BAE Navy project threatened

BAE Systems is threatening to ditch a £3bn project to build two aircraft carriers for the Royal Navy if Ministers force it into an unprofitable partnership to expand the contract and build a third carrier for the French.

BAE has told the Ministry of Defence that bringing the French into the project could cause long delays and would upset America, which is providing much of the technology.

The tough line from Britain's leading defence manufacturer could again put it in direct conflict with Downing Street. The Prime Minister is keen to promote a deal to build a third aircraft carrier for the French as a symbol of Britain's European defence commitment.

But a BAE source insisted: 'The Government may be keen for political reasons to allow the French in on this deal, but the reality is that they (the French) will want a slice of the action.

'The project will become severely delayed and the Americans have told us they are not keen to share their technology with the French.'

BAE's robust stance stems from the fact that top executives are angry at what they see as constant Government sniping over cost overruns on major defence procurement projects.

The company also believes the Government is not doing enough to secure fair competition with its rivals. BAE was forced to share work on the carriers with the French group Thales.

'Every defence contract in this country is run on rigorous competitive lines. The French compete and often win major contracts,' said the source.

'We are not against that. But do you really think that Britain would win a major defence contract in France? Of course not. We are up against competition with countries that close their own markets when we want to compete. It is time for a level playing field.'

BAE will send a clear signal to the Government this week that the days of taking on large projects for the sake of prestige are over and that it will only agree to projects that make a profit.

Chief executive Mike Turner will go on the offensive tomorrow when he goes before the Public Accounts Committee.

He is to be questioned about alleged multi-billion cost overruns on the Astute nuclear submarine and the Nimrod reconnaissance aircraft.

One reason for BAE's assertiveness is its success in building up American business. It employs 20,000 workers in the US and last year won more business from the Pentagon than any other foreign company, almost doubling its revenue from this source to £1.13bn.

BAE will reveal its profits this week. They are expected to be about £710m, down from £796m in 2002.