BAe in red over provision for lease aircraft

BRITISH AEROSPACE is preparing to announce another set of heavy losses after disclosing yesterday that its 1993 results will include a pounds 250m provision to cover lease liabilities in its turboprop aircraft division.

The provision is expected to turn a pounds 50m-pounds 75m pre-tax profit into a loss of pounds 175m- pounds 200m - the third successive year that the aircraft and defence group has plunged into the red.

In 1992 BAe recorded a pounds 1.2bn loss - the biggest in UK corporate history - after setting aside pounds 1bn to cover a huge restructuring of its regional aircraft business.

This latest provision will cover BAe's leasing exposure on Jetstream 31 and 41 aircraft and Advanced Turboprop aircraft sold before 1993.

Analysts said the move should clear the decks for a rationalisation of the turboprop business, based in Prestwick, Ayrshire, which BAe aims to merge with Fokker of the Netherlands or ATR, a French- Italian consortium.

There are just under 400 BAe turboprop aircraft in service, three- quarters operated under lease or arrangements giving rise to 'recourse costs'.

BAe's exposure arises because it sells the aircraft to banks or finance houses, leases them back under head leases and then sub-leases to airlines.

The sub-leases are generally much shorter than the head leases so that if an airline goes bankrupt or returns the aircraft early BAe still has to meet its head lease obligations.

Since the beginning of last year it has built these recourse costs into its finances at the time the aircraft are leased.

The turboprop division lost an estimated pounds 120m last year and is still struggling in the face of overcapacity and weak demand. Of the pounds 60m that BAe lost on turboprop aircraft in the first six months of last year, half related to recourse costs.

Despite the announcement of the provisions, BAe's shares surged ahead, closing 22p higher at 575p as rumours swept the market of a possible counter-bid for the Rover car group from Honda.

A BAe spokesman dismissed the talk of Honda topping BMW's pounds 800m offer as 'idle Friday chatter'. There had been no suggestion of an approach by Honda.

Honda, meanwhile, said it wanted to maintain a 'very special relationship' with Rover but gave no indication this might involve a bid. Last week it had offered to raise its stake from 20 per cent to 47.5 per cent but felt it could not take the matter further.

The Rover sale will swell BAe's coffers by an estimated pounds 350m-pounds 400m, enabling it to set any further restructuring costs in the turboprop division against profits this year.

After initial suspicion, analysts warmed to the turboprop provisions. One said: 'By cleaning up its lease book BAe is in a much better position to get a good deal when it comes to put the business into a joint venture.'

A BAe spokesman said: 'Bringing contingent liabilities on to the balance sheet gives our investors a better view of what is going on.'