Commentary: Saudi blow to BAe confidence

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The Independent Online
It is impossible to exaggerate the importance of the Al Yamamah arms-for-oil deal between Saudi Arabia and Britain, which is worth pounds 2bn a year to British Aerospace for the next decade.

The decision of the Saudis, therefore, to shelve an important component of phase two of Al Yamamah - the construction of a new air base at Sulayil costing pounds 5bn- pounds 8bn - would seem to have serious repercussions for BAe, Britain's biggest and, arguably, most troubled manufacturing company.

In the murky world of arms sales, however, things are rarely as simple as this. BAe contends that the Saudis' decision may be good news for the company since it increases the likelihood of Riyadh switching its oil resources to the purchase of additional Tornado strike aircraft and Hawk trainer jets.

With the Tornado production line at Warton about to run out of orders there can be little doubt that, given the choice, BAe would rather be profiting from fighter aircraft sales than building an airbase in the middle of the desert.

Conversely, the postponement of the airbase may suggest a change in Saudi thinking since there are suggestions that the Saudis wanted the airbase completed before more Tornadoes were delivered. That would indicate further delays in the follow-up Tornado order.

In the short term, the decision is unlikely to have any impact on BAe's income from Al Yamamah since the present oil uplift of 500,000 barrels a day is barely paying for the cost of servicing the hardware already delivered.

However, it does little to strengthen sentiment towards BAe when its biggest customer appears so equivocal about the contract that will continue to underpin profits for the foreseeable future, whatever other horrors lie in store in commercial aircraft, cars and property.