The Treasury and the Department of Trade and Industry are poised to reject BAe's application for launch investment for the new A340-500 and 600 aircraft.
The development has come as a shock, since only last Friday the DTI announced a pounds 200m aid package for Rolls-Royce to develop a version of its Trent engine to power the 375-seater Airbus jet.
The recommendation not to grant government support to BAe is understood to have been made by the Paymaster General, Geoffrey Robinson, who has been vetting the application as part of his overall responsibility for public-private partnerships. Both the President of the Board of Trade, Margaret Beckett, who is in New Delhi at the moment as part of trade mission to India and Australia, and the Chancellor of the Exchequer, Gordon Brown, are understood to have discussed the situation.
Spokesmen for both the DTI and the Treasury denied that a decision had been made, adding that the application was still under active consideration. However, a BAe spokesman said: "If the rumours are true that launch aid has been refused then there will be very serious consequences."
It is understood that BAe would review its investment strategy with the intention of carrying out the Airbus work in a country where government support would be forthcoming.
"It would be reasonable to speculate that BAe would look very seriously at whether it would want to continue investing in the UK as far as the Airbus programme is concerned," said one senior industry source.
BAe employs about 6,000 people directly on the Airbus programme, making wings for the aircraft at Chester, the Filton plant near Bristol, Chadderton near Manchester and Prestwick in Ayr.
However, the total number of UK jobs dependent on the Airbus programme is reckoned to be nearer 40,000 including subcontractors and suppliers.
It is thought that one option for BAe would be to subcontract its work share on the new Airbus to Italy or Spain, which is one of the four partners in the consortium.
A refusal by the UK government to provide support for the latest jet could also complicate attempts to turn the Airbus consortium into a single commercial entity by 1999 ahead of a flotation of the business. "This is an important moment for Britain to be showing an interest in Airbus and a commitment to the business," one source said.
BAe has a 20 per cent stake in Airbus while Daimler-Benz and Aerospatiale of France each have a 37.9 per cent stake and Casa of Spain the remaining 4.2 per cent.
BAe has now repaid all the launch aid received on the Airbus A320 programme and expects to repay a further pounds 500m of launch aid over the next three years.
Airbus had planned to confirm the industrial launch of the A340-500 and 600 at the Dubai airshow but was forced to postpone an announcement because of uncertainties about UK support for the programme. Four airlines have so far announced orders for the new aircraft - Virgin Atlantic, Air Canada, Egyptair and Eva Air of Taiwan. Airbus is understood to have 80 orders from seven launch customers.
The new A340 will cost about $2bn (pounds 1.2bn) to develop in total and will be able to seat 375 passengers - allowing it to compete directly with some versions of the Boeing 747 Jumbo jet.
A Treasury spokesman said last night: "A decision has not yet been announced. The Government is considering the application against the framework of public-private partnerships."
The DTI said: "The matter is still under consideration and a decision will be made in due course."
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