BAE casts doubt on pledge to raise profits after first-half slump

The defence contractor BAE Systems yesterday cast doubt on whether it would deliver on its promise to increase profits next year.

The doubts came as the group shocked the City by announcing worse-than-expected first-half results after taking a £120m hit to cover problems on a series of naval and avionics contracts.

BAE shares fell 14 per cent as the group reported a 25 per cent decline in profits before tax, goodwill, amortisation and exceptional items to £359m compared with analysts forecasts of about £430m.

After a profit warning in 2001, BAE has repeatedly reassured the City that earnings would be flat this year and then start to grow in 2003. However, BAE's new chief executive Mike Turner, who took over in March after the abrupt departure of John Weston, said yesterday: "We are more confident than ever that we are going to get profit growth but we can't say in what year." He said the uncertainty was caused by not knowing exactly when the benefits of a £1.5bn increase in the Ministry of Defence's budget would flow through to BAE's bottom line.

Sir Dick Evans, BAE's chairman, added that even if war broke out in Iraq it would not lead to instantaneous military orders for the company.

The fall in first-half profits was caused mainly by a £90m charge to cover losses on two fixed naval contracts for landing platform docks and auxiliary oil replenishment vessels being built at BAE's Barrow and Clydeside yards. There was also a £30m hit after problems on two avionics programmes to supply navigation systems for the Hellfire anti-tank missile and a ground-based satellite communications device.

Mr Turner said BAE would not take on any big fixed-price contracts in future from the MoD, insisting that there had to be a better balance between risk and reward on major procurement programmes, including the forthcoming £3bn contract for two new aircraft carriers.

BAE has been calling for the MoD to give it a monopoly on future orders to preserve the UK's skills base and hi-tech defence capability. But Mr Turner insisted that it was not seeking to stifle competition but ensure there was an "intelligent up-front debate" before big procurement deals were awarded.

Although BAE lost out in the bidding for the US defence contractor TRW, it said it was still keen to expand in North America, which now accounts for a quarter of group sales.

BAE was also upbeat about Airbus Industrie, in which it has a 20 per cent stake. Airbus profits rose to £122m and BAE said it remained on course to deliver 300 aircraft this year and next.