BAE expects to clinch Saudi, US orders

BAE Systems, Europe's largest defence contractor, said it expected to clinch a multibillion-pound order from Saudi Arabia this year to provide maintenance support for the Eurofighter Typhoon aircraft.

Unveiling the results for 2008, BAE chief executive Ian King said the company was in active discussions on the next phase of the initial contract signed by the Arab kingdom and the UK government in 2007 for 72 aircraft. He said he saw "no evidence at this time" of a slowdown in potential orders from the Middle East.

King also said that US President Barack Obama's plan to send 17,000 more American troops to Afghanistan would extend demand for the company's armoured trucks, which helped increase profit by 94 per cent last year. Obama's decision may prompt a wave of orders for vehicles lighter than those used in Iraq as troops fight in more mountainous terrain, he added.

Defying the downturn in the UK's manufacturing sector, the company posted a 31 per cent surge in underlying pre-tax profits, while sales rose by 18 per cent. BAE said it had benefited from the weak pound against the US dollar, which accounted for £5.9 billion of the increase in orders, as well as new contracts, including a 15-year deal with the UK ministry of defence.

The biggest drain on the company's profits is likely to be its pension plan. In view of the sharp drop in the stock markets, it said it would pump in an additional £200 million into plugging the deficit in its UK pension schemes, and $250 million into its US pension schemes, this year. King said that though BAE had been affected by the difficult economic environment, a long-term recovery plan was in place and had been agreed with the pension scheme's trustees.

Apart from its pension exposure, the defence industry is largely insulated from the troubles in the world's financial markets. BAE's dividend is to go up by 13.3 per cent to 14.5p, and expectations for 2009 also remain optimistic.

The main threat to BAE's 2009 performance is a reduction in defence spending in the West. In the US, budgets may shrink after almost a decade of growth, although the president's commitment to increasing troop numbers in Afghanistan may hold. In the UK, the industry is waiting for the follow-up to the 2005 Defence Industrial Strategy, and experts do not rule out delayed or cancelled programmes given the existing defence budget deficit.