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British Aerospace Plc

British Aerospace Plc

Warwick House
Farnborough Aerospace Centre
Farnborough
Hampshire GU14 6YU
United Kingdom
(01252) 373-232
Fax: (01252) 383-000
Web site: http://www.bae.co.uk/html/home.htm
Public Company
Incorporated: 1978
Employees: 75,823
Sales: £8.55 billion (1997)
Stock Exchanges: London
Ticker Symbol: BTASF
SICs: 1522 General Contractors, Other Than Single-Family Houses; 1541 General ContractorsIndustrial Buildings & Warehouses; 1542 General ContractorsNon-Residential Buildings; 1622 Bridge, Tunnel & Elevated Highway Construction; 1629 Heavy Construction, Not Elsewhere Classified; 3482 Small Arms Ammunition; 3483 Ammunition, Except Small Arms, Not Elsewhere Classified; 3484 Small Arms; 3489 Ordnance & Accessories, Not Elsewhere Classified; 3663 Radio & TV Broadcasting & Communications Equipment; 3721 Aircraft; 3764 Guided Missile & Space Vehicle Propulsion Units & Propulsion Unit Parts; 8711 Engineering Services; 8741 Management Services

British Aerospace plc (BAe) is the largest defense contractor in Europe, as well as being a leading aerospace company. The companys defense operations include military aircraft, missiles, small arms and ammunition, warships, and combat command systems. In aerospace, BAe holds a 20 percent interest in Airbus Industrie, the European plane-making consortium, provides a variety of services, and makes various equipment. The largest exporter in the United Kingdom, BAe generates more than 80 percent of its revenues overseas. In addition to its defense and aerospace operations, British Aerospace also has a property development unit called Arlington Securities plc, which is a leading developer of business parks in the United Kingdom.

Many of BAes activities are conducted through international joint ventures and consortia, with more than 30 partners linked to the company. In addition to Airbus Industrie, other notable BAe-involved ventures include Eurofighter Jagdflugzeug GmbH, which is 33 percent owned by BAe and is developing the next-generation Eurofighter 2000 military aircraft; Euromissile Dynamics Group, which is developing the Trigat third-generation antitank missile and is owned by three equal partners: BAe, Aérospatiale S.A. of France, and Daimler-Benz Aerospace AG (DASA) of Germany; Matra-BAe Dynamics, which is 50-50 owned by BAe and Lagardère Groupe SCA of France and specializes in guided missile systems; Panavia Aircraft GmbH, a three-nation consortium, 42.5 percent owned by BAe, which produces the Tornado military aircraft; and Saab-BAe Gripen AB, which makes the Gripen combat aircraft and is 50-50 owned by BAe and Saab Aircraft AB of Sweden. British Aerospace also holds a 35 percent stake in Saab AB, the parent of Saab Aircraft.

Predecessors Consolidated in the 1960s

In the years after World War II the British aircraft industry was overpopulated with manufacturers who had an increasingly difficult time competing not only with each other but with larger American manufacturers such as Boeing, Douglas (later McDonnell Douglas), and Lockheed. British companies were victimized by small orders from a government that was divesting itself of most of its empire and thus had greatly reduced military needs. Noting that the British aircraft industry was three times larger than Frances, with no obvious justification for being so, the Economist asked the critical question, Does Britain need an aircraft industry? Throughout the 1950s the health of British aviation was a major political issue and was the subject of many Parliamentary debates. Finally, in 1960, after intense lobbying from the Minister of Aviation, Duncan Sandys, Parliament passed a bill that called for a rationalization of the British aircraft industry through the merger of several existing companies that were facing closure.

The purpose of the rationalization was to combine the talent and resources of about 20 companies and limit overall production, while avoiding the politically sensitive issue of creating unemployment or allowing the British aeronautics industry to fall victim to external economic pressures. It was hoped that the program would raise the intensity of technological development to a level equal to that of the Americans. It was also noted that British aeronautic companies were diversifying themselves out of aircraft production, a trend that could have left Britain without an aircraft industry of any kind.

Early in 1960 Vickers-Armstrong, Ltd., which was originally founded in 1928, merged with English Electric (founded in 1918) and Bristol Aeroplane (founded in 1910) to form the British Aircraft Corporation (BAC). The three companies continued to operate as divisions of BAC, with Vickers and English Electric each accounting for 40 percent of the consortiums capital and the remaining 20 percent coming from Bristol. In May 1960 BAC acquired a controlling interest in another British company, Hunting Aircraft.

At the time of the British Aircraft Corporation merger, a second group of British aircraft companies were amalgamated to form the Hawker-Siddeley Aviation Company. Like BAC, Hawker-Siddeleys constituent companies, Armstrong Whit-worth (founded in 1921), A.V. Roe & Company (1910), Folland Aircraft (1935), Gloster Aircraft (1915), and Hawker Aircraft (1920), were operated as subsidiaries. Each brought an area of expertise to the new company. Armstrong produced large cargo airplanes, Avro built smaller passenger liners, and Folland, Gloster, and Hawker were known for their Gnat, Javelin, and Hunter jetfighters. Hawker-Siddeley also acquired a controlling interest in de Havilland Holdings, Ltd. and The Blackburn Group, as well as a 50 percent share of Bristol-Siddeley, Ltd., the airplane engine manufacturer.

The amalgamation that created British Aircraft Corporation and Hawker-Siddeley also made Westland Aircraft Britains primary helicopter and hovercraft manufacturer. Rolls-Royce (which received most of its publicity from its manufacture of automobiles but most of its profits from aircraft engine production) and Bristol-Siddeley, Ltd. became Britains leading engine manufacturers. Handley Page, Short Brothers, Scottish Aviation, and British Executive and General Aviation were the only British companies that were not a part of the governments rationalization program.

During the 1960s BAC continued to manufacture English Electrics Lightning and Huntings Jet Provost fighters in addition to Vickerss four-engine VC10 jetliner. The company also built a new twin-engine jetliner called the BAC-111. In 1962 BAC entered a coproduction agreement with Aérospatiale of France to build the Concorde supersonic passenger transport.

Hawker-Siddeley was divided into two divisions: Aircraft, for aircraft production, and Dynamics, for missiles and rockets. The aircraft division took over production of the HS-125 executive twin-jet from de Havilland and the HS-748 turboprop airliner from Avro. In 1964 it introduced the Trident, a three-engine jetliner intended to compete against the BAC-111, Douglas DC-9, and Boeing 727. In the military field, Hawker-Siddeley assumed production of Blackburns Buccaneer fighter and developed the HS-1182 Hawk trainer as well as a military patrol version of the de Havilland Comet called the Nimrod. The unique product of Hawker-Siddeley during the 1960s was the Harrier fighter jet.

The Harrier featured thrust nozzles that the pilot could aim either straight backward or toward the ground. When the nozzles were pointed backward the Harrier could take off on a runway like a conventional jet. When the nozzles were pointed down it could take off vertically like a helicopter. The Harrier was built in two configurations, one for the Royal Air Force and one for Royal Navy aircraft carriers.

Hawker-Siddeley Dynamics produced the Seaslug, Firestreak, and Red Top missiles. BAC also operated a missile division that manufactured the Vigilant, Blue Water, Thun-derbird, and Bloodhound missiles. The Bloodhound was a particularly effective weapon, but created a scandal when details of BACs high profits from the project were made public.

The success of the rationalization program was, however, limited, and by 1965 Britains aerospace industry was again unable to compete with foreign competitors. Lord Plowden headed a special Parliamentary committee that recommended a second major restructuring of the aircraft industry. The Plowden Report proposed that Rolls-Royce and Bristol-Siddeley merge to form a single company that manufactured aircraft engines. This merger, which included the sale of Hawker-Siddeleys 50 percent interest in Bristol-Siddeley to Rolls-Royce, was carried out in 1966. The second proposal, a merger of BAC and Hawker-Siddeley, was abandoned.

Company Perspectives

We are shaping our business through the concentration on five areas our five values. These values will drive our decision making, will help shape our processes and, above all, will define the kind of behaviour we expect between colleagues, between the Company and individuals, and between ourselves and the outside world. Customers our highest priority. People our greatest asset. Partnerships our future. Innovation and Technology our competitive edge. Performance our key to winning.

In February 1969 the governments of France and West Germany concluded an agreement that established a consortium called Airbus Industrie to manufacture a new passenger jetliner designated the A-300. The British government was invited to join Airbus as a full partner, but declined when it decided the project was doomed to failure. In its opinion, there was simply too little room in the commercial airliner market (already dominated by Boeing, McDonnell Douglas, and Lockheed) to support another competitor. Hawker-Siddeley, however, agreed to produce wings for the A-300 as an Airbus subcontractor. Because of intense competition, BAC and Hawker-Siddeley made no plans to develop successors to the BAC-11 and Trident. Even British Overseas Airways (BOAC), Britains state-owned international air carrier, was ordering the more advanced American-made jetliners. In addition, the American aircraft companies had extremely profitable military divisions that enabled them to devote large sums of money to the development of new commercial aircraft. BAC and Hawker-Siddeley had excellent military divisions, but the requirements of the domestic military establishment were small. At the same time, the international arms market was dominated by the American and Soviet manufacturers. American arms import restrictions prevented Hawker-Siddeley from selling its Harrier to the United States, despite interest in the jet from the Pentagon.

More Financial Difficulties Led to 1977 Creation of BAe

British Aircraft Corporation, Messerschmitt-Bolkow-Blohm (MBB) of Germany, and Aeritalia of Italy created the Panavia partnership to develop the Tornado Interdictor Strike fighter. Separately, BAC and Breguet of France created another consortium called SEPECAT (Société Européenne de Production de L avion E.C.A.T.) to develop the Jaguar jet fighter. Both of these programs were a financial drain on BAC, despite substantial contributions from the British government. Finally, it became apparent that BAC was unlikely to realize a profit from its costly coproduction of the Concorde with Aerospatiale. Only 16 were built (seven each for British Airways and Air France, with two remaining unsold), the first of which did not enter service until 1976. Once again the two largest British aerospace companies were in financial trouble and facing bankruptcy.

Engineers at Hawker-Siddeley designed a new short-haul 80-passenger jetliner called the HS-146. Convinced of the aircrafts commercial potential and the need for Hawker-Siddeley to remain in the commercial aircraft market, the British government pledged to share the development costs for the HS-146. To generate capital, the companys chairman, Sir Arnold Hall, authorized the sale of de Havilland of Canada to the Canadian government for $38 million. Similarly, BAC sold assembly rights for the BAC-111 to the government of Romania.

While the HS-146 was being developed, poor economic conditions and intense competition from the Americans eroded the already tenuous position of the British aerospace industry. In 1975 the Plowden merger proposal for BAC and Hawker-Siddeley had been resurrected in the form of an Aircraft and Shipping Industries Bill. The following year BAC and Hawker-Siddeley were nationalized, less in an attempt to protect their finances than to force a merger upon them. In 1977, after once being rejected in the House of Lords and defeated in the Commons, the Industries Bill was successfully ushered through Parliament.

The Aircraft and Shipping Industries Bill merged the Aircraft and Dynamics divisions of Hawker-Siddeley with the British Aircraft Corporation and Scottish Aviation, Ltd. The new company, called British Aerospace (BAe), continued to be operated by the British government as a state-owned corporation. British Aerospace was divided into two divisions: Aircraft, based at the Hawker-Siddeley facility in Kingston, and Dynamics, headquartered at the BAC Guided Weapons plant in Ste-venage.

Scottish Aviation, the third and smallest member of the BAe group, was established in 1935 to create employment opportunities in aviation in Scotland. Scottish Aviation built the international airport in Prestwick, which later became the forward traffic control base for flights between London and North America. Later, Scottish Aviation manufactured a series of propeller-driven general purpose aircraft.

Joined Airbus Consortium in 1979

In 1978 British Aerospace considered partnership with foreign companies to produce a new large passenger airliner. Even in its new form British Aerospace lacked the resources to develop a commercial jetliner any larger than the HS-146 (renamed BAe-146). Airbus, for which BAe was still building A-300 wings, was a candidate, as was Boeing, which was beginning work on its next generation of commercial aircraft. To join Boeing would have been politically inexpedient since Boeing was the primary source of the British aerospace industrys decline. In addition, British officials expressed concern over Boeings size and aggressive corporate personality. Joining Airbus, on the other hand, would require a substantial entry fee for development costs already incurred by the Airbus partners.

Eventually Boeing lost interest in a partnership with BAe. On January 1, 1979, British Aerospace purchased a 20 percent share of Airbus, pledging $500 million through 1983 for incurred costs and development of a new aircraft designated the A-310.

In 1979 Sir Keith Joseph, industry secretary for the Conservative government of Prime Minister Margaret Thatcher, announced the governments intention to privatize (or sell to the public) most of Britains state-owned corporations, including British Aerospace. At first this announcement alarmed officials, including BAe Chairman Lord Beswick, who had worked hard to reform the nations aerospace industry. They feared that private investors would divide the company and indiscriminately sell the more profitable divisions, possibly to foreigners.

The privatization program moved slowly because of political opposition and the governments desire to offer shares only when market conditions were most favorable. In the meantime, BAe appointed a new chairman to succeed Lord Beswick. The man they chose was the chairman of Esso Petroleum, Austin Pearce. Pearce was faced with the dual task of guiding British Aerospace through the privatization while ensuring that the companys orders were being filled. The increased military budget of the Conservative government contributed to the companys backlog of orders.

Became Public Company in 1981

The unconventional method in which British Aerospace was privatized established the form of future privatizations. On December 31, 1979, British Aerospace became a private limited company with authorized capital of £7 divided into seven shares, each with a par value of £1. All seven shares were held by nominees of the Secretary of State for Industry. On January 2, 1981, pursuant to the British Aerospace Act of 1980, the seven shares were split into 14, each with a value of 50p, and an additional 79,999,986 shares were created, raising the companys share capital to £40 million. On the same day, BAe adopted new Articles of Association and was registered as a public limited company. By February 4, 1981, British Aerospaces share capital was increased to 200 million shares, 50 million of which were made available to the public.

In its first year as a substantially public company, British Aerospace registered a pretax profit of £71 million. This was £6 million more than had been predicted, despite £50 million in development costs for the BAe-146 and A-310. The Panavia Tornado was past its development stages and in full production. The West German Panavia partner MBB prevented the consortium from realizing a substantial profit from the Tornado project, however, by not allowing exports of the fighter to countries outside of NATO, such as Saudi Arabia.

Management at British Aerospace was reorganized on January 1, 1983. Admiral Sir Raymond Lygo was appointed to the newly created position of managing director. Under the new system all group executives were to report to Sir Raymond. This enabled the board chairman, Pearce, to handle matters such as company finances more easily. One such external matter was British Aerospaces involvement in the Airbus A-320 project.

The A-320 was designed to carry 150 passengers and featured advanced fly-by-wire electronic control and navigation systems. BAe persuaded the other partners to allow it a 26 percent share of the A-320. The British government supported the companys involvement in the new Airbus project by making a £250 million line of credit available on favorable repayment terms. Under the terms of the agreement British Aerospace produced wings for the A-320.

Rejected Mid-1980s Takeover Bids

As a public company, BAe enjoyed greater independence in its policy making. But like other public companies it also risked becoming a takeover target. On May 15, 1984, the chairman of Thorn EMI, Peter Laister, announced his companys intention to merge with BAe. Thorn EMI was a profitable electronics and leisure conglomerate, whose assets included everything from production rights for video recorders to performance rights to Placido Domingo and the rock group Duran Duran. British Aerospace, described as a company that earned money making missiles and lost it building airliners, was also profitable but involved in an entirely different line of business. The London financial community reacted to Laisters announcement with amazement. In Parliament the Labour Party asked: Is it sensible to allow a firm which has been successful in the fields of color television, videos and the marketing of pop groups to have the responsibility of looking after the development of Britains largest company in civil and military aviation, in missile technology and space satellites?

The announcement also invited criticism from the managing director of Britains General Electric Company (GEC), Lord Weinstock: On two previous occasions when GEC expressed an interest in purchasing all or part of British Aerospace, it was privately rebuffed by the government, which was concerned that GEC would become too dominant a force in the British defense industry. GEC, which was a principal owner of BAC before 1977, was fully prepared to exceed any bid submitted by Thorn EMI.

In June 1984 British Aerospace rejected Thorn EMIs takeover proposal, and the following month did the same with GEC, citing a lack of any specific proposals. The government was satisfied with the takeover rejections because it ensured that British Aerospace would remain under British ownership and that it would continue to be a part of the Airbus group.

In 1985, confident about the companys position, the British government sold its 48 percent of British Aerospace, retaining, however, a special £1 share to ensure that BAe would stay under U.K. control. The £550 million offer was tightly restricted to institutional investors. The company also was reorganized into eight functional divisions during the year, a move that was intended to economize utilization of engineering teams by having them specialize in the development of products in specific fields. BAe was also the prime contractor on a lucrative contract known as Al Yamamah, which was signed with Saudi Arabia in 1985. Under Al Yamamah, the largest defense export contract in British history, BAe supplied Tornado fighter-bombers and other military aircraft to Saudi Arabia. By the early 1990s, the companys contracts with Saudi Arabia accounted for about half of its defense business.

In 1986 the Lockheed Corporation reached an agreement with BAe to develop new versions of the BAe-146 for military and cargo applications. Coproduction agreements with American companies were nothing new to British Aerospace, whose Harrier fighter jet had been built in the United States in conjunction with McDonnell Douglas since the mid-1970s.

Spate of Late 1980s and Early 1990s Acquisitions

In April 1987 British Aerospace acquired Royal Ordnance plc, a state-owned maker of small arms ammunition, for £190 million. Shortly thereafter, Pearce stepped down as chairman. Instead of Lygo replacing him, however, an outsider was brought in: Roland Smith, a professor of marketing who had been chairman of a number of other U.K. firms. Under Smiths leadershipwhich followed the predominant trend of the periodBAe diversified in the late 1980s and early 1990s through a spate of acquisitions, some of which resulted from additional British government privatizations. In 1987 the company acquired Steinheil Optronik GmbH, a German manufacturer of optical equipment, for £17 million, and Ballast Nedam Group, a Dutch construction concern, for £47 million. BAe also bought stakes that year in Reflectone Inc., a U.S.-based maker of flight simulators and other training devices, and System Designers plc, which specialized in computer software and systems and was renamed SD-Scicon plc (the latter stake was sold in July 1991). In 1988 Smith made his biggestand farthest afieldpurchase when BAe acquired The Rover Group plc, an automobile maker, from the British government for £150 million (US $255 million), a sum considered to be a steal. The following year British Aerospace continued to diversify by spending £278 million for Arlington Securities Plc, a major developer of business parks in the United Kingdom. BAe already had a large property portfolio, including substantial holdings gained with Royal Ordnance and with Rover, and the rationale for purchasing Arlington was that through streamlining and plant closings BAe would have additional property to develop and could generate profits by doing so.

Smiths last significant acquisitions were a 76 percent stake in Liverpool Airport in May 1990 and all of Heckler & Koch GmbH, a German small arms, machine tool, and general engineering company, in March 1991. By the time of the latter purchase, BAe was near collapse. A recession had severely impacted the automobile and real estate sectors, turning the acquisitions of Rover and Arlington sour. The economic downturn also wreaked havoc with the companys already troubled regional and corporate aircraft operations. Smith approached first Trafalgar House (a construction engineering and property group) and then GEC about a merger. When the BAe board found out about the talks with GEC, they ordered that the discussions be terminated. In September 1991 the companys dire straits forced Smith to attempt to raise £432 million (US $755 million) through a stock offering. When current shareholders revolted, the board ousted Smith, replacing him temporarily with Graham Day, who had been chairman of Rover. During Days brief six-month tenure, he succeeded in turning away yet another attempt by GEC to acquire BAe. He also restructured the companys defense operations, placing them under a single umbrella subsidiary called British Aerospace Defence Limited.

Restructuring Began in 1992

In April 1992 John Cahill, former chief executive of BTR PLC, was brought in as the new chairman. By this time, thanks in large part to Smith, British Aerospace had evolved into a quite unwieldy conglomerate, with seven core activities: defense, Rover, Airbus, commercial property development, corporate aircraft, regional aircraft, and satellite communications. Under Cahill, BAe began a major restructuring aimed at concentrating the companys efforts on the first four of these seven areas. In late 1992 the company took a £1 billion writeoff to close a plant belonging to its troubled regional aircraft unit and to lay off 3,000 workers. For the year, BAe posted an after-tax loss of £970 million. The company attempted to spin off the regional aircraft unit into a joint venture with Taiwan Aerospace Corporation but the deal fell through. BAe proceeded, however, to sell its corporate jet unit to Raytheon Co. in June 1993. Earlier that year, in January, the company had secured a second-stage Al Yamamah contract with Saudi Arabia totaling US $7.5 billion.

Meanwhile, behind the scenes, Cahill had approached GEC yet again about a merger, this time of the two companies defense units. When word leaked out in mid-1993 about the discussions, the BAe board once again quickly moved to scuttle the talks. Nevertheless, British Aerospace remained in financial trouble and it was expected that merger talks would soon revive. But within a matter of months, BAes financial picture improved dramatically following a spate of divestments, which exceeded the initial bounds of Cahills restructuring. In December 1993 Ballast Nedam was sold to a consortium of Hochtief AG, Internationale Nederlanden Group, and the Ballast Nedam Pension Fund. In March 1994 Rover, which was gobbling up cash and whose acquisition was proving to be a huge blunder, was sold to BMW AG, with BAe netting £529 million in the process. And in July of that same year the companys satellite communications unit was sold to Matra Marconi Space for £56 million. Around this same time, yet another boardroom coup resulted in the ouster of Cahill, who was replaced by Bob Bauman, former CEO of U.S. pharmaceutical giant SmithKline Beecham.

Mid-1990s European Aerospace/Defense Consolidation

While BAe had been busy cleaning up its balance sheet and trying to stay independent, dramatic changes in the world scene brought new threats. Following the breakup of the Soviet Union and the concomitant end of the Cold War, the defense industry in the United States quickly consolidated into three giant firmsBoeing, Lockheed Martin, and Raytheon. In Europe, however, consolidation did not come nearly so quickly, and European companies were increasingly at a competitive disadvantage in comparison with U.S. firms. In response, a healthier BAe began to seek out strategic acquisitions and, perhaps more importantly, to create numerous links with other European defense and aerospace firms in what were likely the first moves toward a Europe-wide consolidation.

In June 1995 BAe lost outto GECin a bid for VSEL, a U.K. maker of submarines. That same month, however, British Aerospace formed a joint venture, Saab-BAe Gripen AB, with Saab ABs Saab Military Aircraft to manufacture and sell the Gripen combat aircraft. In January 1996 the company shifted its troubled regional aircraft operations into a three-way consortium, Aero International (Regional) SAS, with Aerospatiale of France and Alania of Italy. This venture was dissolved in mid-1998, however, following disagreements among the partners. BAe in April 1996 expanded into the Australian defense market with the acquisition of AWA Defence Industries (AWADI, later renamed British Aerospace Defence Industries) for A $50 million. Following more than three years of negotiations, BAe and Lagardères defense arm, Matra, merged their guided missile businesses into a £1 billion joint venture called Matra-BAe Dynamics. In October 1997 the company announced that it would bolster its defense electronics sector through the £320 million (US $536.5 million) purchase from Siemens AG of Siemens Plessey businesses in the United Kingdom and Australia. One of BAes longer-standing joint ventures, the one that had spent years developing the next-generation Eurofighter military jet, received a huge boost in December 1997 when Britain, Germany, Italy, and Spain signed a $40 billion deal to build the jet, ordering more than 600 of them. Also in 1997 BAe announced that it would cease manufacturing its Jetstream turboprop regional aircraft, further distancing the company from this troubled sector.

In April 1998 BAe announced that it would buy a 35 percent stake in Saab AB, furthering the consolidation of European defense. With this link, the two companies planned to cooperate more closely and on more projects. Around this same time, the company was contemplating the purchase of a stake in Construcciones Aeronautics S.A. (CASA), a defense and aerospace firm owned by the Spanish state and a partner of BAes in Airbus (CASA held a 4.2 percent stake). British Aerospace was eager to join with other European companies to form a pan-European defense and aerospace firm, and the four Airbus partners (BAe, CASA, Aerospatiale of France, and DASA of Germany) had issued a reportfollowing a request from their respective governmentsin March 1998 saying that they wanted to merge, though no timetable for doing so was set. A major sticking point to such a merger was that Aerospatiale was owned by the French government. Both BAe and DASA insisted that the French firm had to be privatized for a merger to work, but the French government was opposed to doing so. BAe, meantime, had ruffled some feathers of its own in November 1997 when it signed a multimillion-dollar deal with BoeingAirbuss arch-rivalto make wing parts for the next generation of 737 jets.

British Aerospace continued to divest itself of noncore assets in 1998, most notably selling 16.1 percent of its 21.1 percent stake in Orange PLC, an operator of mobile telephones, for £763.8 million (US $1.28 billion), netting £368 million (US $616.7 million) in the process. The possibility that Arlington Securities would be divested became very real around this time. In the event of such an occurrence, BAe would have come full circle, returning by and large to its defense and aerospace roots. Starting in May 1998, a new management team would see the steadily improving companywhich in 1997 had posted profits before taxes and exceptional items of £596 million, a 31 percent gain over 1996into whatever the future might have in store. Replacing Bauman in the chairmans seat that month was Richard Evans, who had been chief executive of the company since 1990, while John Weston, who had been in charge of BAes defense operations, took over the chief executive slot. The two executives faced perhaps the biggest challenge in British Aerospaces chronically challenging historymerging or transforming the company into European Aerospace.

Principal Subsidiaries

Arlington Securities plc; BAeSEMA Ltd. (50%); British Aerospace Aerostructures Ltd.; British Aerospace Airbus Ltd.; British Aerospace (Aviation Services) Ltd.; British Aerospace (Consultancy Services) Ltd.; British Aerospace Finance Ltd.; British Aerospace Flight Training (UK) Ltd.; British Aerospace (Insurance) Ltd.; British Aerospace (International) Ltd; British Aerospace (Operations) Ltd.; British Aerospace Properties Ltd.; British Aerospace (Systems & Equipment) Ltd.; Lee Valley Developments Ltd. (50%); Liverpool Airport plc (76%); Orange plc (5%); Reflectone UK Ltd. (48%); Royal Ordnance plc; Spectrum Technologies Ltd. (20%); British Aerospace Australia (Holdings) Ltd.; British Aerospace Australia Ltd.; British Aerospace Flight Training (Australia) Pty. Ltd.; British Aerospace (France) SAS; Airbus Industrie (France; 20%); Euromis-sile Dynamics Group (France; 33.3%); Matra BAe Dynamics SAS (France; 50%); SEPECAT S.A. (France; 50%); British Aerospace Deutschland GmbH (Germany); Cityline Simulator und Training GmbH (Germany; 50%); Competence Center In-formatik GmbH (Germany; 30%); Eurofighter Jagdflugzeug GmbH (Germany; 33%); Heckler and Koch GmbH (Germany); Panavia Aircraft GmbH (Germany; 42.5%); BAeHal Software Ltd. (India; 40%); Muiden Chemie International BV (Nether lands); Asia Pacific Training and Simulation Pte. Ltd. (Singapore; 63%); Singapore British Engineering Pte. Ltd. (51%); Saab AB (Sweden; 35%); Saab-BAe Gripen AB (Sweden; 50%); Asia Pacific Space and Communications Inc. (U.S.A.; 17%); British Aerospace Holdings, Inc. (U.S.A.); Reflectone Inc. (U.S.A.; 48%).

Further Reading

Betts, Paul, BAe Benefits As It Brings Its Head Out of the Clouds, Financial Times, June 14, 1993, p. 17.

Betts, Paul, and Jackson, Tony, Defence May Be the Best Attack, Financial Times, February 5, 1994, p. 6.

_____, A Flight Back to Basics, Financial Times, August 3, 1992, p. 10.

Buchan, David, and Gray, Bernard, BAe, Matra in £lbn Missiles Merger Move, Financial Times, May 14, 1996, pp. 1, 20.

Cohen, Norma, Cash Is the Stumbling Block in Property Separation, Financial Times, April 7, 1998, p. 27.

Cook, Nick, BAe Sees United Europe As Only Way Forward, Interavia Business & Technology, April 1996, pp. 18 +.

Davidson, Andrew, Sir Richard Evans, Management Today, January 1997, pp. 38-41.

The Defence Industry Jettisons Its Excess Baggage, Economist, August 8, 1992, pp. 57 +.

Dwyer, Paula, Triage for Battered British Aerospace, Business Week, October 5, 1992, pp. 109-10.

Elliott, Simon, The Drive to Survive, Flight International, December 25, 1991, p. 17.

Europes Defence Companies Join the Modern World, Economist, December 10, 1988, pp. 67-68.

Feldman, Elliot J., Concorde and Dissent: Explaining High Technology Project Failures in Britain and France, Cambridge: Cambridge University Press, 1985.

Fly Off with Me, Economist, October 5, 1991, pp. 70, 72-73.

Getting Together, Economist, August 10, 1996, pp. 46, 48.

Goldsmith, Charles, Airbus Prepares for Unique Restructuring, Wall Street Journal, August 30, 1996, p. A6.

_____, British Aerospace in Enviable Turnaround, Wall Street Journal, March 1, 1996, p. A10.

_____, British Aerospace Opts to Team with Lockheed on U.S. Jet Bid, Wall Street Journal, June 19, 1997, p. B4.

_____, Re-Engineering: After Trailing Boeing for Years, Airbus Aims for 50% of the Market, Wall Street Journal, March 16, 1998, pp. Al, A10.

_____, Report on Defense Restructuring in Europe Is Short on Details, Wall Street Journal, March 30, 1998, p. A14.

Gray, Bernard, BAe Lands Behind Barricades in the UK, Financial Times, June 22, 1995, p. 23.

_____, BAe Pulls Out of £835m Bid Battle for VSEL, Financial Times, June 22, 1995, p. 1.

_____, An Elusive Moving Target, Financial Times, May 14, 1996, p. 19.

_____, How BAe Pulled Back from the Brink, Financial Times, December 18, 1995, p. 7.

_____, Time to Seek a Grand Alliance, Financial Times, December 19, 1995, p. 7.

Hayward, Keith, International Collaboration in Civil Aerospace, New York: St. Martins Press, 1986.

Levine, Jonathan B., and Dwyer, Paula, Europes Weapons Makers Start Linking Arms, Business Week, May 24, 1993, p. 130A.

Lorenz, Andrew, Up in the Air at British Aerospace, Management Today, February 1995, pp. 32-36.

Making Rover Fly, Economist, December 9, 1989, pp. 61-62.

Men of Property, Economist, October 22, 1988, p. 62.

Monopolies and Mergers Commission, British Aerospace Public Limited Company and VSEL plc: A Report on the Proposed Merger, London: HMSO, 1995.

Nelms, Douglas W., Sea Change for Ship of State: Like a Giant Oil Tanker, British Aerospace Is Slowly, Ponderously Altering Course, Air Transport World, December 1993, pp. 64-69.

Nicoll, Alexander, BAe, Dasa Win Siemens Arm, Financial Times, October 31, 1997, p. 25.

_____, Re-Arming for the Battlespace As a Competitive All Rounder, Financial Times, April 15, 1998, p. 26.

_____, Siemens Sale Creates Fresh Fighters, Financial Times, October 31, 1997, p. 27.

OToole, Kevin, BAes Brave New World, Flight International, March 22, 1995, pp. 28 + .

Rescued by Rover, Economist, February 22, 1992, pp. 62 +.

Skapinker, Michael, Aerospace Groups Back Merger, Financial Times, March 28, 1998, p. 2.

_____, BAe Reshuffles for Wider Role, Financial Times, April 3, 1998, p. 25.

Wood, Derek, BAe Foresees Major Changes in Europe, Interavia Aerospace World, May 1993, pp. 30-31.

updated by David E. Salamie

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British Aerospace Plc

British Aerospace Plc

100 Pall Mall
London SW1Y 5HR
England
(01) 930 1020

Public Limited Company
Incorporated:
April, 1978
Employees: 75,823
Sales: £3.14 billion (US$ 4.601 billion)
Market value: £1.302 billion (US$ 1.903 billion)
Stock Index: London

In the years after World War II the British aircraft industry was overpopulated with manufacturers who had an increasingly difficult time competing not only with each other but with larger American manufacturers such as Boeing, Douglas and Lockheed. British companies were victimized by small orders from a government which was divesting itself of most of its empire and therefore had greatly reduced military needs. Noting that the British aircraft industry was three times larger than Frances, with no obvious justification for being so, The Economist asked the critical question, Does Britain need an aircraft industry? Throughout the 1950s the health of British aviation was a major political issue and was the subject of many Parliamentary debates. Finally, in 1960, after intense lobbying from the Minister of Aviation, Duncan Sandys, Parliament passed a bill which called for a rationalization of the British aircraft industry through the merger of several existing companies that were facing closure.

The purpose of the rationalization was to combine the talent and resources of about 20 companies and limit overall production, while avoiding the politically sensitive issue of creating unemployment or allowing the British aeronautics industry to fall victim to external economic pressures. It was hoped that the program would raise the intensity of technological development to a level equal of that of the Americans. It was also noted that British aeronautic companies were diversifying themselves out of aircraft production, a trend which could have left Britain without an aircraft industry of any kind.

Early in 1960 Vickers-Armstrong, Ltd., which was originally founded in 1928, merged with English Electric (founded in 1918) and Bristol Aeroplane (founded in 1910) to form the British Aircraft Corporation (BAC). The three companies continued to operate as divisions of BAC, with Vickers and English Electric each accounting for 40% of the consortiums capital, the remaining 20% coming from Bristol. In May of 1960 BAC acquired a controlling interest in another British company, Hunting Aircraft.

At the time of the British Aircraft Corporation merger, a second group of British aircraft companies were amalgamated to form the Hawker-Siddeley Aviation Company. Like BAC, Hawker-Siddeleys constituent companies, Armstrong Whitworth (founded in 1921), A.V. Roe & Company (1910), Folland Aircraft (1935), Gloster Aircraft (1915), and Hawker Aircraft (1920) were operated as subsidiaries. Each brought an area of expertise to the new company. Armstrong produced large cargo airplanes, Avro built smaller passenger liners, while Folland, Gloster and Hawker were known for their Gnat, Javelin and Hunter jetfighters. Hawker-Siddeley also acquired a controlling interest in de Havilland Holdings, Ltd. and The Blackburn Group, as well as a 50% share of Bristol-Siddeley, the airplane engine manufacturer.

The amalgamation which created British Aircraft Corporation and Hawker-Siddeley also made Westland Aircraft Britains primary helicopter and hovercraft manufacturer. Rolls-Royce (which receives most of its publicity from its manufacture of automobiles but most of its profits from aircraft engine production) and Bristol-Siddeley, Ltd. became Britains leading engine manufacturers. Handley Page, Short Brothers, Scottish Aviation, and British Executive and General Aviation were the only British companies which were not a part of the governments rationalizaton program.

During the 1960s BAC continued to manufacture English Electrics Lightning and Huntings Jet Provost fighters in addition to Vickers four-engine VC10 jetliner. The company also built a new twin-engine jetliner called the BAC-111. In 1962 BAC entered a co-production agreement with Aérospatiale of France to build the Concorde supersonic passenger transport.

Hawker-Siddeley was divided into two divisions: Aircraft, for aircraft production, and Dynamics, for missiles and rockets. The aircraft division took over production of the HS-125 executive twin-jet from de Havilland and the HS-748 turboprop airliner from Avro. In 1964 it introduced the Trident, a three-engine jetliner intended to compete against the BAC-111, Douglas DC-9 and Boeing 727. In the military field, Hawker-Siddeley assumed production of Blackburns Buccaneer fighter and developed the HS-1182 Hawk trainer as well as a military patrol version of the de Havilland Comet called the Nimrod. The unique product of Hawker-Siddeley during the 1960s was the Harrier fighter jet.

The Harrier features thrust nozzles which the pilot can aim either straight backward or towards the ground. When the nozzles are pointed backward the Harrier can take off on a runway like a conventional jet. When the nozzles are pointed down it can take off vertically like a helicopter. The Harrier was built in two configurations, one for the Royal Air Force and one for Royal Navy aircraft carriers.

Hawker-Siddeley Dynamics produced the Seaslug, Firestreak and Red Top missiles. BAC also operated a missile division which manufactured the Vigilant, Blue Water, Thunderbird and Bloodhound missiles. The Bloodhound was a particularly effective weapon, but created a scandal when details of BACs high profits from the project were made public.

The success of the rationalization program was, however, limited, and by 1965 Britains aerospace industry was again unable to compete with foreign competitors. Lord Plowden headed a special Parliamentary committee which recommended a second major restructuring of the aircraft industry. The Plowden Report proposed that Rolls-Royce and Bristol-Siddeley merge to form a single company which manufactured aircraft engines. This merger, which included the sale of Hawker-Siddeleys 50% interest in Bristol-Siddeley to Rolls-Royce, was carried out in 1966. The second proposal, a merger of BAC and Hawker-Siddeley, was abandoned.

In February of 1969 the governments of France and West Germany concluded an agreement which established a consortium called Airbus to manufacture a new passenger jetliner designated the A-300. The British government was invited to join Airbus as a full partner, but declined when it decided the project was doomed to failure. In its opinion, there was simply too little room in the commercial airliner market (already dominated by Boeing, McDonnell Douglas and Lockheed) to support another competitor. Hawker-Siddeley, however, agreed to produce wings for the A-300 as an Airbus subcontractor. Because of intense competition, BAC and Hawker-Siddeley made no plans to develop successors to the BAC-11 and Trident. Even British Overseas Airways (BOAC), Britains state-owned international air carrier, was ordering the more advanced American-made jetliners. In addition, the American aircraft companies had extremely profitable military divisions which enabled them to devote large sums of money to the development of new commercial aircraft. BAC and Hawker-Siddeley had excellent military divisions, but the requirements of the domestic military establishment were small. At the same time, the international arms market was dominated by the American and Soviet manufacturers. American arms import restrictions prevented Hawker-Siddeley from selling its Harrier to the United States, despite interest in the jet by the Pentagon.

British Aircraft Corporation, Messerschmitt-Bölkow-Blohm (MBB) of Germany, and Aeritalia of Italy created the Panavia partnership in order to develop the Tornado Interdictor Strike fighter. Separately, BAC and Breguet of France created another consortium called SEPECAT (Société Européenne de Production de Lavion E.C.A.T.) to develop the Jaguar jet fighter. Both of these programs were a financial drain on BAC, despite substantial contributions from the British government. Finally, it became apparent that BAC was unlikely to realize a profit from its costly co-production of the Concorde with Aérospatiale. Only 16 were built (seven each for British Airways and Air France, two remain unsold), the first of which did not enter service until 1976. Once again the two largest British aerospace companies were in financial trouble and facing bankruptcy.

Engineers at Hawker-Siddeley designed a new short-haul 80-passenger jetliner called the HS-146. Convinced of the aircrafts commercial potential and the need for Hawker-Siddeley to remain in the commercial aircraft market, the British government pledged to share the development costs for the HS-146. In order to generate capital, the companys chairman, Sir Arnold Hall, authorized the sale of de Havilland of Canada to the Canadian government for $38 million. Similarly, BAC sold assembly rights for the BAC-111 to the government of Romania.

While the HS-146 was being developed, poor economic conditions and intense competition from the Americans eroded the already tenuous position of the British aerospace industry. In 1975 the Plowden merger proposal for BAC and Hawker-Siddeley had been resurrected in the form of an Aircraft and Shipping Industries Bill. The following year BAC and Hawker-Siddeley were nationalized, less in an attempt to protect their finances than to force a merger upon them. In 1977, after it had once been rejected in the House of Lords and defeated in the Commons, Prime Minister James Callaghans Labour government successfully saw the Industries Bill through Parliament.

The Aircraft and Shipping Industries Bill merged the Aircraft and Dynamics divisions of Hawker-Siddeley with the British Aircraft Corporation and Scottish Aviation, Ltd. The new company, called British Aerospace, continued to be operated by the British government as a state-owned corporation. British Aerospace was divided into two divisions: Aircraft, based at the Hawker-Siddeley facility in Kingston, and Dynamics, headquartered at the BAC Guided Weapons plant in Stevenage.

Scottish Aviation, the third and smallest member of the British Aerospace group, was established in 1935 to create employment opportunities in aviation in Scotland. Scottish Aviation built the international airport in Prestwick, which today is the forward traffic control base for flights between London and North America. Later, Scottish Aviation manufactured a series of propeller-driven general purpose aircraft.

In 1978 British Aerospace considered partnership with foreign companies to produce a new large passenger airliner. Even in its new form British Aerospace lacked the resources to develop a commercial jetliner any larger than the HS-146 (renamed BAe-146). Airbus, for which British Aerospace was still building A-300 wings, was a candidate, as was Boeing, which was beginning work on its next generation of commercial aircraft. To join Boeing would have been politically inexpedient since Boeing was the primary source of the British aerospace industrys decline. In addition, British officials expressed concern over Boeings size and aggressive corporate personality. Joining Airbus, on the other hand, would require a substantial entry fee for development costs already incurred by the Airbus partners.

Eventually Boeing lost interest in a partnership with British Aerospace. On January 1, 1979 British Aerospace purchased a 20% share of Airbus, pledging $500 million through 1983 for incurred costs and development of a new aircraft designated the A-310.

In 1979 Sir Keith Joseph, industry secretary for the Conservative government of Prime Minister Margaret Thatcher, announced the governments intention to privatize (or sell to the public) most of Britains state-owned corporations, including British Aerospace. At first this announcement alarmed officials, including British Aerospace Chairman Lord Beswick, who had worked hard to reform the nations aerospace industry. They feared that private investors would divide the company and indiscriminately sell the more profitable divisions, possibly to foreigners.

The privatization program moved slowly because of political opposition and the governments desire to offer shares only when market conditions were most favorable. In the meantime, British Aerospace appointed a new chairman to succeed Lord Beswick. The man they chose was the chairman of Esso Petroleum, Dr. Austin Pearce. Pearce was faced with the dual task of guiding British Aerospace through the privatization while ensuring that the companys orders were being filled. The increased military budget of the Conservative government contributed to the companys backlog of orders.

The unconventional method in which British Aerospace was privatized established the form of future privatizations. On December 31,1979 British Aerospace became a private limited company with authorized capital of £7 divided into seven shares, each with a par value of £1. All seven shares were held by nominees of the Secretary of State for Industry. On January 2, 1981, pursuant to the British Aerospace Act of 1980, the seven shares were split into 14, each with a value of 50p, and an additional 79,999,986 were created, raising the companys share capital to £40 million. On the same day, British Aerospace adopted new Articles of Association and was registered as a public limited company. By February 4, 1981 British Aerospaces share capital was increased to 200 million shares, 50 million of which were made available to the public. Currently, the secretary of state holds 48.43% of the companys issued share capital. 3.14% is owned by trustees of the companys employee share ownership plan, and the balance of 48.43% is owned by private shareholders.

In its first year as a substantially public company, British Aerospace registered a pre-tax profit of £71 million. This was £6 million more than had been predicted, despite £50 million in development costs for the BAe 146 and A-310. The Panavia Tornado was past its development stages and in full production. However, the West German Panavia partner MBB prevented the consortium from realizing a substantial profit from the Tornado project by not allowing exports of the fighter to countries outside of NATO, such as Saudi Arabia.

Management at British Aerospace was reorganized on January 1, 1983. Admiral Sir Raymond Lygo was appointed to the newly created position of managing director. Under the new system all group executives were to report to Sir Raymond. This enabled the board chairman, Dr. Pearce (now Sir Austin), to more easily handle matters such as company finances. One such external matter was British Aerospaces involvement in the Airbus A-320 project.

The A-320 was designed to carry 150 passengers and featured advanced fly-by-wire electronic control and navigation systems. British Aerospace, which owns 20% of Airbus, persuaded the other partners to allow it a 26% share of the A-320. The British government supported the companys involvement in the new Airbus project by making a £250 million line of credit available on favorable repayment terms. Under the terms of the agreement British Aerospace would produce wings for the A-320.

As a public company, British Aerospace enjoyed greater independence in its policymaking. But like other public companies it also risked becoming a takeover target. On May 15, 1984 the chairman of Thorn EMI, Peter Laister, announced his companys intention to merge with British Aerospace. Thorn EMI was a profitable electronics and leisure conglomerate, whose assets included everything from production rights for video recorders to performance rights to Placido Domingo and the rock group Duran Duran. British Aerospace, described as a company which earns money making missiles and loses it building airliners, was also profitable but involved in an entirely different line of business. The London financial community reacted to Mr. Laisters announcement with amazement. In Parliament the Labour Party asked: Is it sensible to allow a firm which has been successful in the fields of color television, videos and the marketing of pop groups to have the responsibility of looking after the development of Britains largest company in civil and military aviation, in missile technology and space satellites?

The announcement also invited criticism from the managing director of Britains General Electric Company, Lord Weinstock: On two previous occasions when GEC expressed an interest in purchasing all or part of British Aerospace, it was privately rebuffed by the government which was concerned that GEC would become too dominant a force in the British defense industry. GEC, which was a principal owner of BAC before 1977, was fully prepared to exceed any bid submitted by Thorn EMI.

In June of 1984 British Aerospace rejected Thorn EMFs takeover proposal, and the following month did the same with GEC, citing a lack of any specific proposals. The government was satisfied with the takeover rejections because it ensured that British Aerospace would remain under British ownership and that it would continue to be a part of the Airbus group.

In 1985, confident about the companys position, the British government offered to sell its 48% of British Aerospace. The £550 million offer was tightly restricted to institutional investors. The company was also reorganized into eight functional divisions during the year, a move which was intended to economize utilization of engineering teams by having them specialize in the development of products in specific fields.

In 1986 the Lockheed Corporation reached an agreement with British Aerospace to develop new versions of the BAe-146 for military and cargo applications. Co-production agreements with American companies was nothing new to British Aerospace, whose Harrier fighter jet had been built in the United States in conjunction with McDonnell Douglas since the mid-1970s.

Today British Aerospace is one of the worlds largest aerospace concerns, producing aircraft, missiles and spacecraft, in addition to parts for a variety of jointly produced commercial and military aircraft. As its name implies, British Aerospace will continue to lead the British and European aerospace industries to greater technological heights from which they can effectively compete with the American companies and their seemingly endless financial resources.

Principal Subsidiaries

British Aerospace (Insurance), Ltd.; British Aerospace (Holdings), Inc.; British Aerospace (Insurance Brokers, Ltd.; British Aerospace Australia, Ltd. (Australia); British Scandinavian Aviation AB.

Further Reading

Concorde and Dissent: Explaining High Technology Project Failures in Britain and France by Elliot J. Feldman, Cambridge, Cambridge University Press, 1985; International Collaboration in Civil Aerospace by Keith Hayward, New York, St. Martins Press, 1986.

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"British Aerospace Plc." International Directory of Company Histories. . Encyclopedia.com. 16 Aug. 2017 <http://www.encyclopedia.com>.

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"British Aerospace Plc." International Directory of Company Histories. . Retrieved August 16, 2017 from Encyclopedia.com: http://www.encyclopedia.com/books/politics-and-business-magazines/british-aerospace-plc