Defence cuts in West put BAE's sales into retreat

Britain's biggest manufacturer reports 7 per cent fall in profits and weak outlook for 2012

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BAE Systems raised the prospect of even more job cuts yesterday as Britain's biggest manufacturer announced disappointing results for 2011 and forecast that sales would remain stagnant this year.

Reporting a 7 per cent drop in full-year profit to £2.02bn, as the US army's retreat from Iraq propelled a 14 per cent dive in sales, BAE's chief executive, Ian King, outlined a bleak vision of a world in which "affordability has become the priority for our customers".

Endre Lunde, at the defence analysts IHS Janes, said: "It's a market where large contracts are few and far between. Not just in the US and the UK but in the wider industrial world. Pretty much everyone is cutting or flatlining on defence. BAE is doing what it can, but they don't have that much space to manoeuvre in a market this tight."

BAE is trying to win more international business, in countries such as India, Australia and Saudi Arabia, and to offer more support services, such as upgrading armoured personnel carriers. The group is also keen to expand its small but fast-growing, "cyber-security" business, which includes data storage and fraud detection services.

BAE's gloomy prognosis pushed its shares down by 2 per cent, to 325.2p, putting the company which is involved in the production of F-35 and Typhoon fighter jets and the Astute class submarine among the FTSE 100's biggest fallers.

BAE announced 3,000 UK job losses in September and is expected to cut a further 1,500 more positions when a review of its shipbuilding operation is completed that is likely to lead to the closure of its Portsmouth dockyard.

However, Mr King refused to rule out even more job cuts yesterday, as he painted a picture of rising competition and growing austerity, especially in its key US and UK markets.

"We have to continue looking at the efficiency of our business... The [UK] government has a limited amount of money. We need to be efficient, we need to be agile and we can't rule anything out," Mr King said. "BAE Systems is operating in a difficult business environment as defence spending reduces in its largest markets, the US and UK... Little sales growth can be expected for the group in 2012 in current market conditions," Mr King added.

The US accounted for 47 per cent of BAE's sales last year, while Britain made up 29 per cent. The US military capped its military budget at last year's reduced levels for 2012, while Britain wants to cut defence spending by 8 per cent over the next four years. BAE calculated that the Ministry of Defence's spending review cut £500m from UK sales.

Mr King refused to comment on reports that he and senior colleagues were in line for multimillion-pound bonuses, despite falling sales and profits, because a government tax rebate of about £200m will help to boost the company's earnings pershare this year by 14.5 per cent to 45.6p.

Mr King insisted that the Typhoon programme, a joint venture between BAE, the Franco-German EADS and Italy's Finmeccanica, was still in with a chance of scooping up a £7bn contract to supply fighter jets to India, despite a rival consortium being given preferred bidder status.

The Indians chose France's Rafale jet, made by Dessault Aviation, but Mr King insisted yesterday that the "programme has a long way to go before the contract is awarded" and said he would consider lowering the price to win the business.