" to accommodate a spike in orders. "But there could be limitations in engineering resources and skill areas," he warns. BAe, for one, already is feeling the pinch. "I've got 10,500 engineers, but have enough programs for 14,000," Weston says. Such a shortage is an adjunct of growth. And growth has been synonymous with BAe, a company just 22 years old. As recently as 1992, its annual sales were only $92 million -- a far cry from last year's $14 billion figure (or $19.8 billion if Marconi's numbers are included). The growth should continue. A comfortable order backlog of $28.1 billion helps. So does the Marconi merger. "That gave the company a lock on the defense market in Britain and guarantees that it will be one of the ultimate players globally," assesses Richard Aboulafia, an analyst at the Teal Group Corp., an aerospace-and-defense consulting firm in Fairfax, Va. Besides, says Aboulafia, BAe has John Weston going for it. "He has a keen grasp of what must be done." Obviously, that means making British Aerospace even less British.
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