BAE takes dive on profit warning

DEFENCE contractor BAE Systems today warned profit margins on its controversial 25-year-old Saudi contract, Al Yamamah, and weakening support work margins for the Ministry of Defence here would crimp earnings growth next year.

Although it tempered that with news it was close to signing a contract for 236 Eurofighter combat jets with four European governments, shares in the firm were the heaviest faller in the FTSE 100, shedding 11p to 246 1/4p.

The e13bn contract would be shared between BAE, which has 37% of the programme, pan-European defence group Eads and Finmeccanica of Italy.

A BAE spokesman insisted the news was good, and that the statement did not constitute a profit warning, despite the cautious words about profits next year from its customer solutions and support (CS&S) business group.

The firm said that, as a result of the changing business mix, profit improvement would be 'modest' in 2005.

Led by Mike Turner, BAE said it had been signalling a progressive margin reduction for its customer solutions & support business for some time. But it said today that reduction would come sooner than expected.

In part this arose because it had won a growing volume of support work for the MoD at lower margins than traditional weapons manufacturing. But in Saudi Arabia, an 'increased pace of indigenous Saudi content in the Al Yamamah programme, including greater in-Kingdom repair and overhaul, is expected to bring forward that margin reduction, resulting in a lower CS&S contribution in 2005.' Margins for support work on the Al Yamamah programme, under which BAE sold Saudi Arabia a fleet of fighter planes and related infrastructure, and provided the maintenance, 'are expected to stabilise from 2005', the company said.

BAE and its partners in the Munichbased Eurofighter company, are already delivering the first 148 new-generation Eurofighter combat jets to the RAF and the air forces of Germany, Spain and Italy.

But last week, the German parliament, which has often dragged its heels, approved the e4.6bn purchase of a further 68 of the high-agility fighters for its airforce.

Today, BAE said it had reached agreement in principle with the MoD on variations in Britain's share of the currently contracted tranche of Eurofighter Typhoons, to reflect programme changes. Agreement in principle had also been reached on batch two variations and the British share of the second, larger batch of 236 planes.

'These agreements bring a balanced overall improvement to the Typhoon programme for BAE Systems.' The company said the deal would only become legally binding when all four buying nations had signed it.

The programme plan is for Eurofighter partners to deliver 620 planes, 232 to Britain, 180 to Germany, 121 to Italy and 87 to Spain.