Oil slump costs BAe pounds 500m

BRITISH AEROSPACE is suffering a shortfall of pounds 2.4m a day on payments under the giant Al Yamamah arms contract with Saudi Arabia because of the collapse in oil prices, it emerged yesterday.

The fall in oil prices from $19 a barrel last year to $12 is estimated to have caused a cash outflow of about pounds 500m in BAe's finances in the first half.

Fears over the outflow prompted a 12 per cent fall in BAe shares. BAe posted a net cash outflow of pounds 518m and disclosed that its defence division had negative cash flow of pounds 506m.

The shortfall arises because the Tornado fighter jets ordered by the Saudis through the Al Yamamah deal are paid for with 600,000 barrels of oil a day. The oil is traded through Rotterdam and the cash proceeds are passed to BAe through the British Government.

Sir Dick Evans, the BAe chairman, sought to reassure investors that the shortfall was temporary and that the Saudis would honour the outstanding sums due under the contract, denominated in sterling.

John Weston, BAe's chief executive, added that the cash position would be "reversed with a substantial customer payment" in the neat future.

He was speaking as BAe reported a 24 per cent rise in pre-tax profits to pounds 344m and said it would like to see the US defence giant, Lockheed, take a stake in the Airbus programme.

BAe also said it was continuing to hold discussions with Daimler-Benz Aerospace, one of its Airbus partners, about a link or merger.

Mr Weston said he was keen to agree a transatlantic alliance, but this would probably have to wait until the creation of a single European aerospace and defence company had been completed. As an interim step Lockheed could be invited to join Airbus - due to convert to a single corporate entity next year - probably as a partner on the $10bn super-Jumbo project.

BAe also continues to seek an overseas partner for its troubled Royal Ordnance ammunition business.

Operating profits from defence rose to pounds 303m and the group order book increased to a record pounds 24bn.