The Merlin helicopter sitting on a factory floor in Yeovil is a familiar sight to James Bond aficionados: it featured in the climactic shootout of the 2012 film, Skyfall.

Workers at the Somerset factory are upgrading the aircraft for the Canadian air force, a lucrative source of income for its owner, Italian state-backed weapons maker Leonardo.

But Leonardo has its eyes on a bigger prize for Yeovil: after a drawn-out process, it has emerged as the single bidder for a £1bn contract to build new medium-sized helicopters to replace the Pumas used for decades by the Royal Air Force in conflicts around the world.

Yet with Labour in the UK carrying out a strategic defence review, some in the industry believe the helicopter purchase could be scrapped altogether by a government that has stressed the gloomy state of the public finances.

What happens next matters hugely for Britain’s last remaining helicopter factory, the Somerset market town of Yeovil, and Britain’s wider defence industry. In a local population of about 50,000 people – with several areas in the 20% most deprived wards in England – Leonardo employs 3,300, many of them at higher pay than the surrounding area.

The town’s history is inseparable from the factory. The first aircraft, a seaplane, left the Westland aircraft works on 1 January 1916 on a horse and cart, according to Leonardo. During the second world war the site – which still retains some overgrown pillboxes – made the Seafire, the marine version of the famous Spitfire, before switching to helicopters. Westland became a household name in the 1980s when a row over its future nearly brought down the government of Margaret Thatcher.

Leonardo insists the MoD purchase is not at risk, despite rivals Airbus and Sikorsky quitting the competition last month. Clive Higgins, the chief executive of Leonardo’s UK arm, said that “we absolutely need a medium-lift platform” and that he was confident that the company can meet specifications that rivals thought were too testing.

Leonardo, like the defence industry as a whole, has benefited from the huge rise in military spending prompted by Russia’s full-scale invasion of Ukraine. The Italian company’s share price has more than tripled since the start of 2022, valuing it at more than €12bn (£10bn).

The invasion, other conflicts such as the Middle East crisis, and the perceived threat of Chinese aggression have contributed towards a consensus among Nato allies that more military spending is required. Labour under Keir Starmer and defence secretary John Healey are on board.

Previous Labour leader Jeremy Corbyn was deeply sceptical of the weapons industry, and Leonardo’s Edinburgh operation has been targeted by protesters alleging it supplies parts for the F35 fighter jets used by Israel in Gaza. (Leonardo said it is subject to UK government export controls and does not supply equipment direct to Israel.) But Starmer’s Labour wants to use weapons purchases to support UK manufacturing jobs – deepening a policy introduced by the previous Conservative government.

That should be good news for jobs at Yeovil. Leonardo was always in a good position to win the contract against rival bids from European aerospace champion Airbus and America’s Sikorsky, owned by Lockheed Martin. Airbus had pledged to invest in an assembly line in Broughton, north Wales, and Sikorsky in Gosport, Hampshire.

However, the new medium helicopter competition has turned into a headache after Airbus and Sikorsky pulled out of the running on the day that bids were supposed to be sent in. Both companies said they did not believe it was possible to deliver the programme at the cost envisaged.

Leonardo is putting forward the AW149, capable of carrying 19 troops, which is currently made in Italy, albeit using some parts and designs made in Yeovil. Leonardo has already started to install equipment for a new UK line, ready to produce the new helicopters within two years.

That would add to the existing vast hangar where new aircraft are assembled – mostly by hand – to satisfy exacting military customers. Merlin and Wildcat choppers for Brazil, Portugal and Norway were among those dismantled to varying degrees when the Guardian visited the factory which sits in an 89-hectare (220-acre) site.

Adam Clarke, the managing director of Leonardo Helicopters UK, repeatedly touted the factory’s “end-to-end capability” of the UK’s only helicopter factory. The sprawling site’s responsibilities range from making helicopter blades – stacked in racks in a new warehouse – and gearboxes to certifying airworthiness and training pilots in simulators.

“You can’t simply say ‘I’m going to take an aircraft that has never been built and stick it in a factory that’s never done it’,” said Higgins – a swipe at “pop-up factory” rivals that had planned to assemble helicopters from foreign-made parts.

“You could well get that level of service from another international partner,” he said, “but would you be at the front of the queue against all of the other international customers and their indigenous domestic market? You might not be.”

After passing through various owners, Italy’s Finmeccanica took over Westland in 2004 before changing its name to the Renaissance inventor (and would-be helicopter designer) Leonardo da Vinci.

Leonardo’s UK operations made profits of £188m in 2023 on turnover of £2.3bn. £830m of those sales came from helicopters. But another key source of business is work on radios and sensors on the joint Tempest programme between the UK, Italy and Japan to produce a new fighter jet by 2035.

Tempest will be a vital part of the Labour review, but Higgins indicated that there is little doubt over its future.

“There’s activity taking place so rapidly on this,” he said. “I think government are very keen to make sure it’s moving forward and we’ll see other updates in the next few weeks I’m sure.”

But on the helicopter contract, Yeovil may have to wait. The Labour review is due to report in the spring.

Helicopters – like other expensive military kit – often get overhauled, with replacements to engines or electronics stretching the life of the “same” aircraft out for decades. Airbus last overhauled the Puma in 2011 with new engines and cockpits, and Bruno Even, the chief executive of Airbus Helicopters, claimed it could operate until 2035.

By that point “vertical lift” may have changed. Nato is working on the next-generation rotorcraft capability (NGRC) project which could result in more “tilt-rotor” craft such as Boeing’s V-22 Osprey, which can fly faster horizontally and vertically, while a European effort involves Airbus and Leonardo. Airbus is focusing on a design that puts extra backwards-facing rotors on a helicopter so it can go faster.

Meanwhile, the rise of drones in civilian life and warfare and electric passenger rotorcraft could add more challenges to the helicopter industry.

Making do with the Pumas could prove an attractive prospect to politicians looking for savings. Leonardo has already bet heavily on tilt-rotor craft, but Clarke said the hope to translate “paperwork exercises” into working machines by 2035 is “very very sporty”.

“I think it will be very expensive,” he said. “If you’re speaking from a taxpayer’s perspective, I don’t know that that’s the best use of money.”

In the meantime, Leonardo is hoping the UK government will be swayed by the economic benefits to Yeovil.

“The value proposition that comes from Yeovil to UK plc is significant,” said Higgins. “If you take something like [the] new medium [helicopter] alone, we know there’s a market internationally for 500-550 platforms. Why wouldn’t UK government want to benefit of that activity taking place here in the UK?”