Jens Flottau Frankfurt

The collapse of merger talks between EADS and BAE Systems shows how much influence governments have on the European aerospace industry. It is making mergers all but impossible, even outside Europe.

The two companies called off their planned merger last week, just hours before the British Takeover Panel's deadline for further clarification expired. Executives had tried last-ditch efforts to save the deal, but it had become increasingly clear in the past few weeks that serious political reservations could not be overcome.

Observers suspect that the failed merger is a stark indication of the limits of change for the European aerospace industry. The disagreement among governments “indicate[s] how difficult, politically and financially, it is to win over the numerous stakeholders involved in such mergers,” notes Tom Cruszcz, a director at Fitch Ratings. He concludes that “such obstacles are likely to remain a permanent feature of the sector in light of its inherent security sensitivities,” and suggests there will be “little change to the make-up of the industry in Europe in the medium term.”

In other words, Boeing, Lockheed Martin, Northrop Grumman and their peers now know pretty well which European rivals they will have to deal with in the future: the same ones they are facing today.

Strategically, EADS will have to deal with a defense division that will remain weak in comparison with competitors for the foreseeable future. The company will continue to rely on Airbus as its main source of revenues and profits, but also risks. It has been looking at smaller acquisitions in the U.S., but success has been limited, and without the BAE Systems combination, it will not get anywhere near the size of the defense business it had hoped for.

There have been rumors that BAE Systems may now look for another merger partner. But BAE's CEO Ian King said that there are no plans for any other transaction and that no management changes are to be expected.