British Aerospace Plc

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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 France’s, “with no obvious justification for being so,” The Economist asked the critical question, “Does Britain need an aircraft industry?” Throughout the 1950’s 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 consortium’s 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-Siddeley’s 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 Britain’s 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 Britain’s 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 government’s rationalizaton program.

During the 1960’s BAC continued to manufacture English Electric’s Lightning and Hunting’s 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 Blackburn’s 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 1960’s 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 BAC’s high profits from the project were made public.

The success of the rationalization program was, however, limited, and by 1965 Britain’s 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-Siddeley’s 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), Britain’s 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 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 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 aircraft’s 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 company’s 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 Callaghan’s 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 industry’s decline. In addition, British officials expressed concern over Boeing’s 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 government’s intention to privatize (or sell to the public) most of Britain’s 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 nation’s 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 government’s 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 company’s orders were being filled. The increased military budget of the Conservative government contributed to the company’s 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 company’s 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 Aerospace’s 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 company’s issued share capital. 3.14% is owned by trustees of the company’s 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 Aerospace’s 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 company’s 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 company’s 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. Laister’s 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 Britain’s largest company in civil and military aviation, in missile technology and space satellites?”

The announcement also invited criticism from the managing director of Britain’s 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 EMF’s 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 company’s 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-1970’s.

Today British Aerospace is one of the world’s 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.