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15 Jul 04. The FT reported that Defence contractors Thales and BAE Systems, which will build the Royal Navy’s new aircraft carriers between them, have agreed in principle with the UK Ministry of Defence to construct the ships without a prime contractor, according to Thales’s top UK executive.

Such an arrangement is a blow to BAE, which was originally selected as “preferred prime contractor” last year by the ministry following intense competition.

Geoff Hoon, UK defence secretary, decided to take the prime contractor role away from BAE in March but the company reacted angrily, at one point leading to a heated exchange between Mr Hoon and Mike Turner, BAE chief executive, during a meeting. Mr Turner said this week he remained sceptical of the arrangement, telling a press conference: “We won’t be part of an alliance we don’t think will work.”

However, Alex Dorrian, chief executive of Paris-based Thales’s UK operations, said yesterday BAE had now agreed to an MoD-led alliance in which the two companies will work with the ministry to oversee the project.Mr Dorrian said talks between the three were moving “quite quickly now” over details of the alliance but declined to say when they might be concluded. He said the alliance could also bring in a third company – perhaps a construction group familiar with alliance agreements common in off-shore oil and gas exploration projects – but such decisions will be made later.

“We’re comfortable with that,” said Mr Dorrian of the alliance arrangement. “It’s a surprise to me if BAE is not.”Thales has also been mentioned as a potential buyer of BAE’s shipbuilding business, which BAE has said it is reviewing for possible sale. But Mr Dorrian denied Thales was considering it: “We have no interest in buying BAE’s shipyards.” US naval shipbuilder General Dynamics has also been mentioned as a potential buyer but people close to Nicholas Chabraja, GD chief executive, said he has also ruled out a bid.

Although an agreement on the alliance structure for the carrier programme may be near, the companies and the MoD remain far apart on the cost of the project. The ministry has budgeted £2.9bn ($5.4bn) for the two carriers but Mr Turner said this week that the capabilities requested by the RN would cost closer to £4bn.Mr Dorrian said the companies would have difficulty building the carriers if the MoD decided on “the low end of the figures”.

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