Following on from the announcement late last week that the German Government had approved purchase by the German Air Force of 38 new Eurofighter Typhoon Tranche 4 aircraft and that contracts for delivery of these have been signed with Airbus, it is pleasing that through the NATO Eurofighter and Tornado Management Agency (NETMA) which acts as the single point of contact for customers and governments, Eurofighter Jagdflugzeug GmbH, the consortium which represents the core nations industrial partners comprising Airbus, BAE Systems, and Leonardo, has now awarded BAE Systems a £1.3bn contract that will enable the UK company to support production of the 38 Eurofighter Typhoon aircraft to be built for the German Air Force by the Consortium.
UK work on the new Eurofighter Typhoon aircraft for the German Air Force will commence in 2021 at BAE Systems’ sites in Lancashire. This is a hugely important order for BAE Systems maintain as it will continuity of Typhoon aircraft production through to the mid-2020s and in the process, sustaining high-value engineering roles in the North of England. Maintaining critical military and defence engineering, design and technical skills has perhaps never been more important for the UK than now as we plan for a very different future. The jobs involved are also to be seen as a key element of securing the UK’s sovereign skills and capabilities and that are also, central to realising the Government’s future combat air ambitions.
More than 5,000 BAE Systems employees directly support the Typhoon programme in the UK, supporting a further 10,000 jobs in the UK economy as a whole. The list of UK supply chain companies that will ultimately benefit from the German Eurofighter Typhoon order is large with names such as Rolls-Royce, a member of the Eurojet consortium producing the EJ200 that powers Eurofighter Typhoon aircraft, standing out.
The Eurofighter Typhoon is the most advanced multi-role combat aircraft in operation, supporting European security and defence objectives. The programme is Europe’s largest defence collaboration generating as it does, economic prosperity for all four consortium nations (Germany, UK, Italy and Spain) and maintaining combat air sector capacity and the necessary industrial development and manufacturing capability required to support supply chains and nations involved together with export customers.
As one of the larger members of the Eurofighter consortium, BAE Systems will manufacture and deliver over one third of the components required for each of the new Typhoons ordered by the German Air Force – this will include the aircraft’s front fuselage and tail. This being an order from the German Government, final assembly of the aircraft will be undertaken by Airbus at its large Manching facilities in Germany.
The new aircraft will join the existing German Air Force Typhoon fleet from the mid-2020s and will be equipped with the latest technology, including an advanced electronically-scanning radar. Charles Woodburn, Chief Executive BAE Systems,said in the announcement this morning that:
“Germany’s decision to purchase additional Typhoons reinforces the aircraft’s position as one of the world’s most successful combat military aircraft. The Typhoon programme makes a significant contribution to the UK economy, generating billions of pounds through exports and supporting more than 15,000 jobs across the UK including thousands of highly skilled roles in the North of England.”
The combat air sector delivers £6 billion of revenue to the UK every year and is responsible for 87% of the nation’s defence exports, a significant proportion of which comes from Typhoon. Few areas of Government spending deliver such impactful economic returns and it is important to note that so far, export sales of Typhoon have already returned more than double the UK Government’s £12 billion investment in the programme to the UK economy.
The Typhoon programme will, as it has done over many years, continue to help drive innovation as the Company develops the technology required to deliver the next generation of combat air capabilities. For example, BAE Systems engineers are now producing 3D printed components for Typhoon, including the Environmental Cooling System which will be used to cool the next generation radar.
Typhoon has still got a very long way to go and as a leading member of the Consortium it is important that the UK continues to take a long-term view and ensure that we continue to invest in the capability. In the 2018 Combat Air Strategy the Government made its forward intentions clear in what was rightly seen by many as a bold but very necessary vision for future UK combat air capability and that would of necessity also be the embodiment of an ambitious goal to create Tempest, a UK-led international future combat air system development programme that has at its heart the intention to pioneer new technology, capable of exploiting and staying ahead of evolving threats, enabled by decades of expertise in a world leading industry.
Team Tempest continues apace but it is, in my view, also extremely important that we do not allow the huge strategic importance of the Eurofighter Typhoon programme in respect of the ongoing prosperity agenda to diminish in any way. We must ensure that we continue to invest in the Eurofighter Typhoon programme ensuring that the capability not only continues as the enabler of the bolder vison laid down within the Combat Air Strategy but also to ensure continuing exportability and in ensuring that we maintain the strong sovereign capability that is now more important than ever.
As it is and notwithstanding recent announcements in respect of radar upgrade, Eurofighter Typhoon also underpins the UK’s strategically important international relationships and is in operational service with seven nations – Germany, Italy, Spain, the UK, Austria, Oman and Saudi Arabia – with production orders underway for Kuwait and Qatar.
BAE Systems Trading Update (11th November 2020)
While it is somewhat unusual that I comment on trading updates from corporates because this is somewhat timely in regard of the previous remarks in relation to Eurofighter Typhoon I have, for the benefit of those who may not have seen it, copied the main elements of this below. The bottom line is one of continuing strength:
In respect of the trading announcement Charles Woodburn, BAE Systems Chief Executive, said:
“We have continued to deliver a resilient performance in line with our expectations for a strong second half, thanks to the outstanding efforts of our employees in these challenging times. From a position of strength, the actions we took in quarter two to enhance our resilience are working well as reflected in our guidance, ensuring we continue to deliver on our customer priorities, whilst keeping our employees safe. Demand for our capabilities remains high and we recognise our role not only in supporting national security, but also in contributing to the economies of the countries in which we operate.”
The Group’s full year guidance for 2020 sales and cashflow remains unchanged from the 2020 interim results. Underlying earnings per share are now expected to be slightly higher than previously guided with good operational performance and an expected lower tax rate offsetting the negative foreign exchange impact.
Demand for our capabilities remains high with order intake expectations for the Group ahead of our original pre COVID planning for the year.
The recent German Parliament announcement confirming the approval of the purchase of an additional 38 Typhoon aircraft is significant for the consortium, and we are working with Eurofighter GmbH and our industrial partners to conclude the relevant contracts in the near future.
Our large order backlog and incumbent programme positions are expected to lead to strong and profitable top line growth with increasing cash conversion in the coming years.
Key market update
In the US, the Group’s US-based portfolio remains well aligned to customer priorities and growth areas, which we expect to continue under the next administration. The backlog for the US based business has continued to grow organically and through the two acquisitions made earlier this year. This backlog provides good visibility of growth in the US business. The two-year budget deal enacted in 2019 established a defense spending level of c.$740bn for fiscal year 2021. As lawmakers continue to work on authorization and appropriations bills, Congress passed a Continuing Resolution to provide funding through 11 December, with the CARES Act also extended through the same period.
In the UK, the government has recently re-stated its commitment to meeting the NATO target of spending of at least 2.0% of Gross Domestic Product on defence. The Government’s Integrated Foreign Policy, Defence and Security Review is ongoing and the Ministry of Defence has stated it is progressing its contribution to this Review by planning how best to meet tomorrow’s threats. We see a stable outlook for our UK operations, with defence revenues centred around long-term, contracted and critical defence programmes in the Air and Maritime domains. The Group has limited UK-EU trading and the majority of the UK workforce are UK nationals. Accordingly, any resulting near-term Brexit impacts across the business are likely to be limited.
Our business in Australia, where we are the leading defence contractor, is set to grow significantly in the coming years as the Hunter Class Frigate programme matures. The government announcement in July to increase their 10-year investment in new and upgraded defence capabilities from $195bn AUD to $270bn AUD should provide further opportunities to enhance and extend our growth profile.
In Europe, a number of nations are increasing their defence budgets to address the threat environment and move towards their 2% of GDP NATO commitments. We remain well placed through our positions on the Eurofighter Typhoon, our shareholding in MBDA and our BAE Systems Hagglunds Swedish based land vehicles business.
In Saudi Arabia, we are working closely with industry partners and the UK Government to continue to fulfil the contractual support arrangements in the Kingdom on the key European collaboration programmes.
We are being agile as we address the challenges arising from the global pandemic with employee safety and wellbeing at the forefront. Collaboration and communication across our many stakeholders, particularly in our supply chain and with our Trade Unions, gives us high confidence in our ability to deliver across our defence programmes. As outlined in July, in our defence businesses most operations are operating with well over 90% of employees working. This includes a high proportion still working from home and critical on-site workers operating under the adjusted protective safety measures. We continue to monitor local operational situations with particular focus on our supply chains as we manage fragility in certain areas.
We have seen some pleasing progress since the half year as we continue to deliver improved operational performance against our strong order backlog. Our focus on F-35 ramp up in both the Air and Electronic Systems divisions has continued in the second half.
The integration of the former Airborne Tactical Radios and Military Global Positioning System businesses into the Electronic Systems sector is progressing well, benefitting from positive levels of engagement by the teams. The businesses are performing as expected and well positioned for growth.
The first of the Low Rate Initial Production (LRIP) Armoured Multi-Purpose Vehicles have been delivered to the US Army customer and dozens of hulls are in progress on the production line as the programme continues to build momentum. The Amphibious Combat Vehicle programme successfully completed Initial Operational Test and Evaluation in September, a key milestone in moving from LRIP levels to the full rate production levels.
The Qatar Typhoon and Hawk build programmes are progressing well and our relationships are strengthening as we implement our support and training commitments with the Qatari Armed Forces.
On the Tempest programme, positive progress continues with the inputs to the outline business case submitted on time and good progress has been made towards a trilateral Memorandum of Understanding with our Italian and Swedish international partners.
In Maritime, the fifth and final OPV, HMS Spey, was accepted by the Ministry of Defence in October, and the acquisition of Techmodal is an exciting step for the sector as we look to support the Royal Navy’s ambition to be a ‘digital navy’ by 2025.
At the start of November, we completed the disposal of the ex-Silversky business. This has no material impact on the guidance.
CHW (London – 12th November 2020)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785