News Analysis: Airbus conversion set for slow take-off

Saudi cash boosts BAe despite European losses
AIRBUS INDUSTRIE, the European aircraft maker, lost pounds 125m in 1998 and will not meet its target of converting into a fully commercial company before the end of this year, British Aerospace said yesterday.

The disclosure came as BAe unveiled a 17 per cent increase in profits last year to pounds 708m and said that Saudi Arabia has made a cash payment of around pounds 1bn in January to make up for the shortfall in oil revenues from the Al Yamamah arms deal.

BAe, which has a 20 per cent stake in Airbus, said its share of the consortium's operating losses for last year was pounds 25m. The losses were caused by pricing pressures on smaller single- aisle aircraft, which made up the bulk of Airbus' 229 deliveries last year.

The goal of BAe and its three other Airbus partners, DaimlerBenz Aerospace, Aerospatiale and Casa of Spain, had been to transform Airbus into a single corporate entity by mid-1999. This would pave the way for the $11bn launch of the new 500-seater super jumbo, the Airbus A3XX, and the eventual flotation of the group.

But Mike Turner, the director of commercial aircraft at BAe, said: "I would be very surprised if there was a single corporate entity this year."

But conversion is unlikely before spring 2000 because of wrangles over the valuation of the four partners' Airbus assets. The French partner, Aerospatiale, also slowed progress in protest at plans by BAe to merge with another Airbus partner, Daimler Benz Aerospace.

BAe, which makes the wings for Airbus aircraft, insisted that its pounds 25m loss was "entirely cosmetic" since it is Airbus, not the individual partners, which takes all the risks on price.

BAe receives a fixed sum for its workshare which means the more efficient it becomes, the more profit Airbus generates. Last year, BAe's underlying profits from Airbus are estimated to have been in the order of pounds 200m but this was offset by pounds 141m in launch aid repayments to the British government on the A320 and A330-A340 programmes.

Launch aid repayment will rise to pounds 179m this year but will fall significantly in 2000, which should produce a big improvement in financial performance of Airbus for BAe.

The pounds 1bn cash payment from the Saudis came too late for inclusion in BAe's figures, resulting in it reporting an pounds 839m operating cash outflow for the year. For the first time BAe has produced figures showing the Al Yamamah deal, first signed in 1986, contributes pounds 3bn towards its current order book of pounds 28bn.

BAe has now completed delivery of the 120 Tornado aircraft and Hawk trainer jets to the Saudis under Al Yamamah. This means that the Saudis oil offtake, which is used to pay BAe, has fallen from 600,000 barrels to 400,000 barrels. But BAe continues to earn revenues of about pounds 2bn a year from service support and training for the Saudi airforce. It has 5,500 staff based in the kingdom and the contract has a further 25 years to run.

John Weston, BAe's chief executive, said that further equipment orders from the Saudis were unlikely, given the low oil price. But he said ongoing revenues from the deal were in line with BAe forecasts.

Mr Weston also held out the prospect of alliances with other European defence manufacturers and an eventual transatlantic tie-up once BAe's pounds 7.7bn takeover of GEC's Marconi defence electronics division goes through.

BAe is confident the main aspects of the deal will be vetted in London, not Brussels, but Sir Dick Evans, chairman, said there was still a 50:50 chance of it being referred to the Monopolies and Mergers Commission.

BAe executives have warned the Government that if the deal is blocked, Marconi could fall into the hands of Lockheed Martin of the US. This could undermine moves to create a single European Aerospace and Defence Company and push BAe into an alliance with Boeing in which the US defence giant was the senior partner.