Airbus offers BAE a first-class opportunity

London Briefing: Now that the price of Airbus is so depressed, does it really make sense for BAE Systems to sell its 20 per cent stake in the European civil aircraft maker?

The British company still seems keen to exercise its option to pull out and sell its stake back to EADS, the Franco-German group that owns the other 80 per cent of Airbus. It wants to exit the commercial aircraft business to concentrate on defence and expanding in the US.

Unfortunately, the recent valuation of Airbus by investment bank Rothschild, which was asked by the two sides to come up with a fair price, is considerably lower than BAE had expected. So the British have decided to launch their own audit of Airbus and temporarily put the sale on hold.

By the admission of its new crew, Airbus and its parent EADS are now in a hole.

Unseemly political infighting between shareholders and management, not to mention the industrial problems at its flagship A380 jumbo project, have badly dented Airbus's reputation.

Even in France, where it has always been a source of pride, Airbus has fallen from grace. A poll has just relegated it to the number 18 slot in France's league of most admired companies. And only 40 per cent of those polled now have a positive image of Airbus against 82 per cent just four months ago.

At Farnborough air show this week, the European group is seeking to restore some confidence in its industrial and technical know-how by pledging to resolve the A380's problems and launching a much more ambitious and costly wide-body airliner to compete against Boeing's hot-selling Dreamliner.

The challenge is nonetheless daunting and success will depend on how the recovery strategy is executed by the new teams at Airbus and EADS. Here big questions remain. On past form, the Franco-German joint management at EADS has proved disruptive and divisions and national rivalries are hardly going to disappear overnight.

As for the new Airbus boss, Christian Streiff, he is new to aerospace and faces a steep learning curve.

That said, it would be silly to give up Airbus as being as good as dead in a market that is, after all, dominated by only two big manufacturers. And BAE could seize on the current Airbus problems and the ultimate intention of the two EADS core shareholders - DaimlerChrysler and LagardÃare - to disengage from aerospace to make a counter-intuitive move by increasing rather than disposing of its Airbus stake.

By betting on the long-term potential of Airbus, BAE could negotiate a deal with the other shareholders to increase its stake to about 35 per cent. This would give it a strong case to manage Airbus, bringing in its industrial and commercial expertise and financial management - all clearly lacking nowadays at Airbus.

Such a move would undoubtedly represent a 180-degree rethink on the part of BAE's Mike Turner. But the BAE boss, who once ran the company's civil aircraft business and represented BAE on the old Airbus supervisory board, could well be tempted into returning to the promising civil sector.

Nor should this cause undue problems for his defence business and expansion plans in the US defence market. These could be spun off into a separate company kept at arms length from the European civil aircraft business. At the current price Airbus is fetching, it could be a once-in-a- lifetime opportunity for BAE.

Lukewarm reaction to Rosneft flotation

Rosneft's initial public offering (IPO) looks remarkably like a traditional Russian doll - big on the outside but rapidly shrinking as you peel off the layers. The sale raised $10.4 billion (€8.3 billion) and Vladimir Putin can certainly claim a diplomatic success. He argued that the "market-based and transparent" flotation endorsed international confidence in Russia's economy.

Yet scratch the surface, and market forces seem to have played only a minor role in the sixth-largest IPO ever. After all, in the current climate of high oil prices and renewed Middle East tensions, an oil company was always going to be an easy sell.

But the IPO only seemed to attract strong demand from oil companies and big Russian investors, while traditional financial institutions appeared lukewarm.

The shares also made a flat debut on the Russian bourse yesterday. In contrast, Bank of China, which raised $11.2 billion from its IPO last month, saw its shares soar 15 per cent on their first day of trading. Does this say something about investor confidence on China and Russia? - (Financial Times service)

Chris Johns is on leave