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It’s a Battle for Britain to Sell the Eurofighter


U.K. output of the Eurofighter Typhoon warplane may be cut as manufacturer BAE Systems Plc struggles to pin down a follow-on order from Saudi Arabia, the biggest export customer for the Mach 2 jet.


Eurofighter production is the cornerstone of a military-aircraft business that employs 12,500 people at BAE, with final assembly at Warton in northwest England. The last four aircraft from an earlier Saudi contract were delivered in the first half, with the first two from an Omani deal for 12 planes already shipped, eating into the backlog.


“We obviously have to review our production demand very carefully,” Chief Executive Officer Charles Woodburn said on a conference call Wednesday. “We are confident that we will win further Typhoon orders, what we can’t be confident around is the timing.”


Build rates will be under “constant” appraisal, London-based BAE said in a statement, adding that even if a new order was placed today it would take at least 24 months to boost production. The company has already slowed output of the Typhoon to help eke out the backlog and could do so further, Woodburn said. The Royal Air Force also has planes to be handed over, so that BAE’s deliveries will total 20 this year and 11 in 2018, including final jets for Oman.


BAE shares fell as much as 2.1 percent after earlier gaining 3.5 percent after the company announced an 11 percent jump in first-half earnings. They were trading 1.8 percent lower at 596 pence as of 2:30 p.m. in London. The stock has gained 0.8 percent this year, valuing the company at 19 billion pounds.


No Cliff-Edge

BAE Chief Financial Officer Peter Lynas said that the Eurofighter workload has been buoyed by the Omani deal as well as subcontracting work on 28 Typhoons ordered by Kuwait via its Italian partner in the consortium, Leonardo SpA.


“We’re not staring at a cliff edge here,” he said. “We now do as much revenue through the support of Typhoons as we do on producing Typhoons, so in that sense the production is relatively speaking somewhat de-risked.”


Manufacturing work on the Lockheed Martin Corp. F-35 Lightning II, including the plane’s rear fuselage and tail, is also located in northwest England, with 55 ship-sets produced last year, rising to 80 this year and 130 in 2018, helping to balance the warplane portfolio. “They’re different lines, but in terms of the overall activity levels within the business, similar geography,” Lynas said.


Overall, the multinational Typhoon program has received 599 orders from eight customers with 512 aircraft delivered, leaving a backlog of 87 unfilled orders spread across four assembly lines at BAE, Leonardo and Airbus SE. The two lines in Germany and Spain are already scheduled for closure at the end of next year, Airbus has said.


Future Fighter

BAE also makes the Hawk fighter-trainer, though deliveries are also set to fall, from 18 this year to 12 in 2018. Oman has ordered eight planes, with two handed over and the rest set to follow in the second half. Saudi Arabia is taking 44 Hawks in two batches.


BAE is confident that it will participate in any future European fighter program, Woodburn said, despite German Chancellor Angela Merkel and French President Emmanuel Macron last month announcing plans for a new-generation plane not involving the U.K. Fernando Alonso, the head of Airbus’s military-aircraft arm also said in June that a “continental” approach was more likely following Brexit, especially with BAE drawing closer to the U.S. via the F-35.


“We have a very capable organization, a long history of collaborating on these European programs -- Tornado, Jaguar, Typhoon -- and we have an awful lot of capability to bring to the mix,” said Woodburn. “So I think you would not be surprised if we are confident that we’ll find a position on a future program.”


BAE’s six-month earnings before interest, tax and amortization increased to 945 million pounds ($1.25 billion), better than the 907 million pounds estimated by analysts as Europe’s biggest defense company benefited from increased global defense spending.


Woodburn, who took over in June as Ian King stood down after eight years as CEO, reiterated a forecast that full-year underlying earnings per share will rise by 5 to 10 percent from 2016’s 40.3 pence, excluding some one-time items and financial costs.


The company expects to see “some softening” in sales at its cyber security division, which will take a restructuring charge, and faces a currency headwind from a change in the pound-dollar exchange rate, it said. Woodburn said there’ll be no major change of direction, with the focus on smoothing operations, cutting costs and research and development.

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Bloomberg News

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