updated 6/7/2005 8:02:00 PM ET 2005-06-08T00:02:00

Europe needs to spend 2 billion euros ($2.5 billion) a year more on space projects to have any hope of keeping up with the United States and to avoid being overtaken by China, India or Japan, says Europe’s top industry executive.

Building and launching satellites has become a multibillion-dollar trade, but European spending is dwarfed by the budgets for commercial and military programs in the United States, said EADS Space President Francois Auque.

“Europe just produces words as far as its ambitions in space are concerned,” he told Reuters in an interview ahead of the Paris air show next week.

Europe’s space industry, which is limping out of a painful restructuring, has been appealing for years for more public spending to close the gap with the United States.

But hampered by weak economic growth, European governments are under pressure to limit spending to keep deficits under the ceiling allowed by the rules for the euro currency.

“Budgets are being stabilized, but they shouldn’t be stabilized, they should be increased. It’s a matter of protecting our relative position,” Auque said.

“Europe is caught between the Americans -- for whom space is truly strategic and who recognize this through their budgets --and China and India, who are no longer very far behind us.”

EADS Space, a subsidiary of aerospace group EADS, is the largest industrial space group in Europe and the world’s third largest behind Boeing and Lockheed Martin.

It is the prime contractor for Europe’s Ariane rockets and builds satellites through its subsidiary, EADS Astrium.

Auque says that while the U.S. National Aeronautics and Space Administration (NASA) has an annual budget of $16 billion for 2006, U.S. investment in space includes another $16 billion of military spending from the Pentagon and about $10 billion linked to missile defense projects.

By contrast, the European Union spends 5 billion euros on civil projects and 700 million on military ones, Auque said, adding that these figures should be 6 billion and 2 billion respectively.
Japan spends about $4 billion annually, while China, India and South Korea are accelerating their spending just as Europe did in the 1950s and 1960s, Auque said.

“We are in a space market characterized by very weak growth, because the bulk of these activities are generated by state institutions and governments. And European budgets are flat, desperately flat,” Auque said.

He said EADS Space had done what it should to adjust to a market suffering from overcapacity following the Internet boom, when many aerospace companies overinvested in the hope that telecoms companies would launch more satellites than they eventually did.

And EADS Space emerged from its own drastic restructuring with an operating profit of 10 million euros last year.

“We managed to reduce our costs and our staff by 30 percent over two years with revenues growing,” Auque said.

Revenues amounted to 2.6 billion euros in 2004 and Auque predicts higher revenues and profits for 2005.

But he said it was difficult to remain profitable in the commercial satellite market when five companies are fighting over just 15 satellites a year.

EADS Astrium targets two contracts for telecoms satellites a year. So far this year it has landed one from South Korea.

A rebound in the dollar is bringing some relief.

Unlike its EADS sister company Airbus, the world’s largest maker of passenger jets, EADS Space was not able to compensate for the dollar’s weakness by shifting costs to the dollar zone -- its plants are in France, Germany, Britain and Spain.

The dollar has recovered from record lows of $1.36 to the euro in December to around $1.23 to the euro now.

“With a euro above $1.25 ... the impact is very strong. On current contracts the garrotte has been loosened a bit,” Auque said.

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