BAe targets new market on back of MoD deal

BAe Systems has struck a ground-breaking agreement with the Ministry of Defence to cut the Government's bill for military equipment and support by 20 per cent a year.

BAe Systems has struck a ground-breaking agreement with the Ministry of Defence to cut the Government's bill for military equipment and support by 20 per cent a year.

The deal, unveiled on the eve of the Farnborough Air Show, came as BAe said it planned to target the £50bn support services market, predicting that half its £14bn turnover could come from this area in 10 years.

The MoD agreement, signed by BAe's chief executive John Weston and the head of the Defence Logistics Organisation, General Sam Cowan, could eventually yield savings for the taxpayer of more than £1bn a year if applied right across the MoD's £6bn logistics budget. BAe believes it could save £100m alone on aircraft programmes.

It is an "umbrella agreement" meaning that it applies not just to existing programmes, such as Tornado and Hawk, but future programmes including Eurofighter and the Meteor missile system. One of the key aims of the agreement will be to cut the time taken to service equipment already in use.

Robin Southwell,head of BAe's solutions and support business, said, for instance, that it took 264 days to repair a wing flap on the Tornado because of the number of different stages the work went through.

Mr Weston said BAe would use the cost saving techniques developed for the MoD's procurement programme to bid aggressively for customer support business in overseas markets. Mr Weston said BAe had identified £50bn worth of work over the next 10 years, adding: "We see large-scale future growth in customers solutions and support. We are looking to double the value of our business in this sector over the next three years."

BAe believes that customer support could become one of the most lucrative areas of the defence business. For instance, the MoD's future requirement for strategic tanker aircraft - in effect petrol stations in the sky capable of refuelling front-line attack aircraft - could be worth £2bn- £3bn. But Mr Weston said that if the MoD adopted a PFI-style approach, the equipment order could turn into a £10bn-£12bn service contract over 20 years.

BAe's biggest overseas customer support contract is the £20bn Al Yamamah 2 arms-for-oil deal with Saudi Arabia. The company has 5,500 personnel in Saudi Arabia servicing Tornado and Hawk aircraft supplied to the Kingdom. Mr Weston said BAe would like to sell the Eurofighter to the Saudis at some point in the future. But he denied that the two sides were negotiating an Al Yamamah 3.

This year's Farnborough show will see Airbus and Boeing of the US slugging it out for supremacy in both the civil and military markets.

Airbus is expected to announce further expressions of interest from airlines in its A3XX 550-seater super-jumbo. So far eight airlines have declared they may buy 50-60 aircraft - enough to launch the £12bn programme if Airbus can convert these expressions of interest into firm orders.

Airbus is also providing competition in the military transporter market with the go-ahead in June for the A400M, a rival to the US C130J aircraft. Britain has signed up to buy 25 of the A400M in a deal worth up to £10bn and further commitments may be announced next week from some of the other six other European countries involved in the project.

Despite the intense competition, another theme at Farnborough will be collaboration. BAe has angered its European partners by setting its sights on a global transatlantic alliance.

Last week it took a further step towards that goal with the $1.2bn purchase of Lockheed Martin's control systems and aerospace electronic systems businesses. The deal gives BAe $4bn worth of sales in the US, 25,000 employees and a presence in 28 states.

Mr Weston said that the US and Europe were moving towards greater uniformity in their equipment programmes, but added:"If we want more collaborative projects across the Atlantic then we need industrial structures which support that not obstruct it."

Mr Weston said BAe was on target to achieve £55m in cost savings this year following the takeover of Marconi Electronic Systems and would exceed the goal of £275m in efficiency gains over a three-year period.

The restructuring programme has so far resulted in 4,800 job losses, of which 1,000 are among senior managers. BAE's "stretch target" is to achieve savings of £400m a year which would trigger extra bonus payments for its top executives. Mr Weston said that achieving those targets did not necessarily mean further job losses.