Why BAE has America in its sights

DEFENCE and aerospace giant BAE Systems this week signalled the beginning of the great ground offensive in its new grand strategy by buying United Defence Industries of the US for £2.2bn. The five-year plan, agreed by the high command of the main board last November, will take the company's main interest inexorably westward, out of Europe and into America.

For Mike Turner, the ebullient, blunt talking chief executive, the deal for UDI - making of the Bradley Fighting Vehicle - makes BAE the leading transatlantic defence and aerospace company. The combined company becomes a world player in the development of ground combat systems, rivalled only by Abrams tank builder General Dynamics. In Europe, it puts BAE's Alvis-Vickers and Swedish division Hagglund together with UDI subsidiary Bofors.

The new BAE team is set fair to win contracts for the most ambitious programmes of the US and British armies. But here is the difference: the Future Combat Systems for the US forces is costed at about $100nbn (£52bn) over five years. The Future Rapid Effects System for the UK, already delayed, is worth £6bn or less.

While the US offers prospects for new markets, according to Turner, the European and UK end of the business will see a steady decline with an inevitable loss of jobs. After the Typhoon Eurofighter, Britain will lose the ability to build fast combat jets. This will mean a decline of specialists in the aircraft sector from 15,000 to 5,000.

'This will be paid for by the taxpayer,' says Turner. He would like to see skills and resources switched to new generations of unmanned surveillance and combat planes, which Britain will otherwise have to buy from the US or Israel.

'Since 9/11, defence and security are number one in the United States. For politicians here, support for a budget increase for defence is a low priority,' he says. 'It's not the vote-winner it is in the US - 9/11 didn't occur in Europe.'

In the UK, Turner believes the worst of BAE's recent troubles are over, especially the overruns and delays in the Nimrod MRA4 aircraft and Astute submarine programmes. The ending of the fixed-price contract cost BAE shareholders £750m and UK taxpayers £500m.

In Britain and Europe, programmes such as the Type 45 Destroyer, Typhoon fighter, MBDA missiles and its share in Airbus are making a steady profit. 'We have what we have, and we're comfortable with it,' Turner says.

{2} But the continuing shortage of funding for defence procurement will bring cuts and programme delays for all three services. Most notable will be the rethink of the plan to build two aircraft carriers for the Royal Navy. Turner does not foresee a cancellation but his team does think the programme will be delayed and ship designs scaled down.

'On the current model, there is a gap between the design they want and the budget available,' says Chris Geoghegan, in charge of the programme at BAE. The design will have to be rethought this summer, making it virtually impossible to meet the in-service date of 2012. With all eyes on the US, where the defence budget is about to hit $500bn - next year it will be bigger than the combined defence budgets for the rest of the world - Turner sees little threat to BAE from Europe.

He sees the merger between Eads and Thales in France as inevitable. 'It's taken far too long as it is,' he says drily. 'The rest of Europe does not have support from the US, and they don't have our unique competitive advantage, being the preferred ally. They are going to face a massive decline in business soon.'

In the short term, BAE will stick with its 20% stake in Airbus. Eads owns the rest. But the change in management and finance allows for a quick sale and exit, 'in case we need the cash quickly somewhere else', according to a senior manager.

While commercial skies may darken over Europe and new horizons open in America, Turner's biggest worry is the prospect for Britain and its security and defence policy. 'The Ministry of Defence does not have the funding to support and equip the armed forces in the way they should,' he says. 'As part of BAE I am very optimistic, as a British citizen I am deeply pessimistic. And I don't like it.'

Navy on course for crunch

THE fortunes of BAE in the UK and of the Royal Navy as an independent fighting service - in the 200th anniversary year of its greatest triumph, Trafalgar, and of the death of its greatest hero, Nelson - rest with two aircraft, one European and one American, and two aircraft carriers.

Deliveries of the Eurofighter - or Typhoon in the UK version - to the RAF are well under way. Orders for 45 in the first batch and 85 in the second were confirmed at the end of last year. The contract for the second batch and the retro-fitting of some of the first for ground attack comes to about £5bn. The whole UK Typhoon project is costed at £19bn, the most expensive British defence project to date.

Critics argue that the plane is years late and out of date because it was designed to fight off Russian bombers in the Cold War. But RAF chiefs are purring about its performance. It can beat any aircraft currently operating, and will probably outperform the hugely expensive US F22 Raptor.

{3} BAE has a 17% share in the Lockheed Martin F-35 Joint Strike Fighter (JSF). The Ministry of Defence plans to buy 150 of the jump-jet version for the two new aircraft carriers. The JSF is at least five years behind, has problems with weight on take-off and payload, and the projected cost has shot up to $25bn (£13bn) from $17bn, with industry sources saying that figure is likely to double.

Some fear the project may have to be scrapped, which would leave plans to build the Royal Navy's two 60,000-tonne aircraft carriers without a designated aircraft. The CVF carrier project, a joint programme between the Ministry of Defence, BAE, Thales and KBR, faces a crunch this summer. Originally costed at £2.9bn, the price is now put at a more realistic £4bn, and this is not available under present defence budget pressures.

Any new Government after this summer's General Election will have an ugly choice of finding extra money or cutting down the size and capability of the carriers - or cancelling them.

Which brings us back to Nelson. Without the carriers, the Navy loses almost its entire reason for existing, at least according to New Labour's Strategic Defence Review of 1998. As the hero of Trafalgar might say: 'Engage the enemy more closely' - with the aim this time on Whitehall, rather than the French.