A source close to EADS told Reuters that the two companies had been talking on and off for almost a year. The source said the talks were the brainchild of Marwan Lahoud who is in charge of strategy and marketing at EADS.

The merged company would supply a range of products from the Airbus commercial jets such as the A380 superjumbo and its A400M military transporters to the BAE-made Tornado fighter jets and its Astute-class nuclear-powered submarines.

The two companies have a long history of collaboration and are partners in a number of projects, including the Eurofighter and the European MBDA missile joint venture. A deal would also bring BAE back into having a direct interest in Airbus and the France-based planemaker’s British plants, having sold its 20 percent stake in 2006.

It would also give defence-focused BAE more access to commercial aerospace markets, which are booming with EADS’s main unit Airbus currently swamped with a backlog of order for passenger jets, while EADS will gain more defence expertise.

The merger would also mark a turning point for BAE 13 years after it was accused of turning its back on Europe in choosing to concentrate on building its U.S. defence business with the takeover of GEC Marconi in preference to merging with Germany’s main aerospace and defence group, Daimler Aerospace (DASA).

Spurned by BAE, DASA decided in the same year, 1999, to instead go ahead and create EADS through a merger with French group Aerospatiale and Spain’s Construcciones Aeronautica (CASA).

POLITICAL TIES

A tie-up could also allow EADS to break free from the shackles of its shareholder agreement which dictates a Franco-German balance of power at the group.

Tensions between the two sides have been simmering this year, notably over plans to refocus more of the roup’s activities near the Airbus headquarters in Toulouse.