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As Europe plays politics, Boeing should benefit

If imitation is the sincerest form of flattery, the proposed merger of two European rivals paid Boeing Co. a big compliment.

Boeing, however, would rather have a business advantage than a compliment, and it got just such an edge this week when the European deal fell through.

From a business perspective, combining European Aeronautic Defence & Space Co. with BAE Systems PLC made sense. The Pentagon is BAE's biggest customer. EADS, the parent of Airbus, has struggled to make inroads into the U.S. defense market.

In many ways, the deal was a European analog to the 1997 merger of Boeing and McDonnell Douglas. A defense-focused company like McDonnell or BAE will struggle when military budgets are shrinking, but it makes a nice fit with a commercial airliner business like Boeing or Airbus.

In Europe, however, politics trumps business. The British government has veto power over deals involving BAE. France has an ownership stake in EADS, and a German state agency is acquiring a similar stake.

In the end, a deal that made business sense couldn't satisfy the three governments. If Britain kept the headquarters of the defense business, and France remained the base for Airbus, there wouldn't have been any prestigious piece for Germany, so the Germans essentially vetoed the deal.

For that favor, Boeing should send German Chancellor Angela Merkel a thank-you note.

“Boeing was the only American aerospace company that was threatened by the potential merger,” said Richard Aboulafia, an analyst with Teal Group in Fairfax, Virginia. “The prospect of a direct commercial competitor having access to a greater level of defense revenue, especially U.S. defense revenue, was probably concerning for them.”

“The breakup is good news for Boeing,” added Loren Thompson, a military analyst at the Lexington Institute in Arlington, Va. “It didn't want to see its chief rival in the jetliner market gaining a larger toehold in the U.S. defense market.”

Of course, defense companies on this side of the Atlantic are political animals, too. Thompson says Boeing probably was especially concerned about a deal that would have increased EADS' clout Congress.

EADS is building a commercial aircraft plant in Alabama, and BAE has operations in Virginia, Florida, Pennsylvania and several other states. Combined, they'd have a lot of friends in Congress.

Those legislators can influence not only defense procurement matters, like the tanker contract that Boeing won over EADS in 2010, but also trade issues like the subsidies Boeing and Airbus have been fighting about for years.

“What Boeing has had for a long time is unfettered access to Congress and the U.S. political system,” Thompson said. “If EADS became a bigger player in this country, they might lose some of that advantage.”

Thanks to Germany, though, that won't happen. The question now is whether both EADS and BAE are viable as standalone companies. Some analysts say defense-heavy BAE may be pushed into a merger with someone else, like Finmeccanica of Italy or General Dynamics of the U.S.

Thompson doesn't think a merger is urgent for either BAE or EADS. “Both companies should be able to make a good profit in the years ahead,” he says.

Good, though, isn't the same as great. The combination would have created the largest defense and aerospace company in the world, and posed a competitive threat to Boeing in its home market.

That threat is now gone. Boeing has spent years criticizing European governments for their influence over Airbus, but it should be grateful for this latest bit of political interference.

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In this April 27 file photo, employees take photos after the new Boeing 787 Dreamliner is rolled off the production line at Boeing's new production facilities in North Charleston, South Carolina. If imitation is the sincerest form of flattery, the proposed merger of two European rivals paid Boeing Co. a big compliment. (AFP)

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