Airbus and Thales have held exploratory talks about a possible merger of some of their space activities, which could present a critical test for Europe's willingness to consolidate in an increasingly competitive and strategic sector.

The discussions, which are still in an early stage, are focused on the satellite activities of the companies, according to two people familiar with the situation.

Thales Alenia Space, the space business of Thales, and Airbus are Europe's largest manufacturers of satellites for communication, navigation, and surveillance. Leonardo, Italy's defense giant, holds a 33% stake in Thales Alenia.

The aim, according to one of the individuals, is to create a pan-European alliance in space, similar to that of MBDA, the regional missile champion. MBDA's successful cross-border manufacturing and one-company ethos is seen as a model for the type of defense industry cooperation that Europe needs following Russia's invasion of Ukraine.

The conflict and the extensive use of satellites by both sides have also highlighted how important space has become for national security.

“It would be a test of how strategically important space is to Europe,” said one of the people.

However, an agreement would bring significant regulatory and antitrust hurdles, the individuals warned, noting that Airbus and Thales had explored similar mergers in recent years, most recently in 2019.

The French, German, and Italian governments would have to agree to an alliance, as would the European Commission. The current volatile political situation in France would also likely pose an obstacle, according to one of the individuals.

The talks come at a time when both Airbus and Thales are under pressure to limit losses in their respective space businesses.

The demand for their large geostationary satellites has decreased, while the market for broadband and other services from smaller, more affordable spacecraft in low Earth orbit has increased significantly. Elon Musk's Starlink now operates the world's largest constellation of broadband satellites.

Airbus announced last month that the company would record a charge of around 900 million euros in the first half of the year related to its space systems business. The company said at the time it would "evaluate all strategic options such as potential restructurings, cooperation models, portfolio reviews, and M&A options.

Thales has also pointed to pressure in its space division and announced in March that about 1,300 positions will be cut due to a decline in demand for telecommunications satellites.

The talks are separate from the ongoing restructurings at both companies, which, according to people familiar with the situation, have priority.

Airbus, Thales, and Leonardo declined to comment on the talks, which were first reported by La Tribune.