RestructureProg/TradingUpdate

BAE Systems PLC
10 January 2001


BAE SYSTEMS restructuring programme and trading update


BAE SYSTEMS has developed into a well spread systems, defence and aerospace
company following a number of significant acquisitions and now further
enhanced by the new Airbus company.  A detailed strategic and operational
review has been conducted as part of the year end planning process for the
newly merged and integrated BAE SYSTEMS business.  As a result of this review
certain actions are to be implemented to address disappointing performance in
some activities and to improve further the competitive position of the company
in its global markets.

Merger integration
The new organisation is in place and functioning well.  The planned £55m of
profit contribution from synergy benefits for 2000 from the merger between
British Aerospace and MES has been secured with cash savings of some £100m. 
The business is on track to deliver a profit contribution from synergies of
not less than £275m in 2002.

Restructuring
The near term outlook for Programmes and Customer Solutions & Support has
become more difficult.  Since the Interim Report in September 2000 when,
despite good medium term prospects, export orders for Hawk aircraft were
reported as falling short of expectations and budget constraints on customers
were beginning to impact, order intake from the UK MoD has also fallen short
of expectations. 

As a consequence, capacity, primarily in the Programmes business sector, is
being reduced to reflect this subdued order intake in a period of lower
activity between Tornado and Eurofighter Typhoon production.  The exceptional
charge to profits for 2000 and 2001 is expected to be £110million and
£115million before tax respectively, and the net cash cost will be some
£60million in 2000 and £135million in 2001.   

Nimrod
This review has identified that the full cost of delivering the Nimrod
development and production contract will exceed the contract value, leading to
a charge of £300m before tax which will be taken against operating profits in
2000.  The net cash cost of some £210million will be incurred in 2001. The
programme will deliver a system of unrivalled capability to the customer. 
Heads of agreement have been signed with the UK MoD, for through life support
of the system, which the company expects could double the size of the
programme and generate good returns.  

Trading update
The overall trading outcome for 2000 will be broadly in line with market
expectations prior to these charges and the cash flow performance for the year
has been robust.  Within business group totals, profits from Commercial
Aerospace will be higher than previously expected, while the performance from
Programmes and Customer Solutions and Support will be lower as customer budget
constraints have restricted progress in the second half. 


Prospects
The mix of business changes with market demand and as the portfolio of
programmes mature through development, to production and subsequently to
in-service support.  The company is entering a period where there will be a
distortion in mix due to the timing of a number of such issues. 

In 2001 and 2002, there will be a significantly different profits mix between
business sectors.  With the current phase of Al Yamamah construction activity
completing and with order intake from the UK MoD and Hawk exports falling
short of anticipated levels, the near term outlook for Programmes is expected
to remain difficult. 

Notwithstanding the early benefits from the restructuring programme, reduced
volume throughput is expected to result in substantially lower profits for
Programmes in 2001 and 2002 with growth expected to return in 2003. As
indicated previously, sales in Programmes are expected to be some 40% higher
in 2004 than in 2001.  Investment for future growth in Customer Solutions &
Support will see profits modestly lower in 2001 with growth expected to return
in 2002.

In other business sectors, Avionics and North America are expected to deliver
good profitable growth, the latter boosted by the acquisitions of the Control
Systems business and the AES electronic warfare business from Lockheed Martin.
 The recovery in Operations is expected to continue and good forward momentum
in International Partnerships is being driven by a strong order book.

In Commercial Aerospace, the combination of improved trading prospects and
synergies from the new integrated Airbus company, with recent successful
foreign exchange management, means prospects for the contribution to BAE
SYSTEMS from its 20% interest in Airbus are substantially enhanced. The
revised arrangements for launch aid repayments and the fair value adjustments
made prior to consolidation of the 20% Airbus stake will further benefit the
profitability and cash flow from BAE SYSTEMS' Airbus shareholding.  The fair
value adjustment on exchange rates was made at a rate of $0.94/Euro and
multi-year forward cover has been achieved at similarly attractive rates to
those secured in respect of the fair value arrangements, underpinning this
substantially enhanced profit outlook.

The Airbus family of aircraft has been a great engineering and marketing
success and this success will now manifest itself in strong underlying trading
performance.  Following the Airbus Integrated Company transaction 20% of sales
and profits for the new Airbus company will be consolidated by BAE SYSTEMS
resulting in the substantially enhanced profitability of the Commercial
Aerospace business sector.

The combination of these business sector prospects and higher interest charges
associated with the cash elements of the restructuring programme and the
Nimrod contract loss provision, mean that underlying results in 2001, before
charging restructuring provisions, are expected to be broadly unchanged
compared with the underlying performance in 2000, with a resumption of growth
anticipated in 2002.      

John Weston, Chief Executive, BAE SYSTEMS said:

'With the success of the integration of British Aerospace and MES, and our
recent US acquisitions, BAE SYSTEMS is now positioned as a world leading
systems company.  The measures we have announced today will strengthen our
business as we bridge the period between major Tornado and Eurofighter Typhoon
production, dealing decisively with legacy assets and accelerating our
transformation.

In addition,  the formation of the single Airbus company is an excellent move
for BAE SYSTEMS and it shareholders.  The additional value created will become
visible through the trading performance of the new company.

We now have a well balanced systems, defence and aerospace company,
underpinned by a robust balance sheet and good cash generation.  We are
confident about delivering growth in 2002 and beyond.' 


Issued by
BAE SYSTEMS plc