FIVE POUNDS was all it took to lure Mike Turner into the aerospace and defence
industry. In 1966, faced with a choice between a place at the London School
of Economics and a commercial apprenticeship with Hawker Siddeley, the
aircraft maker, he chose the one that paid the best.
“Mick Jagger was at the LSE, so maybe I could have been a Rolling Stone. But
it was £5 a week on a student grant, and £10 a week from Hawker and
sponsorship for a degree,” said Turner.
Forty years on, Jagger is still strutting his stuff for the Stones, but
Turner, 60 this year, is in his swansong. After six years as chief executive
of BAE Systems, Britain’s biggest defence contractor (the successor company
to Hawker and a host of other famous British aerospace names) he will stand
down at the end of August.
It has been an eventful reign. Turner stepped into the job just before a
long-simmering row with the Ministry of Defence burst into open warfare. A
couple of years later he made the unpopular decision to sell the group’s
stake in Airbus, leaving Britain without a direct interest in commercial
aircraft manufacture. And for most of his time at the top of BAE there has
been fierce public scrutiny and criticism over huge contracts to supply arms
and support to Saudi Arabia.
The Saudi affair won’t go away any time soon. Last week campaigners against
the arms trade were in the High Court challenging the Serious Fraud Office’s
decision to drop a long-running inquiry into alleged bribery in connection
with the contracts. The US Department of Justice is working on its own
investigation, and last week The Sunday Times revealed that dissident
American shareholders had in effect frozen some assets of Prince Bandar bin
Sultan, a former Saudi ambassador to America, as part of a lawsuit against
him and BAE executives – including the entire BAE board.
Turner, looking relaxed after a two-week break in Barbados – “I missed Michael
Winner, I think he had just gone home” – remains stalwart in his defence of
the company’s Saudi Arabian business. “We have done nothing illegal. I know
we have done nothing illegal. We have now had four years of it [the SFO and
other investigations] and I think that is unfair.”
Although its importance has been lost in the intervening years, the original
Saudi deal, signed by the Thatcher government in the late 1980s, was of
critical importance to BAE. It was struggling with a loss-making commercial
aircraft business and a disastrous investment in Rover, the British carmaker
later sold to BMW.
Some defence-industry executives believe that without Al-Yamamah, as the
contract was known, BAE would have gone bust. Turner is one of them. “It was
huge. I think we would have gone under without that relationship between the
UK government and Saudi Arabia. Both sides benefited. We got the
profit-ability – which a lot of people say was large but wasn’t, it was fair
– and the Saudis got an excellent aircraft and support. That is why they
have now gone for the Typhoon.”
Saudi Arabia recently signed up to take 72 Eurofighter Typhoon aircraft after
years of negotations. But the real value of the deal should come in
contracts to support the new aircraft, and then to build up Saudi Arabia’s
own defence industry. This last aspect could be the most promising of all.
“When John Reid [then defence secretary] was going out to Saudi to sign the
memorandum of understanding, he said to me ‘This is us, the UK government,
committing to the Kingdom that we will help them develop their defence
industrial base. We need you, BAE Systems, to stand behind that.’ And we
will.”
That relationship and the “Saudiisation” of BAE’s presence, with 57% of its
5,000 Saudi staff now locals rather than expatriates, should lead to work on
tanks, ships and other military equipment, not just aircraft. “If defence
spending in America should ever turn down, and there is absolutely no sign
of that happening, then Saudi is a huge opportunity,” said Turner.
Defence contracts provided the bedrock of his experience in BAE, but Turner
earned recognition for handling the group’s commercial aircraft interests
from the early 1990s. As well as its interest in Airbus – in those days a
loose consortium of national aerospace groups – BAE was struggling to sell
its own line of aircraft, the four-engined BAE 146, later rebranded the Avro
RJ.
“We weren’t selling them, we were leasing them, and to smaller airlines that
weren’t viable in the long term. You would lease them out one day, and they
would come back the next.”
BAE wanted to get out, but the cost was prohibitive. “The bill was estimated
at about £3.5 billion. We would have broken our [banking] covenants if we
had gone past £1 billion. So we had to gradually wind it down.” Eventually,
the cost of BAE extricating itself was about £4 billion.
Airbus was another problem tossed into Turner’s lap by Sir Dick Evans, then
chief executive. While the European grouping had enjoyed some success
challenging the dominance of Boeing, it needed to restructure if it was to
take on the 747 jumbo jet that monopolised the market for large aircraft.
With four players around the Airbus table – the French, Germans, Spanish and
the Brits – progress was painfully slow.
BAE eventually broke the impasse, buying Marconi’s defence business to create
a British powerhouse. To stay competitive, the other European players united
their defence and aerospace interests, resulting in the formation of EADS.
“Once there were just two round the table – ourselves and EADS – we could
get it done.”
BAE eventually turned its back on Airbus, alarming White-hall in the process.
Turner said the decision was a “no-brainer” given Boeing’s decision to fight
the Europeans toe-to-toe, and the investment that would have been necessary
in new aircraft.
“At the time Boeing was going through this really difficult decision of
whether to exit commercial aircraft. They knew it was going to take tens of
billions of dollars to create a family of aircraft to match the one
developed by Airbus.
“Harry Stonecipher [who took over as Boeing boss in 2003] decided to take
Airbus on. That changed the market dynamic. We had a real competitor again.
“We could see that big investment would be needed for the A350 [a new
medium-sized jet] and the new A320 [the best-sell-ing small aircraft], and
that it was possible, because of the World Trade Organisation, that the
shareholders would have put their own money in. And I was never really happy
with the cyclical nature of the commercial aerospace business. I saw it as a
great opportunity for us [to sell] and we convinced the board of that.”
The decision was not well received in government. Turner confirmed that there
were several “conversations” with “senior civil servants and ministers”. “I
understand their position. But I had to do the right thing for shareholders.”
By this stage – BAE sold the Airbus stake in 2006 – Turner was no stranger to
confrontation with ministers. The biggest show-down came only a few months
after he took the top job, when crises on two big Ministry of Defence
contracts burst into the public domain.
The first was for Astute, a new generation of nuclear hunter-killer
submarines. The second was for the refurbishment of a fleet of Nimrod
maritime reconnaissance aircraft. Both had run out of control, with the
programmes years behind schedule and hundreds of millions of pounds over
budget.
After attempts to hammer out a solution behind the scenes failed, the
government decided to call BAE’s bluff. Its hardball tactics forced the
group to tell shareholders – out of the blue – that there was a huge black
hole in two of its biggest contracts.
BAE’s share price dropped 20% in a single day, and investors were furious that
they had not been kept informed. The company was eventually forced to take a
£750m hit.
The blame, according to Turner, lay with the original contracts. The MoD and
BAE signed fixed-price deals without the underlying risk and technology
being fully understood.
As well as sorting out the immediate problem, he was determined to improve
what he called the “terms of trade” with the MoD. It had been intent on
full-scale competitions for big contracts, with, BAE felt, a harmful effect
on Britain’s domestic defence industry.
“You can’t keep having these international competitions, opening up your
market to everybody, awarding these contracts to overseas firms, with a
little bit of low-tech offset to the UK, and expect to maintain a defence
industrial base.”
Turner was prepared to play tough. Thanks to the Marconi deal and other
defence-industry consolidation, BAE was Britain’s last big defence group,
capable of undertaking large and complex projects. If BAE decided to take
its business elsewhere – and it had already built up a size-able portfolio
in America – Britain would be left in the embarrassing position of not
having its own defence capability.
“What I made clear with the prime minister and the cabinet, was, do they want
one or none? @ For me it was a no-brainer for the country – it’s
better to have one than none.” Turner’s stand eventually led to a reshaping
of the Nimrod and Astute deals, and the adoption, through defence
procurement minister Lord Drayson, of a defence industrial strategy. This
provides for the allocation of work, rather than competition for contracts,
where it would preserve vital capabilities.
But Drayson left the government last year, and a budget squeeze means there is
renewed uncertainty over what programmes the government will buy (see panel
on right).
As for Turner, he is looking forward to a slightly easier life, and is looking
around for nonexecutive posts. “With this job you are never able to switch
off. I would like to do something, but do less.”
BUDGET FEARS
THIS WEEK the Defence Management Board, a group comprising the top civil
servants and serving officers in the defence establishment – along with
three outsiders, who sit as nonexecutive directors – will convene to try to
do the impossible.
They must make the Ministry of Defence’s spending programme fit its budget.
Unfortunately, the shopping list is way beyond the funds available.
The expense of operations in Iraq and Afghanistan, combined with several big
programmes for new kit, have left them with a shortfall estimated at between
£1.5 billion and £2 billion.
Defence commentators have speculated that one of the big spending programmes –
the £4 billion aircraft carriers for the Royal Navy, the third set of
Eurofighter Typhoons, or the £10 billion new fleet of armoured vehicles –
could be cancelled.
Turner said that while there is a chance of this happening, it was more likely
that some or all would be delayed. “It costs more in the long term, but
that’s the way it happens.”
BAE’s chief executive said pressure on the budget is inevitable because there
are few votes in raising defence spending. “In America, there are votes in
defence spending. In Britain, it’s health, education and crime. If you ask
people about security, yes they want it, but they don’t associate that with
the spending necessary to give our armed forces the equipment they need to
go and fight beyond our shores.”
A delay to the carrier programme would be particularly problematic for defence
groups. A planned merger of BAE and VT’s shipbuilding operations is
predicated on the carrier deal. Executives close to the negotiations still
expect the carriers to be built, but fear there could be long delays.
