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BAE SYSTEMS CLOSES THE RJX PROGRAMME

Travel News Asia Date: 27 November 2001

Following the events of September 11, 2001 in the United States, BAE SYSTEMS has completed a review of the trading outlook reflecting recent changes in the commercial aerospace market and the impact on its commercial businesses.

1) 2001 trading performance continues as planned.

2) Plans for 2002 adjusted to reflect the following:

a) Airbus:

- Deliveries reduced to 300 aircraft in 2002

- Airbus is expected to remain profitable at this revised level of output and additional actions underway to further safeguard profitability.

- For the avoidance of doubt, the employment consequences of this announcement relate solely to BAE SYSTEMS' wholly owned businesses and exclude any impacts of 11 September falling within the Airbus integrated company.

b) RJ programme

- We will close the RJX programme

- We will finish the four RJ aircraft currently in build for sale, and build no more

- We will continue to support in service Avro RJ and out-of-production regional aircraft

- We will review consolidating Aircraft Services Group's (ASG) In Service Support and In Service Engineering

- Aircraft Services Group operations in Toulouse, Sydney, and Washington will be reviewed

- We will take an exceptional charge of £250m in 2001

- Cash costs of this are £210m, £145m after tax

- Currently 36 people at Brough are engaged on activities associated with the RJ programme. As a result of this announcement we will begin the process of redeployment. Therefore, this negates the need for a further reduction in their headcount at this time.

c) Other commercial aerospace activities:

- £150m restructuring and support costs

- of which approximately £120m to be provided in 2001

- cash cost £125m, £90m after tax

d) We will now not move the Nimrod work to Chadderton as previously announced in July 2001

e) Our defence businesses are unaffected by this, except that the Nimrod work will not be moved to Chadderton



The re-structuring that follows from the actions on the RJ and RJX manufacturing programmes and the impact of aerostructures work levels from Boeing, Airbus, and Raytheon mean the loss of the following numbers of job posts from the sites indicated:

ASG Aerostructures Programmes Total
Chadderton 0 299 0 299
Prestwick 0 219 0 219
Samlesbury 0 87 53 140
Woodford 993 0 0 993
Filton 18 0 0 18
Total 1011 605 53 1669

John Weston, Chief Executive, BAE SYSTEMS, said:

"We have now completed a detailed assessment of the probable impact on our business of the recent severe downturn in the commercial aerospace market.

Since September, the trading outlook in these markets has changed substantially. In particular, operating profit expectations for Airbus next year have been reduced significantly and the outlook for regional aircraft has deteriorated sharply. Regrettably it has been concluded that our regional jet business is no longer viable in this environment. The company has a number of smaller commercial aerospace activities in aerostructures, avionics and equipments and in aircraft maintenance and conversion. The outlook for these other activities has also reduced.

Today's announcement draws a line under the company's exposure to regional aircraft manufacturing and secures the company's financial exposure in this market. While the impact of the changes in trading expectations for Airbus will postpone the company's return to growth, the core defence businesses are progressing well."

Trading background

BAE SYSTEMS is one of the world's leading systems defence and aerospace companies.

In the half year to 30 June 2001, 70% of group sales and 77% of operating profit before goodwill amortisation and exceptional items was derived from defence activities, and these businesses are expected to make good progress next year.

A number of recent successes have further enhanced the outlook over the medium term. The agreement over the build strategy for the UK's Type 45 destroyer and a contract for two ALSL ships have strengthened the naval activities. Agreement has been reached on the next phase of the competition for the UK's next generation aircraft carriers and the company has been awarded a sole source contract for the UK MoD's Indirect Fire Precision Attack programme.

In airborne systems the company's position has been further strengthened with the DoD's recent selection of the Lockheed Martin JSF, where BAE SYSTEMS is a full partner with an approximately15% programme participation. This important win is a valuable new addition to the company's forward plan and enhances the longer-term growth potential of the defence business.

In contrast, the events of 11 September have led to a significant deterioration in the outlook for civil aerospace related businesses. These businesses principally comprise the company's 20% interest in Airbus and the Aircraft Services Group (ASG) that together form the Commercial Aerospace business group. ASG includes the RJ and RJX regional jet programmes, the Asset Management activity responsible for managing a portfolio of regional jet and turbo prop aircraft and the Aviation Services freighter conversion and maintenance business for Airbus aircraft. BAE SYSTEMS has commercial aerospace involvement in other areas of its business, notably Operations, Avionics and in the North America business group. The company has now completed a review of the impact of the changed outlook on prospects for all its commercial aerospace businesses and activities.

2001 Update

The trading outlook for the group for the current year, including the contribution from the commercial aerospace related activities, remains broadly in line with earlier plans.

For some years, BAE SYSTEMS has been reducing its exposure to the regional aircraft market: turbo prop programmes have been progressively exited and the regional jet (RJ) programme has run at progressively lower volumes. In 2000, regional aircraft contributed £10m operating profit. The closure of manufacture and development of the RJ and RJX will incur cash costs of £145m net of tax, primarily expended in 2002. This decision will result in an exceptional charge, before tax, of £250m in the 2001 accounts. Rationalisation of employment resulting from this decision will be partly offset by transfers to other programmes at the Woodford, UK, facility.

The operating performance of the Commercial Aerospace business group has previously included certain costs to support the in-service fleet of regional aircraft, including costs associated with aircraft types no longer in production. BAE SYSTEMS remains committed to the continued support of these aircraft including their continued re-marketing within the Asset Management activity. The cost of these support services is covered in the above £250m charge. With the closure of the RJ / RJX programme the engineering and support activities are to be restructured, creating a unified support function for all the company's, now discontinued, regional aircraft.

The company's Aerostructures activity is involved in the sub-contract manufacturing of aerostructure assemblies for both Airbus and Boeing. A rationalisation of this activity is planned in response to the anticipated reduced volume throughput.

Aviation Services is engaged in the conversion of Airbus wide-body aircraft into freighters and the heavy maintenance of Airbus aircraft. The order book for this activity has declined and some rationalisation of the business is anticipated. The options available for this business are under review.

In 1998 the company announced a Financial Risk Insurance Programme (FRIP) that substantially insure income receivable from the fleet of regional aircraft to which the company retained financial exposure at that time. The FRIP provides a valuable insulation against all but the first £30m of lease income exposure on a net present value basis, not otherwise provided, relating to the insured fleet. As a consequence of the deteriorated regional aircraft market it has been decided that it would be appropriate to provide for this exposure with a charge to the 2001 accounts.

In addition to the closure of the RJ / RJX programme, the combination of the above restructuring and the FRIP provision will result in an exceptional charge of £150m of which approximately £120m will be taken in the 2001 accounts. The cash costs of these actions will be £125m, £90m after tax.

Together these charges represent the end of the company's financial exposure to regional aircraft manufacture and secure the company's financial exposure to that market.

2002 commercial aerospace outlook

Airbus deliveries are currently expected to reduce from some 320 aircraft this year to around 300 in 2002. Flexibility in the manufacturing system, including substantial use of contract labour to accommodate prior increases in programme volume, will enable costs to be reduced to match lower demand. In addition, and whilst the A380 development programme is expected to continue as planned, scope remains for R&D spend to be reduced from earlier plans, partially mitigating reduced profitability. As a result, Airbus is expected to continue to make a positive contribution to BAE SYSTEMS' operating results, albeit much reduced from earlier plans.

In addition to the Airbus and Aircraft Services Group activities in the Commercial Aerospace business group and the Aerostructures activity in its Operations business group, the company has relatively minor commercial aircraft related activity in its Avionics, and North America business groups.

Avionics is a minor supplier of avionics equipment to the commercial aircraft market. The Control Systems division of the North America business group is a supplier of digital flight control equipment to both Airbus and Boeing and digital engine controls to GE aero engines.

Reduced throughput in these Aerostructures, Avionics and North America activities resulting from the weakened commercial aerospace market is expected to reduce operating results by approximately £25m in 2002.

Longer term group outlook

The implications of 11 September are expected to have a significant impact on the civil aerospace activities of BAE SYSTEMS and to delay the resumption of growth that was previously envisaged next year.

Airbus deliveries in 2002 are expected to be slightly down on the current year at some 300 aircraft. The business is expected to continue to trade profitably at this level of throughput and additional actions are underway to further safeguard profitability.

In the longer term, prospects for Airbus remain excellent. The outlook for the defence businesses remains good with a number of important new programmes set to contribute and further enhanced over the medium term by the recent JSF selection.

About BAE SYSTEMS:

BAE SYSTEMS is the truly global systems, defence and aerospace company.

BAE SYSTEMS employs some 100,000 people and has annual sales of around £12 billion. The company offers a global capability in air, sea, land and space with a world-class prime contracting ability supported by a range of key skills.

BAE SYSTEMS designs and manufactures civil and military aircraft, surface ships, submarines, space systems, radar, avionics, communications, electronics, guided weapon systems and a range of other defence products.

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