BAE Systems and VT unite as MoD agrees £4bn deal for new carriers

The Ministry of Defence finally gave the green light yesterday to the building of two new aircraft carriers – 14 years after it first established a team to study the £4bn project.

It may have been a long time coming, but the announcement will have been greeted with a sigh of relief in the shipyards at Govan and Scotstoun in Scotland and in Portsmouth, where 10,000 jobs will now be secured for the foreseeable future.

Trevor Harrison, head of the Northern Defence Industries' Group said the carriers represented the "the largest navy shipbuilding programme for a generation." He added: "We are confident that many of our best SMEs will be successful in winning sub-contract work at every level of the supply chain, giving a significant boost to the region's economy over the next six to eight years until the new ships come into service."

Other jobs hinging on of the awarding of big MoD contracts aren't likely to meet such a happy fate.

"This will be the last large procurement order that we will see from the MoD for some while," said Howard Wheeldon, a defence analyst at BGC partners. "There are bound to be cuts, and they will be dribbled out in typical fashion."

The carrier decision has been repeatedly delayed from the original deadline last year, feeding growing concerns in the defence industry that the Government's budget shortfalls would lead to deep cuts to its spending programme. Industry sources said that the MoD was dealing with a shortfall of at least £2bn.

The MoD said yesterday: "We have recently concluded our regular planning round which prioritises across the Defence programme. The examination of the equipment programme will be focused on identifying potential savings to the equipment programme in order to better support the frontline and our people at home."

The contract to begin building the carriers has yet to be signed. BAE Systems and VT Group, the leading British shipbuilders, had been waiting for the MoD's go-ahead before consummating a joint shipbuilding venture they agreed in principle last year. The companies will now proceed with the creation of the new group, to be called BVT Surface Fleet. Once that deal receives shareholder approval and is completed, the MoD will award the contract. "This is an milestone in the development of the carrier programme and plays a major part in the long-term sustainability of the UK naval sector and the transformation of our business," said BAE's chief executive Mike Turner.

"The programme will provide a strong order book and forward workload over the coming years."

The two carriers, to be called the Queen Elizabeth and the Prince of Wales, are expected to enter service in 2014 and 2016. Des Browne, Secretary of State for Defence, said: "This is an important day ...I am delighted we are moving closer to signing the contracts for the manufacture of the carriers."

The carrier represents the last in recent a flurry of procurement deals done by the MoD. In March, it signed a £13bn contract for a fleet of new in-flight refuelling tankers with a consortium of defence companies. It also selected General Dynamics as the designer of a new fleet of armoured vehicles, part of the Future Rapid Effect System (FRES) programme that seeks to replace several vehicle fleets.

It pushed back making a final investment decision, however, and industry sources fear that the MoD could cancel other parts of the FRES programme altogether. Other defence projects are also feared to be on the chopping block. Mr Wheeldon said: "I don't think we'll get any more Type 45s, I don't think we'll get any more Astutes, and I don't think we'll get tranche three of Eurofighter."

BAE Systems is waiting on an order for the fifth Astute attack submarine and for another order beyond that for six Type 45 Destroyer warships from the MoD. The £1bn order of seventy Future Lynx helicopters for the Army and Royal Navy is also feared to be on the verge of being axed.

The most potentially disruptive cancellation, if it occurs, would be of the expected third tranche of Eurofighter jets. The MoD had previously pledged to order 88 of the jets as part of a wider order of 232 between it and its partners in Spain, Germany and Italy. Wriggling out of that commitment, upon which jobs depend in all of those countries, including in Britain , would be politically difficult.