Quality jobs require long-term thinking

The attempt by BAE Systems and EADS to create the world's biggest aerospace and defence company collapsed last week, but the planned merger raised big questions.

They included how much say governments and shareholders should have over corporate decisions and, crucially, what sort of jobs we want future generations to have.

I was broadly in favour of the deal. Many mergers fall apart because of the difficulties of melding cultures. But the executives of BAE and EADS had worked together before and the British had been a bridge between EADS' German and French partners.

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I thought the deal would have been particularly good for defence specialist BAE. With military spending falling in the UK and US, its two big markets, a merger would have given it a stake in Airbus, the civil aircraft maker that is EADS' main business.

And I thought the merger was vital for the future of high-quality UK manufacturing employment. British workers help make Airbus aircraft, designing and building the wings at Filton, near Bristol, and at Broughton in north Wales.

These facilities have a worldwide reputation and it is difficult to imagine Airbus closing them. However, the Germans, in particular, have long wanted to be more involved in wing-making and it seems they have had some success.

Traditionally, the UK has been responsible for about 20 per cent of the work on an Airbus aircraft. But, as my colleagues Andrew Parker and Jim Pickard reported recently, only about 15 per cent of the work on Airbus' planned A350 aircraft will be done in the UK. The wings will still be largely British, but Airbus' German and Spanish plants have won the right to make more components.

Where did the 20 per cent figure come from? It matched the 20 per cent stake that BAE held in Airbus. Why has it gone down? Because BAE sold its Airbus stake in October 2006. The UK government still provides launch aid for Airbus aircraft, giving it some say over where work is done. But, as the A350 shows, the UK's position is not as strong as it was.

Renewed BAE involvement in EADS would have helped ensure the future of a healthy UK civil aircraft manufacturing sector. Instead, BAE will now have to try to expand its defence business. With the US and UK shrinking, where are its best prospects? The company is pinning its hopes on its old pals in Saudi Arabia. These were the options Britain faced in this merger: making world-class civil aircraft or helping to prop up an unpleasant dictatorship.

Why did BAE sell its stake in 2006? Airbus was in deep trouble at the time. On the same day that BAE shareholders voted, almost unanimously, to approve the sale of the Airbus stake, EADS' shares tumbled because of problems with its A380 superjumbo aircraft. Mike Turner, BAE's then-chief executive, said: "We have to bear in mind that Airbus now faces a challenging medium-term future."

But aircraft manufacturing is not a medium-term business. EADS and Airbus stuck it out. Airbus had argued for years that the growth of the middle class in Asia would lead to a huge demand for travel that would require bigger aircraft.

The A380 caused EADS many more problems, but there are now 84 in the air and a further 173 on order. Airbus has an order book of 4,414 aircraft of all types.

In the end, the governments involved in the proposed merger failed to agree. The UK and France made progress on issues such as restricting government shares, but they were vetoed by Angela Merkel, the German chancellor.

Even if she had assented, BAE's shareholders would have had to agree, and they didn't. A large percentage said they wanted BAE instead to "return capital" through a share buyback. How prescient are UK shareholders and how reliable is their long-term view? Over the six years since they approved the sale of the Airbus stake, BAE's shares have significantly underperformed EADS' and its total shareholder return has been lower.

Why did Ms Merkel object to the merger? Some said because the British and French would have been too strong. Others because she wanted EADS' headquarters to be in Germany. But perhaps she decided Germany didn't need the deal. It already has top-class manufacturing jobs. It has secured them through training, investment and government-business co-operation rather than by making a fetish of the return of capital to shareholders.