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BAE’s U.S. Chief Says Contractors in ‘Fierce’ Competition

Defense contractors are engaged in intense price competition as weapons spending declines, according to the chief executive officer of BAE Systems Plc (BA/)’s U.S. subsidiary.

“I have never seen competition as fierce as it is right now,” Linda Hudson said today at a conference in Washington. “People are willing to do irrational things to win a contract.”

Saying her company is feeling a “tremendous amount of pricing pressure,” Hudson predicted moves toward greater consolidation among prime defense contractors.

“Our industry may wind up with a very small handful of superprimes,” she said. “We’d prefer to help drive that consolidation, as opposed to being the victim of it.”

A plan by BAE, Europe’s largest arms maker, to merge with European Aeronautic, Defence & Space Co. (EAD) fell through last year. Now, London-based BAE is among defense contractors feeling the pain of the across-the-board U.S. budget cuts called sequestration.

BAE was the Pentagon’s No. 7 contractor in fiscal 2011, receiving about $7 billion in work. The company said last month that it may have to dismiss 3,500 employees in its U.S. shipbuilding business as the Navy delays maintenance work on vessels.

Tax increases are “inevitable,” along with spending cuts, as the U.S. struggles to reduce its national deficit and find an alternative to sequestration, Hudson said in her speech at a conference on contracting law at George Washington University.

“It’s simple math when you look at the magnitude of what we need to do to deal with debt and how we can get there,” she said.

Hudson didn’t say how revenue should be increased, except that the government should “get rid of loopholes, instead of putting more on those who are already overburdened.”

The Pentagon also may need to close depots and bases, reducing its workforce, “as we have,” she said.

To contact the reporter on this story: Kathleen Miller in Washington at kmiller01@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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