BAE Systems Restructures Naval Sector

BAE Systems has reached agreement in principle with HM Government on measures to enable the implementation of a restructuring of its U.K. naval ships business.

The agreement will result in the restructuring of the contract for the Queen Elizabeth Class Aircraft Carrier program, provision of additional shipbuilding work prior to the start of the Type 26 Global Combat Ships program and rationalization of the U.K. naval ship business to match future capacity requirements.

In 2009, BAE Systems entered into a Terms of Business Agreement (ToBA) with the Ministry of Defense that provided an overarching framework for significant naval shipbuilding efficiency improvements in exchange for commitments to fund rationalization and sustainment of capability in the sector. The agreements announced today, together with an anticipated contract for the design and manufacture of the Type 26 Global Combat Ships program, will progressively replace that ToBA.

Queen Elizabeth Class Aircraft Carrier
BAE Systems, with the other participants in the Aircraft Carrier Alliance, has agreed changes to the Queen Elizabeth Class Aircraft Carrier contract. Under the revised terms, the contract will be amended to accommodate program changes and activities previously excluded from the contract.

Under the new Target Cost contract the industrial participants’ fee will move to a 50:50 risk share arrangement providing greater cost performance incentives. The maximum risk to the industrial participants will continue to be limited to the loss of their profit opportunity.

The revised contract reflects the increased maturity of the program, with structural assembly of the first of class vessel now substantially complete.

Interim shipbuilding workload
A significant reduction in workload will follow the peak of activity on the Aircraft Carrier program, the six Type 45 destroyers and two export contracts. The anticipated Type 26 program will, in future years, address some of that workload reduction. In the interim period, a proposed contract for the manufacture of three Offshore Patrol Vessels, announced today, will provide additional capability for the Royal Navy and sustain key shipbuilding skills.

Restructuring of the Naval Shipbuilding business
Following detailed discussions about how best to sustain the long-term capability to deliver complex warships, BAE Systems has agreed with the U.K. Ministry of Defense that Glasgow would be the most effective location for the manufacture of the future Type 26 ships. Consequently, and subject to consultation with trade union representatives, the Company proposes to consolidate its shipbuilding operations in Glasgow with investments in facilities to create a world-class capability, positioning it to deliver an affordable Type 26 program for the Royal Navy.

Under these proposals, shipbuilding operations at Portsmouth will cease in the second half of 2014. Subject to consultation, Lower Block 05 and Upper Blocks 07 and 14 of the second Queen Elizabeth Class Aircraft Carrier will be allocated to Glasgow.

The company remains committed to continued investment in the Portsmouth area as the centre of its Maritime Services and high-end naval equipment and combat systems business.

Consultation will commence on a total employee reduction of 1,775 that is expected to result from these restructuring proposals, including 940 in Portsmouth in 2014 and 835 across Filton, Glasgow and Rosyth, progressively through to 2016.

The cost of the restructuring will be borne by the Ministry of Defense.

The implementation of these restructuring activities will sustain BAE Systems’ capability to deliver complex warships for the Royal Navy and secure the employment of thousands of highly skilled employees across the U.K.

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