Hammond Sees Budget Cuts Driving Overhaul of Defense Industry

Military spending cuts among developed countries and changes in export markets will force defense companies to restructure, U.K. Defense Secretary Philip Hammond said.

“I have no doubt the reorganization of the defense industries across the developed world will be required over the coming years,” he said at the Royal United Services Institute’s annual air-power conference in London today. “There are a number of permutations that are possible,” he said, without outlining details.

BAE Systems Plc (BA/) and European Aerospace, Defence & Space Co. (EAD) explored merging into the world’s largest aerospace and defense company by sales, in part to broaden market access in the face of lower spending prospects in Europe. The plan unraveled amid government opposition to the deal.

“The merger shows just how significant the national- interest barriers are that have to be overcome,” Hammond said. That is true even if the German concerns were over jobs rather than defense considerations, he said.

Changes being made within the defense ministry should help companies generate overseas sales, such as building in “exportability” into programs as they are defined, Hammond said. Having a strong aerospace industry is “vital,” he said.

The defense ministry will publish more details of its equipment plan in the coming months, Hammond said. “This will provide greater granularity than ever before about how money will be spent across the breadth of capabilities by breaking down spending for equipment and support.”

Balanced Budget

Prime Minister David Cameron’s government says it has closed a shortfall in the defense budget inherited from the previous Labour administration and the National Audit Office is due to make an assessment by year-end.

Budget concerns persist, though, with submarine plans set to create a cash spending increase after 2020 that needs to be dealt with to avoid derailing other equipment projects.

The U.K. is still debating whether to use both aircraft carriers now under construction. The cost of operating a second carrier would be 70 million pounds ($113 million) per year, Hammond said. “I think that’s an extremely good investment,” he said, while noting a decision on whether to proceed with deploying both will be made in 2015 at the next strategic review.

The U.K. will put one carrier into operation starting in 2018 with around 12 Lockheed Martin (LMT) F-35B Joint Strike Fighters. That figure could be increased if necessary, Hammond said.

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

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

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