BAE job cuts just the beginning

BAE Systems’ response to the UK ‘s defence budget downturn could hardly have come at a worse time for a country struggling to hold recession at bay. But while 2,930 job losses came as a hammer blow to the workers affected and their families and communities, the cuts must also be seen as inevitable.

With both the flagship Eurofighter Typhoon and Lockheed Martin F-35 programmes facing delays and outright cutbacks, and other defence spending facing severe reductions, BAE responded as probably any of its peers would have done. As chief executive Ian King put it: “To ensure we remain competitive, both in the UK and internationally, we need to reduce the overall costs of our businesses in-line with our reduced workload.”

Joseph Lampel, professor of strategy at the Cass Business School at London’s City University, says this is “a very, very tough time for British aerospace”. But, he adds, the Typhoon has been struggling for years with affordability, and as the UK, Germany, Italy and Spain have slowed acquisition or cut numbers, the cost of remaining aircraft has only risen. “I’m surprised there is surprise about what is happening,” he says.

One analyst who’s not surprised is Ian Godden, chairman of the UK’s ADS aerospace industry trade group. On Monday, the day before BAE confirmed its plans, Godden issued a statement to coincide with the Labour Party national conference to warn that historical and recent government defence spending cuts would lead to a further 20,000 to 30,000 job losses in a sector that supports more than 300,000 jobs and was worth over £23 billion in 2010, with £9.5 billion of that coming from exports last year. As each job in a prime contractor like BAE Systems supports about two jobs in its supply chain, the cuts announced this week will probably result in a total loss of 9,000 jobs – about a third of what the ADS predicted would stem from the current budget squeeze.

Government promises to assist affected workers in retraining are of course welcome, but the geography of the problem will make it difficult to find new jobs for many if not most of them. There is, for example, little prospect of finding new aerospace jobs locally for many of the 900 workers being pushed out of BAE’s Bough, Yorkshire factory. As Godden observes, there are several significant clusters around key UK factories such as Brough, Rolls-Royce in Derby, Airbus in Filton or Bombardier in Belfast. In such places, loss of the main factory – as at Brough – would be devastating to local aerospace employment.

But, says Godden, a notable characteristic of UK aerospace is the geographic diversity of the supply chain, which reflects the huge range of technologies drawn on by the industry – and suggests that the impact of BAE’s cuts will be very widespread. Indeed, while the big numbers being cut by BAE are at four locations – Brough and, in Lancashire at Samlesbury (565 jobs) and Warton and Preston (843) – BAE is also cutting smaller numbers at many locations around the UK.

Some comfort can be taken from the growth of civil aerospace activity, where a production boom is sure to see suppliers hiring over the next several years. But Godden sees no prospect for civil activity to absorb the bulk of the people being hit by defence cuts. Civil aerospace output was up 6% in 2010, but owing to productivity improvements that growth resulted in no net job gains. Over the coming two or three years, though, Godden reckons the UK’s civil aerospace industry may add up to 5,000 jobs because “there’s not much slack” in the supply chain today. But that total, while welcome, clearly falls far short of the losses on the defence side. “We’re in a net loss situation,” he says.


The significance to the UK economy of these job losses should not be underestimated. The ADS likes to point out that the UK is second only to the USA in its share of the world aerospace business, accounting for 9% of defence output and 17% on the civil side, making the industry a major net exporter. The automotive business is another UK success story, but its net exports are more or less zero; the UK manufactures about 3% of the world’s cars, the same as it consumes. Thus if the UK’s biggest aerospace companies are struggling then it will be very difficult to replace the employment they support.

Godden is bullish about the long-term future in one respect, though. The UK, he says, cannot hope to hold the market share it enjoys today, but even if that share were cut in half then, assuming current civil aerospace growth trends, UK output would in 20 years still be bigger than it is today.

To get there, he says, the government needs to increase investment in research and technology, and make three key changes to its defence procurement practices. One is to abandon an attitude which he describes as “laissez faire gone mad” and bargain hard with the USA, to secure UK work as part of any major purchase. No other country, he says, would spend hundreds of millions on, say, Chinook helicopters without negotiating an offset deal.

Second, says Godden, the UK needs to reduce its focus on the USA as a trading partner and get better at collaborating on development programmes with its European allies. The UK-France co-operation treaty is the right idea, but not big enough to make a major difference.

And, third, UK governments of all parties need to stop pretending they don’t want or need a defence industrial policy and recognise that each procurement decision sets a policy. Industry, says Godden, would be far better off if it that de facto policy was at least consistent.


One aspect of the situation which spells particular trouble for the UK defence industry, the armed forces and the government, though, is that the existing defence industrial policy, whether set by accident or design, is built around big, expensive programmes – and has been failing.

Typhoon is perhaps the best example. As Lampel notes, it has been clear for some time that the RAF’s frontline fighter is not living up to expectations in terms of either strategic or economic benefits. Typhoon, he says, represents the last generation of manned fighter jet and a better strategic decision years ago might have been to skip this generation and go straight to a new era of much smaller drone programmes. Whether the fighter programme once joking referred to as “yesterday’s aircraft at tomorrow’s prices” ends sooner or later, the defence industry is going to have to learn to live without such wildly expensive weapons, because the government doesn’t have the cash to sustain them.

To recover from BAE’s job cuts, Lampel says the clear priority for the UK aerospace industry is to shift as much emphasis as possible from defence business to civil. The good news is that the “hard line” between defence and civil technology has softened over the past 15 years or so, and thus it is increasingly possible to apply defence-developed technologies to civil projects, he says. The bad news, though, is that success in civil markets demands a more flexible, entrepreneurial culture than tends to exist in defence companies, which are conditioned to work in the single supplier, single customer world of government procurement.

For this transition to civil-focussed business to work, says Lampel, there needs to be a combination of “entrepreneurial rigour” and significant private sector investment. Government can support that private sector investment, he says, but throwing public money at the problem is not an answer – even if that money existed.

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