BAE Systems has admitted its share of 2005 profits growth from booming Airbus is likely to be wiped out by deepening losses at its regional aircraft business. However, the UK company’s recent success in securing major defence contracts is expected to more than offset the worsening performance of its commercial aerospace activities.
BAE warns that Chapter 11 proceedings at several US carriers mean that “the performance of BAE Systems’ Commercial Aerospace Sector in 2005 is now expected to be below that for 2004, despite an improved contribution from Airbus”.
Deutsche Bank analyst Chris Partridge says that BAE has always been susceptible to a downturn in the US air transport market. “It was only a matter of time before they had to make some readjustments. The market for regional aircraft has changed dramatically in the last decade, with the US market representing a huge risk for the last four years. BAE has never really had sufficiently competitive products for those markets at the right time,” he says.
The “increased loss” in its regional aircraft business that BAE expects to report in February is unlikely to dampen investor confidence following agreement of the next phase of the Al Yamamah contract with Saudi Arabia.
BAE’s regional aircraft division makes an operating loss of around £50 million ($86 million) a year because of support costs for its fleet, says Ben Fidler, another Deutsche Bank analyst. He forecasts BAE will make a “small money” writedown of £30-40 million due to aircraft covered by residual value guarantees, against an expected £1.2 billion 2005 profit. “In the context of stock market sentiment on BAE it is not seen as a significant number.”
BAE says that as “defence businesses continue to make good progress, the company is on track to deliver its planned overall 2005 performance”. The commercial aerospace division made an operating profit of £176 million on revenues of £2.9 billion in 2004.
Source: Flight International
