Despite Currency Volatility, U.K. Forges Ahead with Core Capability Acquisitions

by Dan Darling, International Military Markets Analyst, Forecast International.

Despite the turbulence endured by the British currency since the surprise result of last month’s referendum on the United Kingdom’s membership in the European Union, the U.K. Ministry of Defence moved forward on day one of the Farnborough Air Show with announcements of two major purchases.

The two projects – involving the purchase of nine P-8A maritime patrol aircraft and 50 AH-64E Apache attack helicopters – are being undertaken via the U.S. government-to-government Foreign Military Sales (FMS) mechanism.

The purchases are denominated in U.S. dollars, an issue that had raised concerns as the British pound twice slumped to 31-year lows versus the American currency in the week leading up to Farnborough.  At nearly 1.27 pounds to the dollar and dropping, the worry was that the two pricey procurements (the price tag for the Apache purchase alone is $2.3 billion) might prove prohibitive at a time near- and medium-term currency fluctuations and economic uncertainties are muddying the longer-term defense budgetary picture.

However, Britain’s Defence Procurement Minister Philip Dunne noted at the Royal International Air Tattoo on July 10 that the government had purchased currency hedges to protect its short-term dollar-denominated arms procurements from such fluctuations in the value of the pound sterling. With hedge protections in place, the U.K. moved forward as expected on the two projects, each considered a core capability element of the future Joint Force 2025 spelled out in the 2015 Strategic Defence and Security Review (SDSR).

The P-8 Poseidon purchase allows Britain to reconstitute its fixed-wing maritime patrol capability six years after the prior long-term solution, the BAE Systems Nimrod MRA4, was scrapped under the 2010 SDSR. Citing GBP2 billion worth of potential savings by terminating the program, the MoD opted to forgo fielding an MPA platform in the near term and, as a result, nine Nimrod MRA4s were chopped up and sold for scrap in January 2011 before ever coming into service.

The official British P-8 FMS request has already been cleared by the U.S. State Department, with notification sent to Congress by the Pentagon’s Defense Security Cooperation Agency (DSCA) on March 24, 2016. The FMS announcement of that date involves the nine P-8As, plus a package of equipment and associated training and support, all combining for an estimated price tag (at the time) of $3.2 billion – now up to nearly $3.9 billion due to the slide in the British pound.

The expectation is that the new P-8s will begin to come on line within the 2019-2020 timeframe, coinciding with Initial Operational Capability (IOC) of the first of two aircraft carriers, HMS Queen Elizabeth, with the Royal Navy. The P-8s will also provide protection for the Royal Navy’s nuclear attack submarines.

The Apache purchase announcement comes nearly a year after the DSCA announced that Britain’s $3 billion FMS request for the remanufacture of 50 British Army Air Corps WAH-64Ds had been authorized. Instead, however, the AH-64Es will be procured off-the-shelf in new-build condition via the U.S. production line.

The planned acquisitions of the P-8 MPAs and AH-64E helicopters may possibly be accompanied by a further announcement for a limited number of series-production F-35s, with which the U.K. hopes to field two operational units totaling 24 of the fighters by 2023. The long-term procurement goal of 138 F-35s vaguely spelled out in the 2015 SDSR (hinting that the full acquisition would unfold over the lifetime of the program) could fall victim to a new government’s review of existing programs under any successive five-year SDSR.

Or it is quite possible that without a market correction in the value of the British pound versus the dollar, the full 138-unit fleet will prove unaffordable in the longer term, though that remains subject to many variables (strength of the British economy, British politics, falling F-35 unit prices in later production batches, etc.) that would still have to play out. Indeed, even the full cost of the P-8 and AH-64E Guardians could prove prohibitive if a currency rebound fails to occur, with payments stretching beyond 2016 weighing progressively heavier on the defense equipment portion of the larger budget.

In the short term, however, forward movement on the two major defense projects announced at Farnborough indicates that British defense policymakers aim to continue unimpeded by the Brexit vote. Whether that indeed happens under a reshuffled Conservative Party government (almost certainly to be headed by Theresa May) depends largely on whether the British economy can avoid a slump on the horizon in the wake of the June 23 referendum – which in and of itself may very well have rendered the 2015 SDSR a dead letter.

The Forecast International International Military Markets series examines the military capabilities, equipment requirements, and force structures inventories of 140 countries, with corresponding coverage of the political and economic trends shaping the defense market outlook for individual countries and regions.Forecast FI Logo

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