Europe's biggest defence contractor BAE Systems forecast flat sales this year after reporting a 7 per cent fall in 2011 profit, hit by continued cuts to military spending by the US and Britain.

Revenues fell 14 per cent to 19.15 billion pounds after the US army cut supply orders following its pullout from Iraq and after the delay of an order for 72 Eurofighter Typhoon jets by Saudi Arabia.

'It's a difficult market as defence spending reduces in our largest markets, the US and UK,' chief executive Ian King told reporters on Thursday, adding that 'little sales growth can be expected for the group in 2012.”

BAE, which is involved in the production of F-35 fighter jets and Astute class submarines systems, posted underlying earnings before interest, tax and amortisation (Ebita) of 2.02 billion pounds ($3.18 billion) for the year to the end of December 2011, slightly above expectations.

It had been expected to post 2011 Ebita of between 1.44 billion and 2.15 billion pounds, with the average at 1.9 billion pounds, according to a Thomson Reuters poll of 18 analysts.

The company increased total dividend 7.4 per cent to 18.8 pence but said the outlook was uncertain.

Shares in BAE, which have fallen 6 per cent in the last year, pared early losses and were 2.5 per cent down at 324.7 pence.

'BAE are forecasting flat 2012 sales and with the difficult market backdrop it looks like it will be a long, hard slog ahead for the company,' said Societe Generale analyst Zafar Khan.

BAE, which derives 47 per cent of its revenues from the US and 29 per cent from Britain, has been hit by cuts to military spending as governments look to reduce their debts.

The US capped its military budget at last year's levels for 2012, while Britain wants to cut defence spending by 8 per cent over the next four years - a move expected to disrupt its procurement plans.

BAE's US peers such as Lockheed Martin and Northrop Grumman have generally guided for flat to low single-digit sales decline and slightly lower margins.

Analysts believe the global nature of its business and long-term contracts make BAE better placed to handle the defence market recession than its rivals.

'Everyone talks as though the world defence market is caving in; this is not the case,' said Edward Hunt, a senior consultant at IHS Jane's Consulting.

'That almost 50 per cent of BAE sales were generated by the US shows that the West's budget cutting is a relative decline, not an absolute one... there also remains huge opportunity in programmes such as F-35 and similar NATO requirements.'

BAE, whose Eurofighter consortium failed to win a deal to supply the jets to India recently, said it could reduce the price of the jets on offer to get back into the running.

'We are in discussions with our partners on anything that we can do. And if that includes the need... to reduce the price then that is something we will look at,' said King.

The company is targeting growth in the Gulf and South America to offset the possibility of a continued slump in its main markets.

'Interest in Typhoon remains high and we have good prospects on deals with Oman, Malaysia, Qatar and the UAE as well as the Brazilian navy,' added King.

The British arms maker last year launched a review into its shipbuilding operations, which could lead to the closure of one or more of its British dockyards. It cut 3,000 jobs in the UK last year, having shed more than 15,000 positions globally over the previous two years. – Reuters