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Talk of an Aerospace Merger Hints at Emerging U.S. Policy

We may be seeing signs and portents. The phenomenon of Boeing Co. and McDonnell Douglas Corp. talking merger could well reflect a new U.S. government determination to back American workers and companies in global markets.

At the very least, the talks should tell you that customers have the real power in today’s global economy, that markets never work as predicted and that even the most efficient companies and workers can have difficulties.

Particulars of the story seem insignificant. Some executives of Boeing and McDonnell, the two U.S. makers of commercial airliners, revealed last week that they were talking about a possible merger or some sort of cooperation involving McDonnell’s defense business.

Timing is meaningful. News of the talks leaked during a strike at Boeing by the International Assn. of Machinists and Aerospace Workers, which represents about a third of the company’s employees. A major issue in the strike is job security--Boeing has reduced its work force by 35% in the last five years.

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Moreover, the strike was made political two months ago by machinist union leader George Kourpias who complained to President Clinton that Boeing was shipping jobs overseas in the co-production agreements with China and other countries that are a traditional part of selling airplanes abroad.

The Clinton Administration launched an investigation but ultimately decided that co-production agreements were necessary to win fast growing foreign markets.

“We have an obligation, as we open markets and work with other countries, to make sure we also produce jobs at home,” says U.S. Trade Representative Mickey Kantor, explaining a policy that tries to reconcile external and internal pressures.

But there’s the rub. Why should jobs at home be a problem if the U.S. is successful in global trade? Frustration is understandable. Boeing’s workers are the world’s most efficient producers of aircraft. And Boeing, with $22 billion in annual sales, dominates the industry with 60% of the world market.

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Furthermore, business is picking up. Predictions that air travel in Asia would grow twice as fast as the rest of the world have come true. By all logic, Boeing--with 80% of its sales outside the U.S.--should be basking in prosperity and so should McDonnell Douglas.

Profitless prosperity is more like it. With three plane builders vying for big orders, power is in the hands of the buyers. Boeing’s sale of 77 new 777 jetliners to Singapore Airlines, announced last week, is revealing.

Boeing won the sale, after a hard fight against Airbus, the government-backed European consortium that now has 30% of the airliner business. But Boeing won by a promise to buy the planes back from Singapore after 10 years at a pre-fixed price, thus shouldering risks of inflation or deflation.

In former times, Boeing put escalator clauses in contracts and passed inflation risk to customers. Now competitive conditions won’t allow it. In a sale this year to Scandinavian Air System, Boeing discounted plane prices by 60%. And McDonnell Douglas practically gave away planes to ValuJet Airlines, a low-cost carrier based in Atlanta.

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Some countries want more than discounts. They want technology transfer to help develop their own industries. Boeing has been cagey in what it allows suppliers to work on but McDonnell Douglas, in a weaker position with only 10% of the market, has been vulnerable.

Boeing doesn’t allow others to work on sophisticated electronics in the cockpits, says analyst Wolfgang Demisch of BT Securities, an investment arm of Bankers Trust. “But McDonnell allowed Korean Air and Halla Engineering (a Korean company) to work on cockpits for its MD-95.”

The upshot is that global markets are both lifeblood and a challenge to even the best of U.S. companies and workers.

It’s noteworthy therefore that reports of the Boeing-McDonnell talks were greeted differently than most merger talks. A spokesman for the machinists said the union would approve of any deal that strengthened the U.S. aerospace industry.

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Investment experts approved on several grounds. “McDonnell Douglas is the swing supplier in an overcapacity market. Combining its airliner business with Boeing’s would stabilize prices,” says Jon B. Kutler, president of Quarterdeck Investment Partners, an firm specializing in aerospace defense.

A deal could “create a national leader in combat and commercial aircraft,” says Demisch.

An increase of defense work would lend secure government cash flow and government aided research and development to Boeing. Defense work, after all, was the underlying support that built the modern U.S. aircraft industry, beginning with a competition in the 1950s for an Air Force tanker plane that produced Boeing’s 707, the first commercial jetliner.

To be sure, some experts say a full merger is unlikely for anti-trust reasons. A Boeing-McDonnell combination would have 70% of the world market.

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But U.S. antitrust law may need to recognize global reality. The competition consists of Airbus Industrie, a company formed and backed by the German, French, British and Spanish governments--although no longer directly financed by government because global trade rules forbid it.

Customers frequently are national airlines hewing to government agendas for technology transfer and employment.

Meanwhile, the U.S entry on this critical frontier consists of private firms that must make a profit to survive, and machinists and other workers who fear for job security--but who have the ear of President Clinton.

What can government do for U.S. aircraft makers? Oh, it could shift some defense business or quietly allow a merger that would rationalize an industry and strengthen the U.S. hand.

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Was it an accident or a signal of something dramatic in the works that news of merger talks was leaked last week?

A sentiment from Mickey Kantor gives a clue: If there’s one message he would send the American people, he says, it would be “that their government stands up for them in trade and they can have confidence.”

When you see signs and portents, pay attention.


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