BAE Systems: £1 billion revenue risk from US defence cuts

Posted on 21 Feb 2013

Despite a £1.5 billion fall in sales from £19.2 billion to £17.8 billion, defence group BAE Systems managed to cushion the blow to profits by implementing manufacturing efficiencies, making redundancies and selling off businesses in its land and armament division.

BAE Systems was heavily affected by defence cuts in the US and the UK and withdrawal of allied forces from Afghanistan. This resulted in 3,600 redundancies in 2012, taking the total of people axed by the company in the past four years up to 26,000.

The US, which accounts for 40% of the company’s sales, has plans in place to cut $487 billion (£321 billion) from its defence budget over the next decade and the UK Government is slashing defence spending by 8% by 2014.

BAE Systems warned that it could axe 3,600 US jobs if plans to make further cuts pass through Congress. America postponed making a decision on sequestration, which would trim state spending by almost $1 trillion, in December. However, a new deadline is looming and if full sequestration is imposed, the impact would reduce BAE System’s revenues by 6%, approximately £1 billion.

The majority of that is likely to come from maintenance and service contracts with the US Navy signalling an intent to cancel a number of ship maintenance requirements should budgets be cut. This could cause major problems for BAE Systems and other aerospace and defence firms such as Rolls-Royce, which have sought to build up their service arms as they are more profitable.

The evolution of BAE Systems has seen the group’s business develop from an equipment supply-centred model to one that now delivers equipment and then works to maintain it to extract more value, maintain relationships and improve efficiency and lifespan for the customer. The speed of software advances and defence cuts has also led to more outsourcing of maintenance, repair and overhaul by the Government.

In 2012, 50% of the group’s sales were generated in services across a wide range of activities and geographies and BAE Systems expects services growth in markets outside of the US. –

BAE Systems has fought hard to expand its international sales outside of the US and the UK, with orders rising to £11.2 billion in 2012 compared with £4.8 billion in 2011. “The group’s broad spread of geographic business is providing resilience [to defence cuts in the US and the UK],” said BAE Systems CEO Ian King.

With most Western countries keen to avoid land conflicts, the US opting not to join NATO allies France and the UK in dispatching a small number of troops in Mali, the UK-based defence group is focusing on generating growth in selling aircraft overseas and growing its cyber, intelligence and security businesses.

BAE Systems signed a five-year strategic partnership was with Vodafone to provide businesses with a range of advanced secure smart phones and tablets as employees continue to operate more flexibly and the threat of hacking by rival companies or government-sponsored groups heightens.

“Partnering with a big international corporation gives us access to markets that we’re not in as demand grow,” a spokesperson told The Manufacturer.

The company won new contracts in Malaysia, Australia, Saudi Arabia, India and Oman last year. Under the Saudi British Defence Co-operation Programme, orders totalling £3.4bn were awarded for support through to 2016, including the provision of manpower, logistics and training to the Royal Saudi Air Force. An additional £1.6bn contract was awarded in May to support its future aircrew training requirements involving supply and support for Hawk trainer jets.

BAE Systems won a £2.5bn contract to supply 12 Typhoon fighter jets and eight Hawk aircraft alongside training and support to Oman. It expects to negotiate a third batch of 20 locally assembled Hawk aircraft in 2013 as emerging economies look to build up the air defence capabilities.