QNTQY Qinetiq Group PLC (PK)

Some of Europe's biggest defense companies appear likely to rely more heavily on service and support work and the drive for exports in the months ahead as cash-strapped governments reign in spending on armaments.

The market for exports, particularly to nations in the Asia-Pacific region and the Middle East, will be competitive: some of the U.S.'s defense giants, such as Lockheed Martin Corp. (LMT), are pursuing the same strategies.

Defense exports are a sensitive issue, but, in the current economic climate, the U.S. and British governments are keen to promote trade, said Ian King, chief executive of BAE Systems PLC (BA.LN), the U.K.'s biggest defense provider.

BAE Systems isn't hanging about. Some of its executives, including Chairman Dick Olver, this week accompanied to India a British government delegation led by Prime Minister David Cameron. The London-based company and Indian partner Hindustan Aeronautics Ltd. Wednesday secured a GBP500 million deal to supply products and services to enable a 57 Hawk Advanced Jet Trainer aircraft to be built under license for the Indian air force and Indian navy. The engines will be provided by Rolls-Royce PLC (RR.LN).

King called the deal "a great first step," and added that India has the potential to become the world's second-biggest spender on defense after the U.S. in 10 years' time.

Finmeccanica SpA (FNC.MI), maker of AugustaWestland helicopters, also signaled the importance of the Indian market. The Italian defense provider highlighted an order to supply 12 AW101 helicopters to the Indian air force as a key order in the first half.

But the trend toward diversification is most evident at BAE Systems, which counts the U.K., the U.S., Australia, India, Saudi Arabia, South Africa and Sweden as its seven "home" markets. King identified Brazil as a possible eighth. BAE Systems' U.K. business in the first half accounted for only 20% of group sales.

The British government currently is looking to cut spending as it seeks to bridge a gaping budget deficit. At the same time, it is carrying out a strategic defense and security review, which is due to report in the autumn and is expected to take the axe to some defense spending.

U.K. defense technology company QinetiQ Group PLC (QQ.LN), which used to be the U.K. government's defense research and development arm, said it had already received notice that the U.K. and the U.S. governments are seeking to reduce costs and focus on direct operational requirements and it was experiencing delays in orders from both countries.

BAE Systems, whose order book at June 30 fell to GBP43.6 billion from GBP44.3 billion a year earlier, said its customer support and services activities accounted for 49% of first-half sales.

It Thursday reported net profit in the six-month period ended June 30 of GBP618 million compared with a net loss of GBP82 million in the same period a year earlier. Sales climbed 9% to GBP10.64 billion from GBP9.75 billion. Earnings before interest, tax and amortization, a measure closely watched by analysts, rose 14% to GBP1.11 billion from GBP978 million.

Engine manufacturer Rolls-Royce, the world's second-largest maker of commercial and military jet engines after General Electric Co. (GE), said it was benefiting from growth in the Middle East and Asia and its wide geographic spread as some customers reduce orders due to the economic downturn.

Chief Executive John Rose noted that defense was only 25% of Rolls-Royce's business, and more than half of that revenue came from service contracts.

The company Thursday reported first-half profit excluding certain financial items, the preferred measure of the company's operational performance, of GBP594 million, up from GBP593 million a year earlier. Revenue rose 5.4% to GBP5.42 billion from GBP5.14 billion and its order book was steady, at GBP58.4 billion from GBP58.3 billion a year ago.

Finmeccanica Wednesday reported first-half net profit fell 20% year-on-year to EUR194 million from EUR242 million. Revenue edged up 1.5% to EUR8.65 billion from EUR8.52 billion.

French defense and aerospace supplier Thales SA (HO.FR) Wednesday said first-half net profit rose to EUR138 million from EUR12 million in the same period a year earlier. Revenue rose 4% to EUR5.96 billion, but order intake fell 12% to EUR5.14 billion.

-By Jonathan Buck, Dow Jones Newswires; +44 (0)207 842 9237; jonathan.buck@dowjones.com

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