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BAE Renegotiates U.K. Aircraft Carrier on 50% Cost Surge

BAE Systems Plc said it is renegotiating contract terms with the U.K. over a 5.3 billion pound ($8.4 billion) effort to build two aircraft carriers, whose costs have already risen more than 50 percent since 2005.

The defense company, Europe’s biggest, is considering contract changes to reflect “increased maturity” of the program, London-based BAE Systems said in a statement today. The first of two carriers is nearing completion.

The U.K. Parliament’s Public Accounts Committee said last month it expected carrier cost to rise after the government reverted to buying Lockheed Martin Corp. F-35B Joint Strike Fighter jump-jets rather than another version. BAE is in talks with the government about bringing shipbuilding capacity in line with demand. The U.K. is not buying enough vessels to sustain three surface shipyards once work on the carriers winds down.

“The current carriers’ contract is not fit for purpose as it fails to provide industry with any real incentive to control costs,” the committee said.

Trading for the period ended Oct. 9 was in line with BAE’s expectations, and a full-year earnings target is within reach assuming successful conclusion of talks with Saudi Arabia over pricing of Typhoon combat jets. Delays in the so-called Salam program, which the company was aiming to complete last year, could decrease earnings per share by as much as 7 pence.

Typhoon Exports

The company also is trying to sell Typhoon jets to the United Arab Emirates as it looks to boost exports to help offset spending declines in the U.S. and U.K. International activity is “vibrant,” Chief Executive Officer Ian King said today in a statement.

BAE has booked about 5 billion pounds in deals this year outside the U.S. and U.K. after reaching 11.2 billion pounds last year.

Shares in the company fell as much 0.6 percent and were trading 1 pence lower at 439 pence as of 8:03 a.m. in London. The stock has advanced 30 percent this year.

The shutdown of the U.S. government since Oct. 1 in the absence of a fiscal 2014 budget has not yet had a material impact on BAE, where about 1,2000 employees temporarily could not report for work, the company said.

BAE, which began a three-year, 1 billion pound share repurchase in February, has so far bought 34 million shares for 134 million pounds. The transactions have helped boost the stock, which has advanced 65 percent this year, valuing the company at 38 billion pounds.

The company also said it has agreed to make a 340 million pound cash contribution to its pension system during the share repurchase period, accelerating a plan to make up shortfalls.

BAE is undergoing several management changes, with Roger Carr, now chairman at British Gas parent Centrica Plc, joining the board this month before replacing chairman Dick Olver next year. The company also is seeking a replacement for Linda Hudson, who announced Aug. 20 she would leave her post as head of the BAE’s U.S. operations.

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