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Saudi arms ruling raises questions over future BAE business

BAE Systems is not alone in its exposure to Saudi Arabia
June 24, 2019

The UK government will not grant new licences for the sale of arms to Saudi Arabia and its coalition partners that might be used in the Yemen conflict, while it prepares to contest a judgment from the Court of Appeal. On 20 June the court ruled British arms sales to the kingdom unlawful, throwing the possibility of certain future contracts between Saudi Arabia and key supplier BAE Systems (BA.) into doubt.

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Saudi Arabia has led a coalition of nine nations in a conflict in Yemen since 2015. As of November 2018, 6,872 civilians had been killed and 10,768 wounded, mostly by Saudi Arabia-led coalition airstrikes, according to the Office of the United Nations High Commissioner for Human Rights (OHCHR). The actual number of civilian casualties is likely to be much higher, Human Rights Watch claims.

The UK has licensed the sale of at least £4.7bn in arms to Saudi Arabia since the outbreak of the war. Campaign Against Arms Trade (CAAT) appealed a High Court judgment in 2017 that permitted the sale of arms for use in the conflict. The court found that the government had fallen foul of a legal requirement to deny export licences to companies in the event of a “clear risk” that the equipment “might be used in the commission of serious violations of international humanitarian law”. The court said that the government made “no concluded assessments of whether the Saudi-led coalition had committed violations of international humanitarian law in the past, during the Yemen conflict, and made no attempt to do so”, which the government denies. Following the ruling, CAAT’s Andrew Smith said “the bombing has created the worst humanitarian crisis in the world”, adding, “UK arms companies have profited every step of the way. The arms sales must stop immediately.” The ruling does not affect existing licences.

BAE Systems, which has had ties to Saudi Arabia since 1966, saw its shares fall as much as 4 per cent on the day of the ruling. The British aerospace and defence company generated 14 per cent of its 2018 group sales in Saudi Arabia. It supplies Typhoon and Tornado jets to the Royal Saudi Air Force, via an agreement with the UK government. BAE leads a pan-European consortium to provide and maintain 72 Typhoons that was thrown into jeopardy after the German government banned arms sales to Saudi Arabia last year, in response the murder of journalist Jamal Khashoggi. In March 2018, BAE signed a memorandum of intent to provide 48 further Typhoons to Saudi Arabia, which would require a new export licence. At its full-year results in February, it cautioned that the German ban may affect its ability to support its Saudi activities and “may have a consequential impact” on its financial performance. BAE does not currently have any firm expectations over the timeline for its second batch of Typhoon jets, a spokesperson told us.

After the ruling, a BAE spokesperson said that the company would assess the UK government’s evaluation of its decision-making on arms sales on the basis set out by the court, once made. “We continue to support the UK government in providing equipment, support and training under government-to-government agreements between the United Kingdom and Saudi Arabia,” the spokesperson added. 

BAE is the most heavily exposed British aerospace and defence company to the kingdom, but it is far from alone. Eurofighter Typhoon aircraft are powered by the EJ200 engine, which was developed by a consortium including Rolls-Royce (RR.), which generated £282m in revenues from Saudi Arabia in its full-year to 2018, or 1.8 per cent of its total revenue. A spokesperson said that the company would study the outcome of the ruling and will discuss next steps “closely with the UK government and our customers”. Meggitt (MGGT), meanwhile, provides $935,000 (£738,104) worth of equipment per Typhoon jet. It recently announced that it was supplying braking systems, including wheels, carbon brakes, landing gear computers and hydroelectric valves, as part of a £5bn order for 24 Typhoon aircraft for the Qatar Air Force, announced by BAE in September 2018. Meggitt declined to comment on this story.

Elsewhere, Chemring (CHG) has historically provided arms to Saudi Arabia, along with decoy technology for aircraft. As recently as 2017, Chemring listed the kingdom’s Ministry of Defence and Aviation as a “principal customer”, while in a 2013 ‘munitions outlook’, it identified Saudi Arabia as an opportunity for sales. It does not, however, mention Saudi Arabia in its 2018 report and its exposure to the kingdom is currently understood to be minimal. Chemring declined to comment on this story.

The UK’s role in providing military training to Saudi Arabia has also proven lucrative business. BAE’s Saudi Development & Training (SDT) programme was first established in 1994. In March 2014, Cobham (COB) was awarded a 30-month contract by BAE to provide air support to operational readiness training for the Saudi air force, as part of the Saudi British Defence Cooperation Programme. The contract ran from 2014 to 2016. Cobham still has exposure to the Saudi kingdom – it lists High Capabilities Telecom, a Saudi-based satellite communications company as a ‘technical service partner’ on its website. High Capabilities Telecom counts Cobham and BAE among its business partners and suppliers. Cobham declined to comment on this story.