BAE-Thales given breathing space

DEFENCE groups BAE Systems and Thales are to secure an eight-month extension to the assessment phase of the multi-billion pound contract to build two new aircraft carriers for the Royal Navy.

The extension follows protracted negotiations between the companies and the Ministry of Defence, which is under severe budgetary pressure following last week's comprehensive spending review.

Although the MOD's budget rose by 1.4% in real terms, it will find itself hard pressed to pay for the new carriers and fulfil other defence commitments.

The MOD had told the Navy that the cost of the carriers would have to be kept to £2.9bn, but both Thales and BAE believe this figure to be unrealistic and that the final amount will be closer to £4bn. This would make the ships the most expensive in the Navy's history.

Thales chief executive Alex Dorian said the French company and BAE had agreed with to work in an MOD-led initiative to progress the project.

The eight-month extension to the assessment phase of the contract is good news for the Navy, which had feared the ships‘ specification would be cut back to meet stringent financial targets.

Defence Secretary Geoff Hoon will this week also announce the winner of an £800m contract to supply reconnaissance drones for the army. The Watchkeeper drones are central to the Army's plans to increase its battlefield surveillance capabilities.

Thales is also in the running for this contract though it faces tough competition from a rival bid led by defence group Northrop Grumman.

Hoon‘s announcement later this week is also expected to reveal how he intends to reshape the armed forces in the wake of the Chancellor's spending review.

Hoon is expected to have to cut back in a number of areas, including a possible merger of various Army regiments and a reduction in the number of front-line RAF squadrons and possible base closures.

The likely cuts have been flagged up by the Tories as evidence that the Armed Forces face a perilous time, being overstretched abroad while being cut back at home.

But Hoon is expected to counter with claims that the Tories would put the Navy's proposed new aircraft carriers at risk if they came to power.