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BAE Systems cuts jobs and ends Portsmouth shipbuilding

By Brenda Goh

LONDON (Reuters) - Defense contractor BAE Systems plans to lay off 1,775 ship workers across the UK as the biggest warships Britain has ever built near completion with no similar-sized orders on the horizon.

The cuts signal the end of more than 500 years of shipbuilding in Portsmouth on England's south coast, with the company consolidating operations at the Govan and Scotstoun yards in Glasgow, Scotland.

The company, which has been reviewing its shipbuilding operations for more than a year, said that after consultation with Britain's Ministry of Defence (MoD) it had decided that Glasgow would be the most effective location for the manufacture of future warships.

"Under these proposals, shipbuilding operations at Portsmouth will cease in the second half of 2014," it said, adding the cost of the restructuring would be borne by the MoD.

Defense industry executives said that keeping all three British yards open was never realistic, given that the Queen Elizabeth-class aircraft carriers are nearing completion, while analysts welcomed the clarification on the future of BAE's naval shipbuilding business.

The first of the new aircraft carriers is expected to begin sea trials in 2017 and a manufacturing contract for Type 26 Global Combat ships is not expected to be awarded until the end of next year.

However, unions and politicians said the restructuring decision was politically motivated, citing next year's Scottish referendum on independence, which the British government is strongly against.

"These are extremely difficult decisions and our first thoughts are with all of those that are affected," British Prime Minister David Cameron told parliament.

A spokesman for the Prime Minister declined to say whether Scotland's referendum had played any part in the decision and whether shipbuilding would stay in Scotland if it does become independent.

CONTRACT CHANGES

BAE, which heads a consortium that includes Babcock , Rolls-Royce and Thales UK , also said it had agreed changes to the aircraft carrier contract it signed with MoD in 2009.

This changes the consortium's fee to a 50-50 risk-share arrangement that provides greater cost-performance incentives. The maximum risk to the companies continues to be limited to the loss of their profit opportunity, it said.

It also unveiled a proposed MoD contract for three offshore patrol vessels, which would help to support shipbuilding until work begins on the Type 26 ships. Under the previous arrangement, the MoD would have had to pay for any periods when there is no shipbuilding activity.

"It's a better outcome than I thought it would be," said Agency Partners analyst Nick Cunningham, describing it as a sensible solution that avoids the political outcry that would have followed had the government been forced to pay BAE while shipyards remained idle.

Shares in BAE remained largely flat on Wednesday after news of the job cuts was reported by the BBC late on Tuesday. By 1419 GMT they were up 0.6 percent at 456 pence.

The cuts will affect 940 workers in Portsmouth in 2014, as well as 835 at Filton, in south west England, and Glasgow and Rosyth in Scotland through to 2016, BAE said.

BAE employs 3,200 people at its Glasgow shipyards and 1,200 in shipbuilding in Portsmouth, though it has a total of 4,100 employees in and around the English city steeped in maritime history. The company will continue to keep Portsmouth as the base for its maritime services business, it said.

Union leaders will meet BAE senior executives early next week to discuss the cuts.

(Additional reporting by Andrew Osborn and William James; Editing by David Goodman)

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