Saudi Arabian budget cuts in response to sliding oil receipts would make it tougher for Eurofighter GmbH to secure an order from the kingdom for a new batch of its $100 million Typhoon warplanes.
Military spending is one candidate for revisions, with a Typhoon order sought by BAE Systems Plc, Eurofighter’s U.K. partner, becoming a less certain prospect this year, said Harry Breach, a defense analyst at Raymond James in London.
“The probability of it slipping out has gone up, but a lot of factors come into that, including price negotiations,” said Breach, who has an “underperform” rating on shares of London-based BAE. “It’s getting closer to fifty-fifty.”
The Saudi government is seeking ways to trim $102 billion dollars from investments as the plunge in crude prices weighs on oil revenue, people familiar with the review said Monday. Defense projects could still survive intact, bolstered by the country’s involvement in wars in Yemen and Syria and skepticism over a U.S.-brokered nuclear deal with regional rival Iran.
“There are other areas in the budget, not least in infrastructure, that could probably take a bit of pain for a while and do less damage,” said Sandy Morris, a London-based analyst at Jefferies Group LLC with a “buy” rating on BAE stock. All the same, pricing power could suffer, he said.
For BAE, securing further Eurofighter sales is central to its ability to lift full-year underlying earnings per share, a target affirmed in a six-month results statement on July 30.
BAE Chief Executive Officer Ian King said last month that Eurofighter, in which the U.K. company is partnered with Airbus Group SE and Finmeccanica SpA, would decide by the end of this year whether to slow output to stretch production beyond 2018.
Securing a further Typhoon deal has become more pressing for BAE as it struggles to guarantee the future of a naval shipyard in Melbourne, something it has said is also a requirement for meeting full-year goals. The Australian government said this month that production will be focused on a competing state-owned facility in Adelaide.
BAE spokeswoman Kristin Gossel said the company couldn’t comment on national defense budgets or clarify what aircraft orders had been anticipated in annual earnings guidance.
A new Eurofighter order from Saudi Arabia would follow the purchase in 2007 of 72 Typhoons valued at 4.4 billion pounds ($6.9 billion), final terms for which were to be agreed by 2012 and based on economic conditions. In the event, negotiations on the so-called Salam contract dragged on until early 2014.
A follow-on deal could involve upwards of 48 Typhoons, Defense News reported June 16, when it said an order could be delayed by the death of a key Saudi Air Force commander, citing the British government’s defense and security export arm.
Saudi Arabia is also pursuing “massive requests” for U.S. defense equipment, with an order for as many as 802 Lockheed Martin Corp. Patriot missiles worth $7.15 billion awaiting approval in Congress, according to Morris. “Even if they choose to look hard at defense, they have choices,” he said.
Michael Stephens, research fellow for Middle East studies at the Royal United Services Institute in London, said seeking to anticipate Saudi intentions is “kind of like looking into a crystal ball” and that relying on a “mega-deal” from the world’s biggest oil producer every few years is unwise.
BAE still has a chance of securing Eurofighter orders from Bahrain, Qatar -- which signed an outline deal in May for 24 Dassault Aviation SA Rafale jets -- and even the United Arab Emirates, which ended talks on a purchase in 2013, he said. The Typhoon’s last export deal was with Oman in 2012, for 12 jets.