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Why BAE-EADS merger is double trouble for Boeing
September, 24th 2012

At an awards ceremony in April, Boeing Co honored 14 "suppliers of the year." Prominent among them: BAE Systems Plc, the British arms maker now in talks to merge with Boeing's biggest civilian rival, EADS , maker of Airbus jets.

"We are grateful to have them as key members of our team," Boeing CEO Jim McNerney said of the contractors feted at the Field Museum in Chicago.

The potential pairing of a top Boeing partner with its fiercest competitor shows how deeply the deal could disrupt the complex relationships in the aerospace and defense industries, which account for hundreds of billions in sales a year.

The BAE-EADS merger would create the world's largest integrated defense and commercial aviation company with annual sales of $92.4 billion, topping Boeing by more than a third, based on 2011 figures.

Boeing initially said it did not see a big threat, but its top defense executive told Reuters this week the deal raised national security and industrial concerns that needed to be addressed.

Executives at companies that have close ties to BAE are alarmed that they may lose access to sensitive Pentagon documents, and potential future business, if the Pentagon clamps down on sharing certain information with BAE. The Pentagon might do that out of concerns that BAE's new partner, EADS, has German and French ownership. At present, BAE has a "special security agreement," or SSA, with the Pentagon that allows it to work as a subcontractor on classified contracts.

"BAE is an important defense player in the United States and their SSA has national security access. That's very unique," said one industry executive, who declined to speak publicly because it was unclear how the merger would be constructed.

"If they're part of a different company, does that eliminate them as a supplier?"

The powerful lobbying teams of the weapons makers have yet to go into battle on the issue, occupied as they are with budget gridlock in Congress that threatens overall US defense spending.

But as Boeing's "supplier of the year" award shows, the merger could disrupt vast supply chains, given BAE's broad work as a supplier.

PARTNER, COMPETITOR BAE's electronics and controls, for example, are installed on 6,343 Boeing jets in use by 181 major airlines. The British-owned company supplies more than 60,000 cockpit and cabin parts to Boeing a year. And it has been chosen to build a special touch-screen controller for the interior of Boeing's aerial refueling tanker, a $51.7 billion defense contract won by Boeing after years of competition with EADS.

BAE also works closely with most other big US weapons makers. It is one of the major suppliers to Lockheed Martin Corp

on the F-35 Joint Strike Fighter, with work done by both its US unit and the British parent. It also teams with Lockheed on a possible replacement for the US Army's Humvee trucks.

 
 
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