Martin Flanagan: BAE is getting defensive over the downturn

Published on 17/02/2012 00:00

DEFENCE giant BAE Systems is on a hiding to nothing at the minute. Order books, sales and profits are falling as its two main markets of the United States and UK retrench from the defence contract glory days of Iraq and Afghanistan.

But as BAE cuts jobs and closes sites, and contemplates more possible site closures and redundancies, it stirs up controversy and negative headlines portraying it as a pantomime villain.

In terms of the depressed defence industry climate, it is difficult to see what else BAE chief executive Ian King and his team could do. A company in any industry, not just defence, has to cut its coat according to its cloth.

And, as BAE is virtually totally dependent on government spending, a large slice of it in the west, it has been hit hard by the new austerity.

Revenues fell 14 per cent in 2011, the group announced yesterday, as underlying profits slid 7 per cent. The order book fell back to £36.2 billion against £39.5bn in what was hardly a halcyon year in 2010.

A bounce is not on the horizon, either.

President Barack Obama has faced down Republican criticisms that he is a defence wuss in an election year by freezing the US defence budget for 2012 at last year’s levels.

As BAE gets nearly half its revenues from the US, that is not particularly good news for the British company, nor are Obama’s signals that he sees the Asian theatre as America’s main defence focus over the next decade against the backcloth of China’s economic and military rise.

Meanwhile, BAE’s slice of UK defence procurement will be impacted by the government’s stated plans to cut spending by 8 per cent over the next four years.

However, sensitivities arise when undenied reports suggest King and his executives are on track for big bonuses as they made 3,000 UK workers redundant last year, including signalling the closure of the group’s factory in Brough in Yorkshire and apparently not ruling out a possible closure of one of its shipyards in Scotland, or its Portsmouth yard.

Across wider industry we are seeing executives meeting targets and getting their gravy as ordinary workers lose their jobs rather than bask in bonus land. Transparent and technically justifiable, yes, but not particularly palatable in this difficult time.

BAE shareholders do better, with £2bn returned to them including the latest 7 per cent rise in the divi. And the group, with its strong cash base and international diversification, is arguably the corporate epitome of the adage that in tough times the slim grow weak and the strong just get slimmer.

Macho musclemen of the ratings agencies

YOU sometimes wonder whether there’s an unstated machismo contest going on between the world’s leading credit rating agencies? Who can most put the wind up the stock market in general, and the banking sector in particular?

Moody’s has raised the bar by threatening to cut the credit ratings of 17 global investment banks and over 100 European financial institutions. Talk about fanning the flames of Athens as the Greeks veer ever closer to leaving the euro and sparking further banking volatility.

After all, last summer all Moody’s rival, Standard & Poor’s, did was downgrade the credit rating of the biggest economy on earth, the US, a few months before strong evidence that America is making a comeback. Credit agency scares are like buses, nothing then three come along at once. All we need now is for Fitch Ratings, the third credit ratings giant, to accuse Moody’s of looking at its pint.

Any plus for the high street is welcome

The National Association of Estate Agents calls for the government to look at transforming vacant high street shops into much-needed housing in some areas.

The idea has merit. Aesthetically, it would add to the attractiveness of the shops that got through the retail downturn without the ugly boarding and flyposters going up.

Not as desirable as all the shops being occupied, but better a pragmatic improvement to revitalise town centres than infecting the resilient businesses with the visible death throes of the vanquished.