View from City Road: Fighter project flies into fog

POLITICS and business do not mix. Defence companies are used to the sometimes conflicting requirements of two distinct constituencies but even hardened operators found yesterday's developments on the European Fighter Aircraft confusing. What chance do investors have of making sense of it all?

On the face of it the Germans, as expected, decided to pull out of the project, leaving the UK, Italy and Spain to soldier on. But the Christian Democrat and Social Union parties voted to continue co-operating with Germany's EFA partners, which gave some of the British companies involved grounds for optimism.

The UK has consistently backed the programme but John Major yesterday raised the prospect of reviewing its involvement. Given that the contractors have been made acutely aware of opposition on cost grounds from the Treasury this could herald yet more uncertainties, or so the pessimists suggested yesterday.

In the fog, investors formed the judgement that it was bad news for British Aerospace, whose shares dropped a further 8p to 245p, making for a 103p drop in two months. But shares in other EFA contractors such as GEC, with a pounds 500m involvement, Smiths Industries and Rolls-Royce were largely unaffected.

The immediate financial damage is, however, limited. Development work currently under way has been paid for by the four governments and not by the companies themselves. It is a question of lost opportunity rather than uncovered exposure.

It is still possible that the UK contractors, principally BAe, will benefit from the decision if they receive a larger proportion of the work following Germany's withdrawal. BAe is building the front fuselage and cockpit and part of the right-hand wing. It might gain the contract for the centre fuselage, which was to have been built in Germany.

But this argument should be treated with some scepticism. The total size of the project is bound to come down and costs are under pressure, with or without Germany.

EFA fears have not noticeably depressed the relative share price performance of Rolls or Smiths over the past year. In the case of British Aerospace, which has underperformed by 60 per cent, the cost of walking away from regional aircraft is a more pressing concern than a scaled down or lost EFA.