In an eleventh hour decision, the European Union approved "in principal" the merger of aerospace giants Boeing and McDonnell Douglas, averting a trans-atlantic trade war. After this backgrounder by Elizabeth Farnsworth and Tom Bearden, Elizabeth Farnsworth leads a discussion.
ELIZABETH FARNSWORTH: A transatlantic trade war was averted today when the European Union 
approved in principle a proposed merger between two American aerospace giants--Boeing & McDonnell-Douglas. The Seattle-based Boeing, a defense and commercial manufacturer, makes 2/3 of the world's civilian airliners. St. Louis-based McDonnell-Douglas is the nation's number two airplane manufacturer and a leading defense contractor. Its merger with Boeing was recently approved by American regulators but was opposed by Airbus Industries, a European consortium considered Boeing's lone commercial competitor. Antitrust experts of the European Union also opposed the merger, arguing it would create a global airline monopoly.
The European Union could not stop the deal and did threaten to fine Boeing and restrict its 
business with European airlines. President Clinton countered by threatening trade sanctions. Last night, Boeing agreed to scale back certain parts of the merger in order to gain European approval. In a major concession Boeing agreed to cancel its exclusive contracts with three U.S. airlines: Continental, Delta, and American. The European Union commissioner for competition hailed the agreement.
KAREL VAN MIERT, E.U. Commissioner: (speaking through interpreter) Boeing entirely accepted our position. They agreed not to enter into similar contracts in the future and also not to apply the three contracts, which already exist.
ELIZABETH FARNSWORTH: Boeing also will give competitors access to some of its military aviation technology and will separate McDonnell-Douglass's commercial airplane unit from its own. Boeing's CEO, Philip Condit, commented on the 11th hour breakthrough.
PHILIP CONDIT, CEO, Boeing, Inc.: We think there is a context there to continue to do business, do it profitably. I think the vast part of that actually is how do we operate. We have an opportunity here I think that's outstanding. We've got to bring this team together, do it effectively. If we do that and do it well, I think we will deliver the kind of results that we ought to deliver.
ELIZABETH FARNSWORTH: The merger is also another step in the ongoing consolidation of the U.S. defense industry. Tom Bearden has that part of the story.
TOM BEARDEN: When the Berlin Wall came down and the Cold War ended, former enemies embraced. The same thing happened in the U.S. defense industry. Formerly bitter competitors were forced to embrace one another because Pentagon spending on weapons has declined more than 50 percent since 1987.
That's met massive layoffs at defense contracting firms. Many companies have merged with rivals to cut costs by eliminating overlapping operations. Just a few years ago there were about a dozen major defense contracting firms, but in 1994, Grumman merged with Northrop. The following year Lockheed merged with Martin-Marietta and then acquired Lorale. Raytheon is the process of acquiring Texas Instruments and Hughes Aircraft.
Last year, Boeing acquired Rockwell International and then announced a $13.3 billion merger with McDonnell-Douglas. And this July, Lockheed-Martin announced an $11.6 billion merger with Northrop. Several of the announced mergers aren't yet final. They still must be approved by antitrust regulators. But if the Lockheed-Northrop deal goes through, it means Lockheed will further solidify its position as the single largest weapons supplier to the Pentagon. Lockheed-Martin makes the F-16 Falcon fighter, the C-130 cargo plane, and the new F-22 fighter. Northrop makes the B-2 Stealth bomber.
And just a few months ago, Northrop belong collaborating with Lockheed on a proposal for still another new plane called the Joint Strike Fighter, which could bring in billions of dollars to the company that wins that contract. But the proposal getting the most scrutiny is the Boeing and McDonnell-Douglas merger. The new Boeing would take in about a third of all the money the Pentagon spends on jet fighters, helicopters, and missiles. The company would manufacture the F-18 fighter plane and the Apache attack helicopter, which were used extensively during the Gulf War.
A RealAudio version of this NewsHour segment is available.
