BAe casts fresh doubt on Airbus super-jumbo
Thursday 27 February 1997
The news came as BAe revealed a better than expected 38 per cent surge in profits for 1996 to pounds 456m, crowning its position at the top of the European defence industry efficiency league. However the group dampened speculation of a merger with General Electric Company (GEC) to create a pounds 16bn giant to dominate the UK defence business.
BAe's scepticism about the Airbus super-jumbo project, codenamed A3XX, comes after Boeing last month scrapped plans to develop a stretched version of its 747 at a cost of up to $7bn. Boeing, which has a monopoly of the jumbo market, has rubbished Airbus's claim that the A3XX would cost $8bn to develop, putting the figure at $12bn.
Sir Richard Evans, BAe chief executive, warned: "It's likely Airbus thinking will be adjusted to take into account the current Boeing thinking, but we've seen no definite proposals from Airbus management ... We're not queuing up to put seven to ten billion bucks on the table." He urged Airbus to concentrate on developing an enlarged version of the existing A340, to compete with Boeing's successful 777 long-distance airliner.
Sir Richard said the commercial case for building the A3XX, which would seat passengers in a "double-decker" formation, had not been fully developed. British Airways has been notably cool on the chances of placing an order for such a plane.
Sources pointed to a vigorous debate going on inside BAe over the economics of building the A3XX, with Mike Turner, head of commercial aircraft, apparently warming to the idea while Sir Richard has become increasingly hostile. Mr Turner explained: "I think Boeing have done exactly the right thing. They have a monopoly. Why spend $7bn on a monopoly."
While the discussions continue, Airbus is moving towards becoming a fully- fledged commercial company in 1999, ditching its consortium status which Sir Richard said had become "a nonsense" in practical terms. A memorandum of understanding was signed last month by the Airbus partners, including Aerospatiale of France, Daimler Benz of Germany and Casa of Spain.
BAe also made clear that completing the restructuring of Airbus was the key to a broader rationalisation of the European defence industry and would underpin longer term discussions with GEC. "We're talking to everybody at the moment and that includes GEC," Sir Richard said.
However he emphasised that the confused network of alliances emerging in the European defence sector meant it was not yet right to take such a fundamental decision to integrate with GEC. However Richard Lapthorne, BAe's finance director, added: "If you don't talk to everybody in this industry you won't know when the opportunity arises."
Negotiations going on with at least five European companies are another sign of BAe's resurgent status in the defence market, five years after the business was on the verge of financial collapse. Five years ago, as a landmark pounds 1bn restructuring provision was announced to tackle huge losses in its commercial aircraft operations, the shares briefly touched pounds 1.
Since 1992 the share price performance has been spectacular. The regional jet operations were drastically slimmed down and later partly merged into the AI(R) joint venture with Aerospatiale and Alenia of Italy. Last year BAe shares were one of the stock market's star performers, rising by almost 60 per cent. Further encouraging news included the pounds 1bn merger of its guided missiles business with Lagardere of France, a pounds 1.9bn order for Nimrod 2000 early warning aircraft and a pounds 1bn contract with the Australian air force to supply Hawk training jets. However yesterday the shares fell 19.5p to 1253p.
The main drain on BAe's bank balance continues to be the commercial aircraft division, described yesterday as "still very difficult". Undisclosed profits earned from the group's work building wings for Airbus jets were yet again more than offset by losses from the Jetstream propeller plane operation. BAe's commercial aerospace operations lost pounds 78m in 1996, compared with pounds 118m in 1995.
The future of the Jetstream business, based in Prestwick near Glasgow, is under review and Mr Evans confirmed that one option was total closure. Production capacity has been slashed from 20 aircraft to 10, with 12 on the order book.
Meanwhile defence sales remained the core of BAe's profitability, rising by 18 per cent last year to pounds 5.34bn. The total defence order book at the end of 1996 stood at pounds 11.7bn. The defence division made profits before exceptional items of pounds 553m, a jump of 14 per cent on 1995.
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