If I was asked this as a hypothetical question, while being interviewed for the company – as I was back in the late 1980’s at their London Headquarters for a position in their Legal department, then having at that time recently passed the Law Society Finals exam in Accounts, I could have explained that:

(i) Because no physical or material loss has occurred yet, the risk remains classified under ‘General Business and Geopolitical Risk’ within the ‘Strategic Report’ of the BAE Systems Annual Report – i.e. It does not sit as a ‘numerical liability’.

(ii) BAE Systems maintains a standard disclosure note for ‘Contingent Liabilities’ covering contract performance guarantees, litigation, and unquantifiable warranty or insurance disputes. So, if a loss occurred and insurers denied coverage under a force majeure dispute, it would typically be disclosed as an unquantified contingent liability until the dispute was legally resolved or settled.
 
Thus, if Iran cuts undersea data cables and BAE suffers downstream financial losses (i.e. communications blackouts disrupting localised operations, or supply chain bottlenecks), the financial treatment will depend upon ‘contractual terms’ rather than a pre-existing ‘balance sheet pocket’.

Business interruption (‘BI’) programs generally require direct physical loss or damage  to the insured’s own property to trigger coverage. If a third-party undersea cable is cut, it often creates a ‘pure delay’ or ‘denial of access’ gap. Standard commercial insurance policies explicitly exclude acts of war or hostile actions by sovereign states (like Iran). For coverage to exist at all, defence contractors rely on highly specialized Political Risk Insurance (‘PRI’) or specific Marine/Aviation War Risk extensions.
 
Rather than absorbing the loss onto the balance sheet immediately, defence firms rely on the underlying government or commercial contracts. If an event is determined not to be a contractually defined ‘force majeure’, the loss and expense are strictly allocated between the parties based on who assumed the operational risk.
 
BAE Systems’ balance sheet resilience against unexpected operational shocks or insurance gaps is underwritten by its massive liquidity and capital allocation strategy, which as of its latest reporting includes:

– An Order Backlog of £83.6 billion.
– A healthy Free Cash Flow of over £2.1 billion, providing significant working capital to absorb sudden operational disruptions.

So, what impact would such a loss have on the share price and investment? – See my comments below – because there is a Trap!

Such an unrecovered operational loss is likely to lead to a decrease in the company’s share price due to reduced earnings expectations and an increased risk premium.

An unrecovered operational or asset loss directly reduces net income.

Because equity markets value a company based on the present value of its future cash flows, a sudden drop in earnings causes a corresponding downward adjustment in the stock price.

If the market perceives that BAE Systems has exposed, uninsurable vulnerabilities in critical infrastructure (like Middle Eastern communications networks), investors will demand a higher rate of return to hold the stock. This increases the company’s cost of capital and compresses its valuation multiple.

To a switched-on General Counsel that propsect should scare the living daylights out of them because it could potentially be existential to the survival of their company.

While losing its entire business in the the Gulf would be a severe operational black eye that would wipe billions off BAE’s market capitalization and require years of restructuring, because 91% of its business is anchored outside of Saudi Arabia and the Gulf, BAE Systems would remain structurally sound and highly profitable. But there is a trap …

The ‘Trap’ – How can the UK exert any geopolitical influence in the Gulf without BAE?

‘Knocking out BAE in the Gulf’ – While you do not thereby knock out the company – you do knock out the UK as a geopolitical player in the Gulf.

That is becuase BAE Systems operates less as a typical commercial enterprise and more as an institutional arm of the UK state.

So, knocking out BAE’s commercial presence in the Middle East would effectively sever the primary artery of British geopolitical influence in the Gulf.

For decades, the UK’s status as a heavyweight player in the Gulf Cooperation Council (GCC) has not been sustained by massive troop deployments, but by defence dependencies. BAE Systems is the vehicle through which these critical relationships are built, maintained, and leveraged.

I wonder if Burnham and his Ministers have fully grasped this?

If they have – then what can they do to safeguard UK geopolitical power in the Gulf by persuading the US and Israel not to attack Iran?

Because if that happens – the UK will be cut off at the knees in the Gulf.

In which case will the consequential capital flight go to the UK or to the East?

In other words – this is bigger than BAE!

I assume that Bankers in the City of London have already figured this all out and are not concerned about the potential loss by BAE Systems of its entire business in the Gulf – even though this would leave Saudi Arabia, Jordan and the Gulf States vulnerable to invasion/civil insurrection – potentially resulting in a new geopolitical order?

Anecdotally – BAE did not make me an offer I could not refuse – in spite of the sight that greeted me at the top of the excalator to their reception. I would encounter this sight again – 6 years later in the offices of a Foreign Government’s Nuclear Energy Headquarters, where the guards in reception were armed with machine guns.

I had been invited to explain to their Head of Legal why a contractual exclusion clause did not exclude consequential loss in the event of a nuclear accident caused by a defect in design, materials or manufacture.

They had paid a top law firm to draft what they thought was an infallible exclusion clause, and struggled to understand how a top law firm could have missed the gaping hole that I pointed out.

In the same year I was interviewed by BAE Systems, I found myself in a conference room in a hotel in Seoul, South Korea – negotiating a multi-million pound power station contract. During the conference the alarm rang for a routine military curfew in the city. This provided me with an exceptional and perhaps unique opportunity to explain to my gracious hosts why my company needed a Force Majeure clause in the contract. Not least because certain losses would not be covered by our insurers, which could potentially put the company out of business. So, when I look today at what appears to be imminent in the Gulf – I am left wondering if our political leaders have fully grasped the potentially catastrophic contractual consequences for major UK companies of the incurrence of uninsured losses as a result of a US/Israeli attack on Iran? In other words – have they thought this all through rigorously?

I assume that the lights will be burning bright this weekend in the headquarters of BAE Systems in London.

AI (24.10.2026) –

‘The hypothetical loss of BAE Systems’ entire business in the Persian Gulf would have a devastating, multi-billion-pound ripple effect on thousands of UK jobs, particularly within the domestic aerospace manufacturing and engineering sectors.

The most immediate and severe impact would hit manufacturing plants across Northern England and Scotland.

The Typhoon fighter jet programme heavily relies on Gulf export contracts (such as Qatar’s major £5 billion order and recurring procurement interest from Saudi Arabia). BAE Systems explicitly states that these multi-billion-pound international agreements sustain and protect roughly 20,000 UK jobs. A complete loss of the Gulf market would immediately halt production lines.

Repatriation – Thousands of UK-based BAE Systems contractors, specialized technicians, and support personnel live and work in the Middle East to manage aircraft fleets, supply chains, and training schools.

Defence manufacturing has a high employment multiplier effect. For every single job directly at BAE Systems, multiple secondary roles are supported across the broader UK economy.’