Europeans Accept Boeing Merger

Averting a potentially brutal trade war, the European Union granted preliminary approval Wednesday to Boeing Co.’s landmark merger with McDonnell Douglas Corp. after Boeing made a series of modest concessions to overcome fierce European opposition.

Although a European official characterized Boeing’s concessions as “spectacular,” the company said the agreement might not have any influence on Boeing’s sales over the next decade and does nothing to financially undermine the merger.

The settlement drew a sigh of relief from President Clinton, who had personally intervened at the eleventh hour to head off one of the most bruising trade disputes between Europe and the United States in recent years.

Meanwhile, Wall Street clearly judged Boeing the winner, as investors bid up Boeing shares 5% and McDonnell Douglas stock 6% in trading Wednesday on the New York Stock Exchange.

Under the agreement with the EU, Boeing will cancel provisions of sales contracts that make it the exclusive supplier to three major U.S. airlines. But the underlying sales deals to the airlines, worth as much as $50 billion, would not be affected, Boeing Chairman Phil Condit said.

In addition, Boeing agreed to operate the Douglas Aircraft Co. unit in Long Beach as a separate entity and to avoid pressuring its suppliers to not sell products to Airbus Industrie, the European consortium that will be Boeing’s sole remaining competitor.

Aerospace experts dismissed the concessions as essentially “cosmetic” and said they were important only to the extent that Boeing had intended to employ monopolistic practices after its acquisition of McDonnell Douglas.

In a Washington news conference jammed with reporters from around the world, Condit gave an upbeat assessment of his company’s prospects under the merger, which he expects to close Aug. 1.

“Overall, we are very comfortable with the agreement we reached, and we can go ahead,” Condit said.

But Karel Van Miert, the 15-nation European trade bloc’s commissioner for business competition, said in Brussels that Europe--usually the weaker cousin to the United States in trade disputes--has “won an essential battle as far as antitrust policy is concerned.”

Van Miert said Boeing had retreated in “spectacular” fashion and said that otherwise he would not have recommended approval of the merger.

The aircraft dispute took on broad diplomatic importance because the United States and the EU boast the world’s largest two-way trading and investment relationship, with a total of more than $270 billion in merchandise crossing the Atlantic in both directions last year.

“I am pleased that Boeing and the EU have resolved their differences,” President Clinton said in a statement. “The . . . merger will promote competition and efficiency in the U.S. defense industry and preserve the jobs of 14,000 workers at Douglas Aircraft Co.”

The five-month European review of Boeing’s intentions turned into a pitched, emotion-charged battle. U.S. critics charged that the EU was simply protecting Airbus, a four-nation European consortium. Airbus now accounts for 30% of worldwide sales of airliners of 100 seats and up, versus a total of 70% for Boeing and McDonnell Douglas.

Van Miert rejected out of hand accusations that the EU was coddling Airbus because it was European. “It’s our business to keep the market open, and that’s exactly what we have been doing,” he said.

The 20-member European Commission, the EU’s executive arm, gave its blessing in principle Wednesday. Formal approval of the $15-billion merger is expected next week.

Condit was careful not to suggest that Boeing walked away with a sweet deal, particularly with formal approval from the European Commission still another week away. But at one point he characterized some of the concessions as predicated on European assumptions that were “theoretical” and “crazy.”

The agreement, for example, prohibits Boeing from applying leverage on existing Douglas Aircraft customers for parts and service in a way that would give Boeing an advantage in selling new airplanes.

“I would be crazy to do that,” Condit asserted. “To penalize a customer is a crazy idea.”

Condit said the firm’s exclusive sales contracts with American, Delta and Continental airlines were important, which is why the firm fought so hard with the EU to keep them. Under the agreement, the sales deals will expire after 10 years, instead of 20.

But Condit predicted that if the firm continues to perform well in serving the customers, it is likely they will be motivated to stick with Boeing as an exclusive supplier.

“If that happens, then in the final analysis it won’t matter,” Condit said.

Indeed, the deals were merely a reflection of the trend in the way airlines purchase their fleets, increasingly sticking with one supplier, experts said. The three airlines involved in the exclusive Boeing deals said they still planned to buy only Boeing aircraft.

Another concession allows Airbus to purchase the rights to patents that McDonnell Douglas has developed in military work but that also have civilian applications. McDonnell Douglas chief executive Harry Stonecipher downplayed that issue at the Washington news conference, noting that those patents had done little to help struggling Douglas Aircraft compete with Boeing.

Aerospace analyst Joe Campbell of Lehman Brothers said the concessions made by Boeing are meaningful antitrust safeguards for European industry but would affect Boeing only if the company had intended to employ monopolistic practices.

“Did it cost Boeing anything? Not much, but these were important to the European Union,” Campbell said.

The ban against Boeing attempting to block its suppliers from also selling products to Airbus was among the most important concessions, Campbell said. Without that provision, Boeing could have forced an alignment of the entire world supply industry, ensuring that the most efficient suppliers were in its network while the second tier went to Airbus.

Nonetheless, Campbell said Boeing does not need to resort to such anti-competitive practices to continue exerting heavy competitive pressure on Airbus, a point of wide agreement among experts.

Vartabedian reported from Washington and Dahlburg from Brussels.

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Inside the Deal

The European Union approved the $15 billion merger of Boeing Co. and McDonnell Douglas Co. on Wednesday, effectively removing the last barrier to the deal.

At issue: The EU has argued that the merger would be anti-competitive because the new company would dwarf Europe’s aerospace consortium Airbus Industrie, the merged company’s only competitor.

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Boeing’s concessions:

* Cancel exclusivity of long-term contracts with three airlines and avoid such deals in the future.

* Let Airbus buy the rights to McDonnell Douglas patents that have civilian applications.

* Separate McDonnell Douglas’ civilian and defense operations.

* Disclose research funding to the EU.

Sources: Aerospace Industries Assn.; Times and wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times