Kevin O'Toole/LONDON

BRITISH AEROSPACE believes that its regional-jet operation, which brought the company close to collapse two years ago, will be back in profit by 1997.

BAe had already promised that the Avro regional-jet business would approach break-even by 1997 following its dramatic slimming down, but helped by a series of cash deals from major European airlines, the group is increasingly optimistic that profits are in sight.

"We will make money on regional jets in 1997," says Mike Turner, chairman of BAe's commercial aerospace division. He says that by then falling costs will have crossed over with rising sales.

Turner admits, however, that there is still no foreseeable prospect of profits from the Jetstream turboprop business, now focused solely on J41 production. "I don't see the cross-over point there because of too many players and crazy marketing," he says.

A better performance from Avro showed through in BAe's first half results, helping to cut pre-tax losses for the group's commercial aerospace division by one-quarter, to £59 million.

Part of the improvement came from growing profits from Airbus work, which is not yet divided from the regional-aircraft figure, although BAe says that it is seeking permission from the consortium to break out these figures separately.

BAe does separate out details of aircraft financing, however, which give some useful insights into the improving state, of both businesses.

In 1993, the group had faced crisis as it was forced to put aside £1 billion to cover the massive liabilities built up on regional-aircraft financing deals. Essentially, BAe had taken out long-term head leases on its own books and sub-leased aircraft on a short-term basis to customers. The group still holds liabilities on head lease commitments and guarantees valued at over £3.2 billion.

The half-year figures show that the cash sales are now accounting for the bulk of business. Avro's success in winning orders from the major European airlines, such as Sabena and Crossair, are largely responsible for the improvement says Turner. Of the 38 orders taken by Avro so far this year, 35 have been cash sales, he adds.

Despite an increasing order book, Turner is adamant that Avro will not seek to raise production rates from its current 18 a year, but concentrate on continuing to improve the quality of business.

Demand for customer financing for Airbus sales also appears to be declining, with only seven of the 79 aircraft delivered over the first half financed through head leases.

BAe's core defence business continued to forge ahead in the first half of the year, showing a 9% growth in pre-tax profits to £240 million ($372 million) on sales which nudged above £2 billion. The group says that it expects the improvement to continue through to the second half.

Source: Flight International