Cuts in military spending impact on BAE

BAE, which is involved in the production of F-35 jets and Astute class submarines, has cut around 15,000 jobs in the last two years in a bid to lower costs.

Britain cut its defence budget last year by eight per cent to help reduce its budget deficit, a decision which hit arms manufacturers such as BAE, which makes around a fifth of its revenues in the UK.

Defence firms with exposure to the US, where around half of BAE’s sales come from, have also been hit by a slowdown in US defence spending in recent months.

BAE said in a statement ahead of its annual general meeting in London: “The group continues to anticipate a reduction in sales in 2011 as the volume adjustment in land and armaments is expected to complete and as the changes arising from the Strategic Defence and Security Review (SDSR) reduce activity in the UK businesses.

“Actions to lower cost and improve efficiency are expected to benefit return on sales and mitigate the impact of that lower activity,” the company added.

The US, which has the world’s largest defence budget, recently reached agreement on a funding bill for 2011 after having operated on a “continuing resolution” that funded the military at 2010 levels, some $20bn less than its defence department requested for 2011, since October.

BAE, however, said the delayed approval of the US budget was unlikely to have a material impact on its annual results.

RBS analyst Sandy Morris said: “In the US, we continue to regard BAE’s business as robust at worst and quite capable of generating satisfactory growth ... on balance, we believe the downside risk to now be limited and the upside risk to be rather more substantial, certainly on a 12-month view.”