PARIS (Reuters) - European aerospace groups Airbus and Thales are exploring a tie-up of some space activities as new competition disrupts the sector, two industry sources said.

The sources said preliminary talks were focusing on their overlapping satellite activities. Both companies declined to comment on the discussions, which were first reported by La Tribune.

"They are thinking about this seriously," one of the sources said, asking not to be identified.

Shares in both companies were fractionally higher in midday trading.

Airbus and Thales Alenia Space, in which Italy's Leonardo holds a 33% stake, are Europe's largest makers of satellites for telecommunications, navigation and surveillance.

Demand for their geostationary satellites is increasingly under pressure as traditional manufacturers face competition from massive constellations of expendable satellites in low Earth orbit, like the Starlink network of Elon Musk's SpaceX.

La Tribune reported that pan-European group Airbus, headquartered in France, and French defence and technology firm Thales had begun "low-key discussions that are exploratory in nature" on space, backed by the French government.

It added that the companies had explored similar tie-ups as recently as 2019, but faced potential anti-trust objections by the European Commission.

France's competition authority said it was "much too early" to comment on any discussions that may be happening.

The EU's move follows a seven-month-long investigation under the Digital Services Act, or DSA.

The discussions emerged weeks after Airbus took a 900 million euro ($980.37 million) charge for its struggling space services business, on top of 500 million euros last year.

CEO Guillaume Faury last month told analysts that the company was "evaluating all strategic options" for its space business including restructuring, cooperation, a portfolio review, and potential merger and acquisition options.

For 2023, Airbus said its Space Systems revenue represented 20% of total Defence & Space revenue worth 11.5 billion euros. Thales Alenia Space, which contains all but a fraction of Thales' space activity, posted 2023 sales of 2.2 billion euros.

Besides EU approval, any alliance or merger negotiations would need support from the French and Italian governments.

Germany, which like France holds 11% of Airbus, is also expected to keep a watchful eye on anything that significantly alters the group's delicate Franco-German balance by doubling up on France-focused space activities, one industry source said.

'CRITICAL MASS'

While Italy's far-right government has been broadly open to tie-ups with foreign companies, Prime Minister Giorgia Meloni has actively used so-called anti-takeover "golden powers" to preserve the national interest in assets deemed as strategic.

Rome blocked a takeover of Italian components maker Microtecnica by France's Safran in November, threatening a wider $1.8 billion takeover of assets controlled by U.S. aerospace group Collins, before clearing the deal last month.

It also recently approved a law to boost Italy's presence in the space industry.

"The intent is clearly to try to build up critical mass in a sector that currently is not going well and is being undermined by players like Starlink," an Italian industry source said, referring to the reported talks between Airbus and Thales.

Broadening the alliance beyond France would improve the chances of winning anti-trust clearance, the source added.

Leonardo declined to comment on the reports of talks between Airbus and Thales.

It has called in the past for a pan-European satellite venture mirroring the MBDA missiles consortium, in which both Airbus and Leonardo hold stakes.

Since January, Faury has focused increasingly on reviewing Airbus's strategy in Defence and Space after separating the day-to-day running of the core commercial jetmaking business.

In January, he signalled impatience with writedowns in space, telling staff that "mishaps of this magnitude and suddenness are just not acceptable". He also replaced the head of Space Systems in an internal note marked "It is what it is".

Airbus faces separate competition from SpaceX in launchers, where it co-operates with France's Safran. Their Ariane 6 rocket blasted off after four years of delays last week.

Several analysts have said the recent decision to narrow Faury's role, as well as competition from SpaceX and others, raised questions over Airbus' future in the space business.

In January, however, Faury told staff that Airbus was stronger with a highly performing Defence and Space division than without a presence in those sectors.

Since then, a further review under new management has revealed deeper losses than expected, as Airbus revises down projected satellite services revenues over coming years.