View from City Road: BAe papering over the prospects

Never mind the figures, just look at the dividend, was the message from British Aerospace yesterday. The 21 per cent increase in the interim payment was clearly intended to signal confidence in the success of the restructuring programme, despite a continued cash outflow and seemingly endless losses from commercial aircraft.

To some extent this looks justified. After three years of acting as their own receivers, BAe directors have put the business into a semblance of reasonable order.

The pounds 202m cash outflow recorded for the first six months may look horrendous in the light of the pounds 529m raised from selling Rover, but it was largely down to a mismatch between receipt of upfront payments on contracts and expenditure on the work. There is no reason to distrust BAe's claim that from now on the company should be more or less cash-neutral. If that is the case, the 39 per cent gearing leaves it much more comfortable than could have been hoped two years ago.

BAe's defence business also looks remarkably healthy against the backdrop of cuts worldwide in defence spending. The pounds 8.8bn order book suggests that Middle Eastern buyers are rather less penny-pinching than others. Airbus is at last repaying the years of investment with profits and, almost, cash.

The main area of concern remains commercial aircraft. Despite years of highly public effort, BAe still seems no closer to agreeing a partnership that might help to stem the crippling losses. Given the extent of over- capacity in the market - in turbo jets, for example, there may be room for only two or three manufacturers compared with a present tally of 16 worldwide - it is probably right that rivals are now addressing the problem with urgency.

Even if a deal can be done, however, BAe is almost certain to have to pay someone to take the business off its hands. The alternative, closure, would be a much more costly option.

Dividend bribe or not, BAe is some way from being out of the woods.