Gulf state is looking to buy at least 60 aircraft to replace its ageing Mirage fleet
BAE Systems faced concerns over its growth prospects on Friday after the United Arab Emirates pulled out of talks to buy 60 Eurofighter Typhoon combat jets, in a blow to the UK government which had pushed hard to land the $9.8 billion deal.
The decision could boost the prospects of French company Dassault Aviation, which sells the rival Rafale plane, although that company has also suffered setbacks in a long-running and unpredictable UAE fighter contest.
The Eurofighter snub punctures Britain's hopes of a deal underpinning thousands of jobs after Prime Minister David Cameron travelled to the UAE last month to lobby for the Eurofighter Typhoon contract, which BAE had said could be a "major game-changer".
However, BAE said in a statement it had not factored the contract into its business plans.
Shares in BAE, Europe's biggest defence firm, fell 4.8 percent, making it the biggest faller in Britain's blue-chip FTSE 100 index. The announcement came after the market close on Thursday, when the shares had finished up 1.8 percent.
Fighter jet exports to regions such as the Middle East have become increasingly important to defence contractors such as BAE, which are facing declining military spending from their biggest customers in the United States and Europe.
The UAE's decision to abandon the talks was the second upset in the global fighter market in as many days after Brazil rejected offers from the United States and France and opted for Sweden's smaller but cheaper Gripen fighter.
Analysts said Britain's refusal to endorse military strikes in Syria after opposition in the UK parliament and its willingness to engage with Iran over a possible deal on its nuclear activities may have weighed against a deal.
"My sense is that the proposition is reasonably robust so I wouldn't be surprised if they were to come back to the table," said John Louth, director for defence, industries and society at the Royal United Services Institute in London.
"Having said that it looks as if decision makers in Abu Dhabi are disappointed with perhaps the UK's stance in relation to the Middle East and that goes beyond the industrial proposition. That's more to do with politics and reputation."
Investec analyst Chris Dyett said the UAE deal had been one of the largest available to BAE, which negotiates in the Middle East on behalf of other Eurofighter consortium partners EADS and Italy's Finmeccanica.
"It's going to be difficult for this company to grow," he said when asked about the impact on BAE of the UAE decision.
Analysts at JP Morgan Cazenove called it a major setback for BAE Systems, noting the contract could have been worth around 45 pence per BAE share.
BAE shares are now trading below their level when the aerospace industry gathered for the Dubai Airshow amid expectations of a Typhoon deal in November.
Thinly-traded shares in Rafale manufacturer Dassault Aviation rose over 2 percent. The company did not respond to requests for comment.
Dassault had been seen as the leading contender to win the UAE contract until it was publicly criticized by Abu Dhabi over the Rafale aircraft's price two years ago.
"It's difficult to see how it can be bad news for Dassault, although it is not clear whether this is a halt of the whole process or just for Typhoon," UBS analyst Charles Armitage said.
Experts who monitor UAE arms procurements have suggested the Gulf Arab state could wait a few more years to see if it can get Lockheed Martin's next-generation F-35 Lightning II.
One reason the UAE went initially for the Rafale to replace its fleet of 60 Mirage 2000-9 is that the French planes have stand-off capabilities which allow them to fire air-to-ground cruise missiles.
U.S. planes currently exported to the Gulf state come without such capabilities due to strict arms controls rules and a long-held policy of giving Israel a qualitative military advantage in the region.
A senior U.S. defence official told Reuters this month that Gulf demand for the F-35 was prompting Washington to review F-35 sales to the region sooner than expected.
Meanwhile, BAE Systems also said it had still not reached agreement with Saudi Arabia over the pricing of Eurofighter jets in an earlier deal.
The continued delay of the so-called Salaam deal has pushed BAE to repeatedly trim its full-year earnings forecasts, and JP Morgan Cazenove called the failure to reach a deal perplexing.
But not all analysts are worried about the pricing delay.
"Does it really matter if it drops into 2013 or 2014? The important part is it gets signed and it gets signed at an appropriate level of profitability to BAE," Armitage said.For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.