Bloomberg News

BAE’s $4 Billion Oman Order Extends U.K. Fighter Heritage

December 21, 2012

BAE Systems Plc (BA/)’s 2.5 billion-pound ($4 billion) order to supply fighter planes to Oman will assure British military-jet production past 2020.

Oman agreed to buy 12 Eurofighter Typhoon fighters and eight Hawk 128 advanced jet trainers. Work on the contract will begin in 2014 with deliveries starting in 2017, London-based BAE said. The deal also boosts Hawk sales to 998 aircraft.

The country is the second purchaser of Typhoons in the vital Middle East export market, following an order from Saudi Arabia in 2007. BAE, working to sustain its fighter production line past 2020 while countering defense spending drops in the U.K. and the U.S., is trying to interest the United Arab Emirates in the twin-engine combat jet as the Persian Gulf federation considers buying as many as 60 aircraft.

“We will be selling more Typhoons and manufacturing them into the next decade,” Chris Boardman, managing director of BAE’s military air and information business, said in a telephone interview. “We see very strong prospects in the Gulf region, as we would given where the tensions are in the world.”

The contract, announced during a visit to Oman by British Prime Minister David Cameron, is part of a broader U.K. government drive to secure sales of more than 100 jets to the Gulf region that could generate 6 billion pounds in revenue to British firms over coming years. Saudi Arabia’s Typhoon purchase was followed by a 1.6 billion-pound order for 22 BAE Hawks this year.

Typhoon Talks

BAE, which attempted a merger with Eurofighter partner European Aeronautic, Defence & Space Co. (EAD) this year to create the world’s biggest aerospace and defense company by sales, pledged to complete the Omani contract before 2013 after the combination failed because of German government opposition.

The merger proposal was borne out of discussions between BAE Chief Executive Officer Ian King and his EADS counterpart, Tom Enders, over how to improve Typhoon’s export chances.

Talks with Oman slowed earlier this year because the sultanate was dissatisfied with progress on a delayed naval- vessel contract and differences over support conditions for the fighter.

BAE fell as much as 2.8 percent to 338.2 pence and was trading down 2 percent at 2:03 p.m. in London. U.K. stocks slid the most in five weeks today after Republican leaders in the U.S. scrapped a vote on a tax plan, fueling concern that party members would prevent politicians from agreeing on a compromise budget.

Eurofighter Partners

The Typhoon is built by the Eurofighter GmbH venture of BAE, EADS and Finmeccanica SpA. (FNC) The deal announced today also supports Rolls-Royce Holdings Plc (RR/), the U.K. supplier of engines for the planes.

Export opportunities for the Typhoon include Kuwait, which recently conducted a flight evaluation, Boardman said. The sales effort is being led by Rome-based Finmeccanica. Libya could also become a buyer as the country rebuilds its fleet following the NATO-led air war last year, he said.

The Oman order comes after setbacks for Eurofighter in India, Japan and Switzerland, where the partnership lost competitions to rivals from France, the U.S. and Sweden.

India, which began contract talks with Dassault Aviation SA (AM) to buy at least 126 Rafale fighters in January, remains a target, Boardman said. “We are ready with a much improved offer should those discussions not come to fruition,” he said.

Saudi Delay

BAE said it expects to resume deliveries of Typhoons to Saudi Arabia next year, even as discussions over pricing of the combat aircraft continue. The company, which had hoped to conclude those talks this year, said Dec. 19 that negotiations over “acceptable pricing” may not be completed in 2012, reducing full-year earnings per share by 3 pence.

Saudi Arabia has taken delivery of 24 Typhoons, with plans to buy at least 48 more aircraft.

The Oman deal “neatly substitutes an expected inflow from Saudi that is seen as necessary to trigger a share buyback,” Andrew Gollan, a London-based analyst at Investec, said in a research report. The contract should bring 500 million pounds in cash from customer advances, he said.

BAE expects Hawk production also to last past 2020, Boardman said, as countries need better training aircraft to prepare pilots for the modern fighters they’re buying. Hawk sales will be spurred by exports not just of the Typhoon, but of

other combat jets such as Lockheed Martin Corp. (LMT:US) F-35 Joint Strike Fighters, he said.

One example is Japan, he said, which a year ago agreed to order the F-35 on which BAE is partner. The U.S. also is planning to buy new jet trainers.

BAE said the Oman contract will support 6,000 jobs mainly at its Warton, Samlesbury and Brough production sites in England. All have been subject to job cuts in recent years as BAE has tried to adjust to declines in U.K. spending.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Andrew Noel at anoel@bloomberg.net


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