City: BAe drinks at last-chance saloon

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The Independent Online
AMONG the legion of substantial companies holed below the waterline by recession, British Aerospace stands out a mile - a corporate Titanic in a landscape of sunken wrecks. A pounds 129m first-half loss, provisions of pounds 1bn to cover rationalisation and write-offs, the humiliation of having to seek the permission of the courts even to pay a nominal dividend, and the halving of the company's already depressed share price within the space of a few hours - you would be hard pressed to find a sadder and more shocking case of corporate shipwreck. And that is not just because of the numbers involved.

BAe is not, like so many of the corporate disaster stories of the past couple of years, some transitory 1980s phenomenon - a hastily constructed house of cards waiting to be blown down. It is Britain's largest manufacturing employer, part of the bedrock of the UK economy and a vital constituent of the country's technological base. The closure of its Hatfield civil aircraft plant - steeped in aerospace history with its Boy's Own names of Tiger Moth, Comet and Trident - may have been well flagged, but it is no less a shock for that. Hatfield's demise seems symbolic of a manufacturing economy in crisis. It is plainly important that in some shape or form - although not necessarily the present one - what is left of BAe survives.

You can't really say the same about many of the companies to have fallen victim to recession. It was never easy to get too worked up over the likes of Brent Walker or Polly Peck. Apart from bankers and shareholders, nobody much cared. The good parts have in any case been salvaged under different management. Nor would the fraudulent collapse of Maxwell's empire have been any great loss to the nation, but for the plight of its pensioners. But BAe is different. For one of Britain's largest manufacturing companies to be close to collapse, as many in the City seem to be saying, is nothing short of a tragedy. It would scarcely have been worse if it had been ICI.

After all the years of mismanagement and strategic bungling, can BAe be saved or is it already too late? I cannot pretend to be the best person to answer this question. Like virtually everyone else in the City and financial journalism, I have been so consistently wrong about BAe that by rights I should be banned from writing about it. Some stockbroking analysts have lost their clients so much money on BAe shares that they fear for their jobs. It's not their fault. The company is a master at the art of building false expectations. With BAe, you end up feeling like the cheated husband who, on discovering his wife has been unfaithful again, naively believes her when she says: 'This time I mean it, it won't happen again.' But it always does. BAe is in the same class of cheating spouse. Every time you think things can get no worse, along comes another shock to bang its long-suffering shareholders on the head. There seems to be no end to the bad news. One black hole after another opens up. Why should things get any better now? There are still plenty of things that could go wrong at BAe. Here are just five of them.

Saudi Arabia might decide not to go through with its expected order for 48 Tornados and 60 Hawks, and its accompanying spares and servicing contract. It's looking increasingly likely that the European Fighter Aircraft project will die before it even gets off the ground. The joint venture deal with Taiwanese Aerospace Corporation, aimed at saving at least a part of BAe's heavily loss-making regional aircraft division, could easily fall through, leading to closure of the business. Cuts in defence spending could hit expected orders for missiles. And the Airbus might not live up to its present promise.

I know I'm a fool, but in the spirit of hope triumphing over experience, I have decided to give the company one last chance. I probably wouldn't have done so but for John Cahill, the former chief executive of BTR. He has been chairman of BAe for only four months, and should therefore be given the benefit of the doubt on the latest liberal dousing of unexpected bad news from the company.

Perhaps the most important assurance Mr Cahill is able to give is that, contrary to some of the wilder rumours in the City, BAe is not facing any kind of a cash crisis. Even in the worst-case scenario - complete closure of all parts of the regional aircraft division - the company could still afford to pay the promised interim dividend and some form of final without putting itself in breach of its banking covenants.

That is not to say the company is not in the most appalling mess. It is. But BAe is plainly not going bust. With regional aircraft losses stemmed, the underlying profitability of BAe's defence interests should begin to show through strongly next year. BTR's management reporting system will be fully installed by January, giving BAe managers proper targets and making them fully accountable for the first time in the company's history. Every 1p in the pound taken out of BAe costs is worth pounds 100m to the bottom line. Mr Cahill believes that measures already in train will produce savings of 3p in the pound over the next year.

Let's hope he succeeds. BAe really is drinking at the last chance saloon this time. Any residual goodwill that might have been left in the City went out of the door with last week's announcements. It's the final throw of the dice. If there is no clear evidence that things are beginning to come right by this time next year, the City will perform its own brutal hatchet job. Parts of the company would survive, but only as pale shadows of their former selves. Make no mistake about it. There will be no Lord Weinstock of GEC galloping over the horizon to save shareholders with a rescue bid. His is a different game altogether. He has certainly been dusting off his file on BAe but he is not interested in bidding. Why should he? The way things are going, all he has to do is wait and eventually the bits he really wants will fall into his lap, without all the bother and hassle of mounting a break-up bid. Shareholders' best hope lies with Mr Cahill's efforts to turn the company round - not with Lord Weinstock.

ERM hangover

AFTER the party, the hangover. The week before last, the stock market was in euphoric mood. Liberated from the the yoke of the ERM, the Government would be able to reduce interest rates, pulling the country swiftly out of recession, the market figured. Now it is not so sure.

If there is no new cut in rates ahead of the Tory party conference next week, the bull run we have seen in equities since the pound floated will almost certainly go into reverse. Norman Lamont has a limited window of opportunity for further cuts in the cost of borrowing. He may already have missed it. Germany is now talking openly of a two-speed Europe with the inner sanctum made up of Germany, France, the Benelux states and possibly Denmark. Perhaps it's not such a good idea being out of the ERM after all, industrialists are beginning to say. Britain would be left out in the cold. That sort of talk is going to put the pound under renewed pressure this week, further reducing Mr Lamont's room for manoeuvre.

But it's actually rather worse than that. The stock market is beginning to wake up to the realisation that a government without an economic policy is a quite worrying phenomenon. There is now a real sense of crisis developing about John Major's leadership. The market hates uncertainty, and it is an uncertain world, both politically and economically, into which we seem to be heading.