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The government has published the letter sent to the prime minister by BAE Systems which warned it would be more expensive to cancel one of the new aircraft carriers than to complete them both.
The letter, marked "in strict confidence" and written by BAE's CEO Ian King, was released today by the government in an attempt to show that they had little choice but to complete to order signed by the previous Labour government.
BAE Systems told the prime minister the cost of completing both HMS Queen Elizabeth and HMS Prince of Wales would be £5.25bn, but due to contractual obligations the cost of building just one would be £4.8bn plus an extra of £690m in cancellation costs.
King also told Cameron that ditching one of the carriers would lead to job losses and would put the survival of the advanced manufacturing and shipbuilding sector at serious risk.
In the most striking passages King warns: "We really do need a reality check here to ensure that the business and the future of the sector is not put at unacceptable risk.”
He adds: "The cancellation of Prince of Wales would mean that production in all BAE Systems shipyards would cease at the end of 2012," he said.
"There is no further production work planned until steel is due to be cut on the new frigate programme in 2016. This means that the business would be unsustainable, and all three yards would close by early 2013, with the loss of more than 5,000 jobs in BAE Systems and many more across the UK in hundreds of the companies in the supply chain."
He added: "It would be a huge challenge, managerially and financially to sustain our high skilled workforce in those circumstances.”
George Osborne announced he would hand over the letter to the Commons Treasury committee this morning when he appeared to defend the coalition's comprehensive spending review.
The Conservative chair of the committee, Andrew Tyrie, told the Evening Standard that the defence manufacturer "effectively held a gun to the head of the government".
Speaking during a debate on defence in the Commons this afternoon defence secretary Liam Fox said the coalition had been lumbered with "existing contractual obligations" they could not avoid.
"If we had a clean sheet of paper, without the financial pressures facing all Government departments as a result of the inherited fiscal deficit, if we were unencumbered by existing contractual obligations and in different operational circumstances the results would undoubtedly have been different," he said.
"Nevertheless, although difficult the decisions we have made are coherent and consistent and will provide us with the capabilities we require for the future."
The government has attracted some ridicule for announcing it will supply the Royal Navy with two huge new carriers but will not be able provide aircraft to fly from them until 2020.
Once both carriers have been completed it is expected one will be mothballed or sold in order to save money, or in Ministry of Defence speak it will be held in "extended readiness".
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