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BAE Systems well placed to profit from UAV spread

Events in Ukraine are likely to drive demand for unmanned aerial vehicles, providing another profitable opportunity for investors in Europe's biggest defence contractor
March 17, 2022

It’s difficult to gauge the effectiveness of weapons systems outside of what the Americans sometimes refer to as “real world situations”. We’re getting a taste of that through events on the ground in Ukraine. By the time hostilities cease, defence contractors – and government procurement agencies – should have a clearer idea of which systems best match the varying strategic requirements of NATO member states.

With many NATO members set to reverse years of real-term declines in defence spending, the question is where the increased budget allocations are headed? This has material implications for anyone looking to gain (or increase) exposure to the broader defence sector. It may be too early to judge whether we are witnessing any shifts to the way in which conventional warfare will be conducted in the future, although the terrible events in Ukraine do point to the growing importance of unmanned aerial vehicles (UAVs) in the battlefield.

The sight of Russian armoured columns being decimated through drone attacks probably wouldn’t come as a surprise to military strategists, nor the fact that most of the damage is being done by the low-cost, Turkish-made Bayraktar TB2 UAV. The effectiveness of this technology against advanced armoured vehicles has certainly improved commercial prospects for the world’s leading defence contractors in this area, not least because of its inherent cost effectiveness. Flying a fifth-generation F-35 through enemy-controlled airspace carries a significant degree of financial risk given its $78mn (£60mn) price tag. It’s worth considering that Ukraine received its initial consignment of TB2s in March 2019 at a cost of $1m-$2m apiece.

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