COOPERATION

Christian-Peter Prinz zu Waldeck, director of the German defence industry federation BDSV, said budget cuts and the need to share capabilities would force European firms to cooperate more on defence projects and lead to more mergers.

“Otherwise, Europe will have no chance in comparison to the United States,” he said.

Analysts believe consolidation between the major defence contractors is unlikely to take place any time soon but predict the major players could look to pick off the second tier of defence groups.

“What you could see is mid-market deals taking place -- they would be substantial multi-billion-dollar deals. The likes of Britain’s Cobham and Ultra Electronics have attracted admiring glances from some of the bigger players for some time,” said a defence fund manager who declined to be named.

The United States and Britain jealously guard their national defence capabilities, making cross-border deals harder than ever to push through. Transatlantic deals are also unlikely to happen in a year when the U.S. presidential election will slow defence-related decision-making.

Declining business in their home markets is driving Western defence firms to look to still buoyant export markets in the Middle East, Asia and Latin America for their salvation.

The pressure to export is intensifying already fierce competition in a worldwide market that some estimates say is worth $1 trillion a year.

“If you read the annual accounts of every major aerospace company, if you can find a chairman’s statement that doesn’t say we are chasing international business strongly, that would be a very rare company,” said Alan Garwood, group business development director at Britain’s BAE Systems, Europe’s biggest defence company.