BAE profits nose-dive thanks to spending cuts

Not a good morning for BAE Systems; its shares fell 3.5% after the defence company produced some fairly lacklustre end-of-year results: its underlying profits inched up a measly 0.8% to £2.21bn. You might think that’s not too bad for a company that’s suffering from the big defence budget cuts both in the UK and the US. But with no sign of things looking up this year, we can’t see BAE staging a celebratory Harrier fly-past any time soon (even if that’s probably all they’re good for these days).

Although revenues were up for the group as a whole, to £22.4bn, the Government’s decision to slash 8% from its budget has devastated parts of the company. Not least, the bits responsible for the Harrier and Nimrod programmes – both were cancelled as a result of the strategic defence review, costing the company 1,400 jobs. The Land and Armaments Unit, which manufactures tanks and missile launchers, was also hit, with sales down by 6%. Not good, given that it’s still recovering from a 54% drop in sales from the year before. BAE as a whole has now had to slash a painful 15,000 jobs in the last two years.

Unfortunately for BAE shareholders, things aren’t expected to pick up anytime soon. The Land & Armaments unit, it said, will continue to see a ‘volume reduction... as the changes arising from the SDR reduce activity in UK businesses’. The Government has already cancelled an offshore patrol contract for Trinidad and Tobago (for which the company has taken a cool £100m cancellation hit). And it added that ‘recent statements by the US Secretary of Defense’ indicated that its budget is likely to be vulnerable to ‘cost efficiencies, programme reductions and potential cancellations’.  

Some will have little sympathy for BAE, in light of past misdemeanours. And it still hasn’t cleaned up its act entirely: it said today it will be making a £29.5m charitable donation ‘for the benefit of the people of Tanzania’, at the behest of the US Department of Justice and the UK Serious Fraud Office, after getting into trouble for making payments to an ‘adviser’ during the bidding for a £28m contract. BAE operates in some pretty murky markets, but particularly in light of the imminent Bribery Act, it needs to be whiter than white.

Nonetheless, BAE remains Europe’s largest defence company – a truly world-class British hi-tech manufacturing business, which is heavily involved in producing the ‘next-generation’ F-35 jet for both the US and UK air forces, not to mention the new Astute-class submarine and the Queen Elizabeth aircraft carrier. It employs around 100,000 people and pays hundreds of millions in taxes. So like it or not, its continued success is arguably good for the UK...