BAE warns defence budget squeeze could delay £3.6bn carrier contracts

Mike Turner has used his last full-year results as chief executive of BAE Systems to call for action from the Government over its constrained defence budget.

"They may save some money in the short-term, but there comes a point when it comes to affect engineering and shipbuilding resources. If people start getting laid off, industry doesn't bear that cost, the Government does. These projects will cost them more in the end," he said. "They have some decisions to make in the next few weeks."

One project likely to be pushed back is the Ministry of Defence's order for two aircraft carriers, at a cost of £3.6bn. "There is a high possibility that it will be delayed," Mr Turner said. If that happens, BAE would probably put off the completion of a joint shipbuilding venture with rival VT Group.

The situation is unlikely to be resolved soon. David Perry, an analyst at Citigroup, said: "The new Prime Minister appears less interested in defence than his predecessor and we think that defence policy and defence spending will be a lower priority for Gordon Brown." He added: "The UK defence budget is stretched and one or more large UK defence programmes involving BAE could be cut back or even cancelled."

The tight picture in the UK is in contrast with the world's biggest defence customer, America, where Mr Turner has pulled off a series of acquisitions to increase its business there. BAE now derives more than half of its turnover from the US, which allowed it to report a sharp increase in full-year profits to £1.44bn, up from £1.2bn the year before, on £15.5bn in turnover.

Unusually for a defence company executive, Mr Turner bemoaned the war in Iraq. He said it was "bad news" for the industry because the massive amount of money and resources it requires has created squeezes elsewhere, and is one of the culprits for the UK's budget difficulties.

Several grey areas remain over the company. A US Department of Justice investigation into alleged corruption related to the Al Yamamah contract with Saudi Arabia continues, as does a civil case in the UK, brought by the Campaign Against the Arms Trade, against the Serious Fraud Office over the termination of the SFO's inquiry into the same deal.

Mr Turner is set to retire when he is 60 in August. He hopes to take up several non-executive directorships.