Bloomberg News

BAE Naval Shipyards at Risk as U.K. Urged to Speed Frigate Order

January 31, 2012

Sabine Pirone

Jan. 31 (Bloomberg) -- Britain should bring forward orders for a new generation of navy frigates to help BAE Systems Plc bridge a production hiatus that’s threatening its warship-making capabilities and 6,000 engineering jobs, the Unite union said.

Europe’s No. 1 weapons-maker said this month it had begun a study into future options for yards in Scotland and Portsmouth, England, once production slows with the completion of two Royal Navy aircraft carriers in 2018. The first Type 26 frigate isn’t due to be delivered until the early 2020s, leaving the sites dependent on support work and minor programs for foreign fleets.

“The government can’t expect a private company to keep thousands of people sweeping the floor or painting its workshops waiting for the work to come in,” Ian Waddell, Unite’s national officer for aerospace and shipbuilding, said in an interview. “It should bring the contract forward to span the gap.”

The situation has gained a political twist as the Scottish parliament moves to hold an independence referendum in 2014, Waddell said. Portsmouth would more likely be retained by the U.K. government in the event of a vote that would effectively place the two Glasgow yards in a foreign country, he said.

BAE spokeswoman Kristina Crowe declined to comment directly on job prospects and said that the study led by LEK Consulting will provide analytical and modeling support to the warship business, aiding usual planning activities.

Government Agreement

The London-based company was already evaluating operations in response to falling defense budgets, and said Sept. 27 it would cut 3,000 U.K. posts to trim costs and slow production of Eurofighter warplanes, having eliminated 15,000 positions globally in 2009 and 2010.

“We are reviewing how best to retain the capability to deliver and support complex warships in the U.K.,” Crowe said.

The appraisal will be in line with commitments given in a 2009 agreement with the U.K. government, she said. That accord guarantees “minimum future work levels” over a 15-year-period while committing BAE to delivering “substantial” efficiency improvements, the Ministry of Defence said in an e-mail.

The carrier and frigate programs already dovetail as closely as can be expected and, a smaller volume of work will inevitably translate into job cuts and lost skills, said Francis Tusa, London-based editor of the Defence Analysis newsletter.

Construction of hull sections for the HMS Queen Elizabeth and HMS Prince of Wales aircraft carriers is being undertaken at BAE’s Scotstoun and Govan yards on the River Clyde in Glasgow and in Portsmouth, with the ships due to be assembled at Babcock International Group Plc’s dockyard in Rosyth, near Edinburgh.

Design Fix

An assessment of the Type 26 that began in 2010 won’t end before 2014, after which the government must sign off on the project before BAE can commence manufacturing. The first example will be delivered after 2020, though it’s “difficult to give an exact date,” Crowe said.

Ships will be built at a rate of about one a year, with a requirement for anti-submarine and general-purpose versions to replace 13 Type 23 frigates dating to 1989.

The frigate program could be accelerated by fixing the design as soon as possible and then eliminating the usual gaps between phases, cutting as much as two years from development and minimizing the lull between projects, Waddell said.

Export orders for the Type 26 could boost the production run, and the vessel is being pitched to foreign governments as the so-called Global Combat Ship. Britain has formally invited Brazil to become a partner in the program, and is looking at opportunities in Turkey and Malaysia, BAE said.

Layoffs Likely

Still, some job cuts seem inevitable, because even bringing forward the Type 26 won’t compensate for the end of work on the carriers, Waddell said. The carriers are Britain’s biggest-ever warships at 920 feet long and 65,000 metric tons displacement.

“I can’t see how you can maintain that level of employment,” he said. “You’re going from two huge carriers to one relatively small vessel.”

Accelerating Type 26 production may not be possible because of the program’s complexity, and engineering know-how is likely to be lost, said Howard Wheeldon, senior strategist at BGC Partners in London, adding there are “question marks” over the status of guarantees provided in the 2009 agreement.

“There’s a lot of mistrust between contractors and the government,” said Wheeldon, who has covered the European defense industry for 20 years. “There’s supposed to be a commitment to providing sufficient work, but that’s going to be very, very difficult. The writing has to be on the wall for Portsmouth.”

Ending an Era?

The Portsmouth yard, employing 1,500 people in shipbuilding and a similar number providing support to vessels including Britain’s Type 45 destroyers, may be most at risk since it can’t offer the synergies that exist between BAE’s Glasgow yards, which support 3,000 manufacturing jobs and are located less than 2 miles apart and 30 miles from Rosyth, Waddell said.

Closing Portsmouth would end more than 500 years of naval shipbuilding in the city. Vessels from Henry VIII’s Mary Rose to the galleons that drove off the Spanish Armada and HMS Dreadnought, the first modern battleship, were built in the south-coast city, which is also home to the oldest functioning dry dock, housing HMS Victory, Nelson’s flagship at the Battle of Trafalgar.

The Royal Navy also has its main management headquarters in Portsmouth and bases two-thirds of the surface fleet there.

BAE, whose stock has gained 10 percent so far in 2012 after declining for the past four straight years, says that Portsmouth should in any case obtain additional work to fit one aircraft carrier with catapult equipment needed to operate Lockheed Martin Corp. F-35 Joint Strike Fighter jets.

And the Scottish independence vote could favor the retention of Portsmouth to preserve capabilities within a U.K. reduced to England, Wales and Northern Ireland.

“If there is full independence, then the government has to make a decision,” Waddell said. “It’s not just about shipbuilding. There is a huge aerospace industry, and complex weapons. It’s a real constitutional issue that has not been debated yet.”

--With assistance from Christopher Jasper in London. Editors: Chris Jasper, Benedikt Kammel.

To contact the reporter on this story: Sabine Pirone in London at spirone@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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