$2.5B jet deal with Saudis boosts BAE

May 25, 2012 at 12:30 PM
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RIYADH, Saudi Arabia, May 25 (UPI) -- BAE Systems' $2.5 billion training contract with Saudi Arabia's air force is a major coup for Europe's largest defense contractor and keeps the wolf from the door as Western defense industries face a sharp downturn because of hefty cuts in military spending.

The core of the deal involves the sale of 22 BAE Hawk advanced jet trainer aircraft and 55 turboprop PC-21 aircraft built by Pilatus of Switzerland, both of which can be armed for counterinsurgency missions.

The deal also includes training equipment and support services.

BAE has been negotiating the contract for months as Western defense companies increasingly focus on exports to the Middle East, a key customer for several decades and currently raking in vast amounts of petrodollars from high oil prices.

Indeed, exports have become crucial to Western defense companies if they are to maintain production lines for their national armed forces at a time when domestic orders are slumping.

BAE showed in its last annual report orders fell from more than $50 billion in 2009 to just above $40 billion in 2010, although earnings advanced to more than $2.5 billion.

The Saudis figure prominently in BAE's efforts to sustain growth, however limited.

Earlier this month, BAE warned investors to expect little growth in sales in 2012 because of the cutbacks, particularly in the United States, a major market for the British defense giant.

The administration of U.S. President Barack Obama is slashing defense spending by $600 billion as he heads into a re-election campaign ahead of the November presidential race.

"BAE's trading statement shows just how tough a new world it now inhabits," the Financial Times reported.

"The U.S. will now make for a hair-raising ride this year as politicians take budget negotiations to the wire."

Whatever growth BAE is likely to achieve will hinge on supplying Saudi Arabia with more Eurofighter Typhoon fighter aircraft, the second phase of a mammoth 2007 deal for 72 Typhoons known as the Salam Contract, worth $7.3 billion.

The first 24 of those aircraft, to equip one squadron, have been delivered.

Negotiations to amend the contract regarding the final 48 jets are under way, with the price likely to change, possibly adding as much as $500 million to BAE's coffers.

The Saudis are believed to be seeking to upgrade those aircraft to Typhoon Tranche 3, the most advanced variant with MBDA Meteor beyond-visual-range air-to-air missiles and electronically scanned array radar.

However, the Saudis have reportedly been mulling the option of pushing back the order, possibly because of Riyadh's December 2011 purchase of 84 Boeing F-15s Eagles in a deal worth $29.4 billion.

That contract also includes upgrading 70 F-15s already in service with the Royal Saudi Air Force.

"The finalization of the Saudi deal is widely expected, but it may give some upside when it finally happens, though it is unlikely to outweigh the reality of a dreadful European sales market and a scary U.S. one," the Financial Times commented.

Some of the biggest defense cuts in Europe occurred in countries that have been hit the worst by the global meltdown, such as Greece, Spain and Italy, the Stockholm International Peace Research Institute reported.

Meanwhile, it noted, military purchases by resource-rich states such as Saudi Arabia and Norway have emerged as a new avenue for growth that have boosted spending on the back of rising oil prices.

BAE had expected changes to the Salam Contract to be signed off in 2011, but officials say those talks are likely to continue this year and could thus affect 2011 profits. BAE earnings in 2011 fell 7 percent.

The proposed contract changes include assembling the final 48 jets in Saudi Arabia and developing a Typhoon maintenance and upgrade facility in the kingdom.

BAE has operated technical facilities in Saudi Arabia since it sold the kingdom 72 Tornado aircraft, 30 Hawk trainers and 30 Pilatus P-9 trainers in the al-Yamamah arms deal with BAE's predecessor, British Aerospace.

BAE said in 2005 the deal had earned it some $80 billion in 20 years and could bring in almost as much again over time.

The British company faced corruption charges over that contract. The full extent of the deal has never been fully clarified, but it has been described as "the biggest U.K. sale ever of anything to anyone."

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