Throttling backBAE Systems sheds 2,000 jobs in Britain

THE shrinking of Britain’s manufacturing industry has been a big concern of successive British governments. It now accounts for just 10% of GDP, down from 25% in the 1970s. So news of job cuts at BAE Systems, the country’s largest manufacturer, stoked old worries.

On October 10th the defence contractor announced that it was shedding almost 2,000 jobs out of about 35,000 in Britain, mostly in its military aerospace division. But although this was bad news for British industry and its workers, investors are more relaxed. Rising defence budgets worldwide, and particularly in America, mean that there are still plenty of growth opportunities for the world’s third-largest defence company.

The main cause of the job losses is a shortage of orders for the Eurofighter Typhoon jet, which BAE Systems makes with Leonardo, an Italian group, and the Spanish and German divisions of Airbus. Thus 750 posts will go next year at BAE’s factories in Lancashire, where parts for the Typhoon are made. Another 400 jobs will go at a facility at Brough in east Yorkshire.

So far 599 Typhoons have been sold to eight customers in a very competitive market, but orders from the Middle East have slowed. Saudi Arabia, which accounts for about 20% of BAE’s overall sales, has bought more than 70 Typhoons, but is prevaricating over buying another 40 or so. Cutting jobs will slow down production before new orders are confirmed by the Saudis and Qatar, BAE hopes. It is unclear, however, whether BAE will be able to sell new planes to the Saudis if it goes ahead with an order from Qatar, as the two have recently cut diplomatic relations.

The Labour Party has called for the government to consider bringing forward its own orders to preserve jobs. The Unite union, which represents many BAE workers, wants the government to commit to building the “next generation” of fighter jets in Britain. But there are no plans yet to build such jets after the Typhoon. On September 6th the government announced a new initiative to invest in naval shipbuilding, preserving jobs and capacity. But the maritime strategy relies on making a new generation of frigates, the Type 31e, that are easy to export. By contrast, the future in the air may depend more on unmanned planes, such as BAE’s Taranis, for which there is not yet a proven export market.

But BAE Systems has a lucrative share in the F-35 stealth fighter, the most expensive defence programme in history. BAE has a 15% stake in the airframe work of the F-35, and will supply much of its electronic-warfare system. The plane will be the cornerstone of Western air defences for decades, and could sell as many as 3,000 units. The airframe work is done in Lancashire.

The F-35 programme also demonstrates how closely the future of BAE is linked to America. The Pentagon is already BAE’s biggest customer, and will become bigger still if the Trump administration succeeds in ramping up defence spending. With geopolitical instability in the Middle East and Asia, other countries are spending more too; last year global military spending rose for the first time since 2011. BAE is well placed to take a share of this increase. The company also has a good order book for its nuclear submarines and is making eight Type 26 frigates for the Royal Navy.

Some of the job losses also reflect a new boss putting his stamp on the company. Charles Woodburn, an oil and gas man, took over in July. He wants to make BAE more efficient and technologically innovative. All worthy stuff, even if he is off to a politically rocky start in Britain.