UK defence firms are making a killing, highest turnovers in 20 years

Soaring profits and robust revenue growth have been hallmarks of UK defence firms in the first half of 2024.

The Russia-Ukraine war, Israel’s war on Gaza and Lebanon as well as escalating tensions between the US and China in the Asia-Pacific region – these difficult realities have enabled British defence companies reap windfall profits.

Let’s take a quick look at the progress made by some big industry names in the past two years.

Rolls-Royce Defence: The company saw its profits surge more than two thirds while revenues were up significantly. Strategic cost-cutting and an influx of unprecedented orders were the main drivers behind the trend.

BAE Systems: The UK’s leading defence giant also delivered a solid performance, with profits rising at a better than expected pace of 5 percent.

Babcock International: The defence contractor maintained its upward trajectory in 2024, achieving robust financial growth.

QinetiQ: The company enjoyed steady gains, reporting consistent increases across its operations.

Serco: Despite industry-wide momentum, unlike its peers, Serco faced difficulties during the period, with profits and revenues contracting slightly.

The current results stem from the momentum built upon 2023, a rewarding financial year for the UK’s defence sector with a reported turnover of £28 billion ($35.5B), up from £22.8 billion ($29B) in 2022, according to British trade association, ADS.

Despite challenges such as supply chain disruptions, high energy prices, and looming recession, the sector demonstrated resilience and adaptability.

British defence companies featuring in the global top 100 have consistently increased their revenues, especially since the onset of the Russia-Ukraine conflict.

“In a year where we saw rising instability across Europe, the Middle East, and other parts of the world, it brings into focus the vital role we play in protecting national security,” says BAE’s CEO, Charles Woodburn, commenting on the company’s successful run in 2023.

Meanwhile, British defence contractor Babcock rejoined the global top 100 defence companies in 2023, finding itself a spot ahead of competitors like Serco and QinetiQ.

The current results stem from the momentum built upon 2023, a rewarding financial year for the UK’s defence sector with a reported turnover of £28 billion ($35.5B), up from £22.8 billion ($29B) in 2022, according to British trade association, ADS.

Despite challenges such as supply chain disruptions, high energy prices, and looming recession, the sector demonstrated resilience and adaptability.

British defence companies featuring in the global top 100 have consistently increased their revenues, especially since the onset of the Russia-Ukraine conflict.

“In a year where we saw rising instability across Europe, the Middle East, and other parts of the world, it brings into focus the vital role we play in protecting national security,” says BAE’s CEO, Charles Woodburn, commenting on the company’s successful run in 2023.

Meanwhile, British defence contractor Babcock rejoined the global top 100 defence companies in 2023, finding itself a spot ahead of competitors like Serco and QinetiQ.

However, the increases seen in the report-based currency cannot be protected when converted into dollars in 2022. As shown in Graph 3, defence revenues in 2022 declined in dollar terms due to the depreciation of the British currency, which began in May and hit a historic low by September 2022.

The British government is set to release the full report of its defence spendings on December 17, but so far two contrasting scenarios have been projected by ADS and Swedish global security observer Stockholm International Peace Research Institute (SIPRI).

ADS says that with the Russia-Ukraine conflict on the horizon and the Gulf states shoring up their defences with UK-made weapons, British defence companies amassed a massive turnover of £24.9 billion ($31.5B) in 2021.

A year later, however, ADS reported a small dip in the country’s defence revenue, marking a turnover of £23.7 billion ($30B), which was still far ahead as opposed to other sectors. This even exceeds the performance of US defence companies, whose revenue fell by 7.9 percent, while British firms managed to grow at 2.6 percent.

The government’s role

The Russia-Ukraine war led to a major shift in the UK government’s security perception. In 2022-2023, the country bolstered its military infrastructure, marking the highest defence expenditure in the past two decades, even reversing a trend that saw health expenditure on a constant rise since the 1960s. In 2022, the UK devoted 11.1 percent of its GDP to its health spendings, but a year later it was reduced to 10.9 percent.

The UK's Ministry of Defence (MOD) is the primary customer for domestic defence suppliers. For example, QinetiQ and Babcock International each earn over 50 percent of their revenue from projects they signed with the British government.

Alongside other nations, the UK has also been a key supporter of Ukraine, committing £7.8 billion ($9.9B) in military support so far.

Between 2019 and 2023, the war-torn country ranked as the third-largest destination for British military sales, highlighting the vital role that UK defence firms have played in arming Ukraine’s military in the years preceding the full-blown conflict with Russia.

International trade and exports

Experiencing a surge in exports in the past five years, the UK has cemented its position as one of the top players in the global defence market.

From 2019 to 2023, the UK ranked as the 7th largest global exporter in international defence sales. In 2022 alone, UK defence exports generated approximately £11.2 billion ($15B), accounting for more than a third of the industry’s total revenue—a staggering 69.9% increase from previous years. The upward trajectory continued in 2023, with exports reaching £9.5 billion ($12B), according to ADS.

This growth is largely attributed to a series of new contracts that have expanded the UK's reach in the global defence sector. The Middle East, in particular, has become a crucial market for UK exports, with countries like Qatar now leading as the top destination for British defence products.

In fact, military spending in the Middle East saw a dramatic 9 percent rise in 2023, amounting to around $200 billion—the largest annual increase in a decade, according to SIPRI.

Stock market dynamics

The performance of defence companies in the stock market is traditionally tied to conflicts and geopolitical tensions. Stock prices generally serve as indicators of both the health of the defence sector and investor confidence.

Rolls-Royce has seen its stock price almost quadruple since the start of the Ukraine war. While Rolls-Royce’s defence segment accounts for only 26 percent of its total revenue, the company’s aerospace dominance and ongoing demand for military engines and systems have contributed to consistent upward movement in its stock price.

Therefore, BAE Systems stands out as a prime example of the sector's success with 96 percent of its revenue tied to defence. During the same period, BAE’s stock price has doubled to around £1300 ($1600).

Other defence players have also shown impressive growth over the past three years. Babcock International’s stock surged more than two-thirds to £500 ($630), while QinetiQ recorded similar gains, rising to £425($540).

Some defence companies experienced volatility despite the rising share prices. The reason being their reliance on non-defence contracts, with Serco, for example, facing some setbacks, particularly following a major loss in its Australian migration agreement.

This highlights that companies with a larger proportion of their revenue tied to defence tend to benefit more from the current climate of rising military spending.

The FTSE 100 index, which tells us how the UK's most valuable companies performed, has captured this trend – that except for defence firms, other sectors only grew at 10 percent during the same period.

Therefore, investors increasingly view defence companies as reliable growth opportunities, betting on sustained demand in an uncertain geopolitical landscape.

Outlook for the Industry

Investors remain increasingly bullish on the sector. Despite halting some contracts with Israel, the UK defence industry is expected to grow as global tensions and military budgets increase.

Recently BAE secured a new contract, worth more than $200 million while Serco inks a $97 million contract.

The government has promised to raise defence spending to 2.5 percent of GDP by 2030, the highest level since 1997. The UK will also commit to providing £3 billion ($3.8B) in military support from 2024 to 2025.

The sector is now on track to mark another strong year of profit as defence giants like BAE and Roll royce recently boosted their outlook for the full year of 2024.