Reaction Engines envisages a hypersonic spaceplane, called Skylon, which could radically cut the costs of launching satellites — or even, one day, allow passengers to fly across the world in around four hours.
Originally developed by former Rolls-Royce engineer Alan Bond and two partners more than 30 years ago, the Sabre technology has passed technical assessments by the US Air Force and the European Space Agency.
BAE will pay £20.6m for its stake, the first stage of an essential funding round to develop a ground-based demonstrator engine. It will have a seat on Reaction's board and will become a preferred supplier to the privately owned company.
The investment will unlock a long-awaited £60m grant package from the UK government, according to David Parker, head of the UK Space Agency.
"This is a very significant moment for two reasons," Mr Parker said. "A world-class aerospace company buying into the project is a vote of confidence in the technology, and BAE will bring in new skills and know-how to take it forward. The rocket science is OK; now the rocket engineering needs to be done."
Other private investors have been talking to Reaction Engines about joining the project. Mr Parker added: "More industrial partners will be needed."
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Mark Thomas, Reaction's managing director, insisted the group's ambitions for the engine to transform civil space and air travel remained the same, despite choosing a defence company as its first partner to develop the technology. "Our objective is to go into space. The company's motivation has not changed," he said.
However, the group has had to scale back its ambitions for a test engine in order to clinch the funding deal. Initially it had set out a budget of £250m for a more extensive demonstrator programme. Mr Thomas said that with BAE and the government grants, the group would have "no immediate funding needs".
Reaction aims to have a demonstrator engine up and running by 2020, and tests are expected to last about a year. The group will then need to find a customer to help fund the development of a test aircraft capable of withstanding hypersonic speeds of up to Mach 5. This could cost hundreds of millions of dollars, according to Mr Whitehead.
Possible partners include Nasa, Esa and aerospace companies such as Northrop Grumman of the US, which has a long-term project to build a hypersonic bomber.