Defense Procurement News

DoD reported that all four of the appropriate defense committees approved the reprogramming for ISR assets. See a story here. The transaction will move $1.3 B from various Army, Navy and Air Force procurement programs to buy various systems to support current operations in Iraq and Afghanistan. The focus of the money will be UAVs and their support systems. The majority of the money came from Army tactical wheeled vehicles and some communications systems.

The Canadian government announced today that they are taking steps to improve the aviation assets for their troops in Afghanistan. See a story here. Up to now the Canadian ground forces relied on either Allied lift or use ground transportation. Now they are leasing Russian Mi-17 and buying CH-47D and F aircraft. The CH-47D will be used immediately, but the CH-47F will be new construction and available in 2013. The country is also leasing and buying UAV assets to support intelligence and surveillance operations.

With the decision here to relax the off set provisions required for work on Indian defense contracts India received six new proposals for their new advanced fighter aircraft, the MMRCA. See a story here. Boeing, Lockheed Martin, EADS, MiG, SAAB and D’Assault submitted proposals. Aircraft from these companies are currently under evaluation with a decision to be made in the next several months.

The House Appropriations Committee marked the FY09 budget before taking their August recess.  See a story here. The Army’s struggling Armed Reconnaissance Helicopter (ARH) program was marked to delete 13 aircraft, and the Navy’s Presidential Helo was also decremented. The House also ordered that consideration of jobs would be a criteria for the source selection of the KC-45 tanker. Boeing won its protest of the award to Northrop-Grumman and EADS and forced DoD to reconsider the contract. The Senate needs to also mark the bill and then there will be a Conference mark up as well.

AAR RECEIVES 10-YEAR CONTRACT TO SUPPORT
HONEYWELL TECHNOLOGY SOLUTIONS INC. AT HILL AIR FORCE BASE

WOOD DALE, ILLINOIS (July 31, 2008) - AAR CORP. (NYSE: AIR) announced today that it has
been awarded a 10-year contract to provide logistics support services to Honeywell Technology
Solutions, Inc. (HTSI). HTSI provides logistics services and depot maintenance support for the
B-2 Spirit stealth bomber and C-130 Hercules aircraft at Hill Air Force Base.
“AAR is very proud to support Honeywell Technology Solutions, Inc. and the U.S. Air Force,”
said Timothy J. Romenesko, AAR’s President and Chief Operating Officer. “This adds to the
growing list of strategic Air Force assets supported by AAR and is a testament to the flexibility
and scalability of AAR’s supply chain management capabilities.”
AAR is a leading provider of products and value-added services to the worldwide aerospace and
defense industry. With facilities and sales locations around the world, AAR uses its close-to-thecustomer
business model to serve aviation and defense customers through four operating
segments: Aviation Supply Chain; Maintenance, Repair & Overhaul; Structures & Systems and
Aircraft Sales & Leasing. More information can be found at www.aarcorp.com.
# # #
This press release contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or those anticipated, including those factors discussed under Item 1A, entitled “Risk Factors”, included in the Company’s May 31, 2008 Form 10-K. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those
described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company’s control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. For
additional information, see the comments included in AAR’s filings with the Securities and Exchange Commission.

According to reports the Iraqi government is planning on buying six C-130J aircraft and associated support equipment. See an article here. The total contract could be worth around $1.5 B. The sale would be handled through the Pentagon’s Defense Security Assistance organization.

India has decided to put out an RFP for light helicopters after all the back-and-forth. See an article here. As previously discussed the planned acquisition was canceled, then planned again, and now it will be for a reduced number than the last attempt. Now rather then going with a 100% foreign buy the contract will be split between a non-Indian company and HAL. One positive of this is that they plan to limit the tech transfer, requirements that recently have been seen as onerous, to only those for the support of the aircraft.

Boeing had been working with Insitu, a Washington state company, on unmanned aircraft. Now it just bought the company. See an article here. Based on reports, Boeing payed quite a premium for the company. Insitu had an estimated earnings last year of $80 M and Boeing reportedly payed five times that for the company. Of course all this is based on anonymous reports as the details have not been made public yet. So if you were able to invest money in Insitu you made it back.

Picture by pfala

India canceled a contract with Boeing for P-8 maritime patrol aircraft due to disagreements over end-user limits on the US technology involved. See an article here. The $2.2 B contract was ready to go for final approval when talks broke down over how to review equipment to prevent technology transfer. India objected to the harsh provisions. This does not mean that the contract could not be renegotiated, but it may be India turns to another provider.

Boeing will continue the C-17 production line for a few more years. See a press release here. No details of how many aircraft or contract value were provided. Boeing is on contract for 190 C-17s for the USAF, of which 175 have been delivered. 15 more were just placed on contract as part of the FY08 Defense Supplemental bill. Boeing had been seeing the end of the production line with the finishing of USAF and foreign orders. Depending on the size of the Qatar order it may extend the line for some time.

The USMC awarded a contract to Hawker Beechcraft for 6 new transport aircraft. See a story here. These will replace older UC-12 aircraft also made by Hawker Beechcraft that have been in service for a few decades. These will most likely be used for personnel transport in more benign environments. The Army has been working to buy larger tactical transports through the Joint Cargo Aircraft (JCA) program but are struggling with the USAF on requirements and quantities.

The UK government is currently planning on buying Eurofighters and F-35 JSF aircraft to modernize their fixed wing aviation force. There are rumors that the Eurofighter buy may be canceled as a cost savings. See an article here. Eurofighter is built by a multi-nation consortium in Europe with BAE being the most important UK participant. If the contract is canceled, with the Government paying termination fees, that means no major aircraft will be built by BAE. They build parts of the JSF but do not assemble the final aircraft. This would be the end of fighter production in England if it happens until a more advanced aircraft then the F-22 or F-35 comes along.

The US Air Force awarded an omnibus maintenance contract. Northrop Grumman was one of the twelve companies that qualified for the contract. See the press release here. If all parts of the contract are executed the value could be as much as $10 B. Normally how these contracts work the government, here the Air Force’s depots, will issue task orders which the qualified companies may bid on. There is no guarantee that any work will be awarded or any company will get work.

CNNMoney has a preview of the upcoming earnings report for a variety of US defense contractors. See this for more. Not surprisingly the outlook is good. The US defense budget remains large and will probably not see any downturn until 2010 at the earliest depending on the US election. Rockwell Collins reported yesterday and they came in with 24% improvement over last quarter. See the press release here.

The soaring costs of the ARH program have caused a Nunn-McCurdy Cost Breach. See a story here. The 40% increase in unit cost has caused the Army and DoD to rethink, again, proceeding with the contract. Nunn-McCurdy cost breaches were established in the 80’s as part of the overall reform of Congressional monitoring of programs.   Read the rest of this entry »

In light of the GAO report the USAF and DoD decided to recompete the new tanker contract. See an article here. This, like the CSAR-X, means that a whole new competition will be held. The Air Force will rewrite the RFP and Boeing and Northrop Grumman will resubmit proposals. Much of the work preparing these will be already done which will speed up the process for the bidders.

The USMC awarded Lockheed Martin a contract to build advanced, new sights for the AH-1 Cobra helicopter. See a story here. The $50 M contract will begin producing the sights in 2010. The AN/AAQ-30 Target Sight System is a multi-sensor system that will also provide targeting data and guidance for the Hellfire missile system. The US has used attack helicopters with great effect in Iraq and Afghanistan as they can provide a great deal of firepower at short notice. The new sight will extend the engagement range of the aircraft.

Lockheed Martin awarded a Norwegian company, Kongsberg, a contract to make parts for the F-35 JSF. See an article here. In an unrelated matter Norway is looking at buying either JSF or Swedish Gripen aircraft to replace their F-16 fleet. Kongsberg will get the contract worth up to $1 B or more even if Norway does not buy the JSF.

The US Special Operations Command awarded a contract to buy small UAVs. See an article here. AeroVironment will provide their small Puma AE to the command. This illustrates that the USSOCOM is a separate entity within the DoD and can do its own acquisition. In the past they would have to rely on the main services to procure their equipment, but they now have their own development and procurement funds. The most recent key split between USSOCOM and the Army was the decision to go with a different rifle then the M4/M16. The Special Ops guys bout HK’s SCAR. For more on that see this.

This article discusses the effect BAE has had on Phoenix, AZ. It also illustrates how the non-US company has grown through the acquisitions of US companies and has gained more and more US defene business. In Phoenix alone the number of BAE employees has tripled in the last five years or so, and the company has been buying facilities and companies. The article also shows how some in Congress feel a British company is better than a joint German and French, making it easier for BAE to continue to gain work in the US.

Goodrich announced that they received a subcontract from Lockheed Martin to provide engine pylons and casings for the C-5 Upgrade Program. See a press release here. The contract is worth $600 M and indicates the size of the total program. As the US is now dependent on a fleet of C-5 and C-17 aircraft continued extension of the life of the C-5 is critical to supporting combat operations in Afghanistan and Iraq.

The GAO ruled today in Boeing’s favor on the KC-45 protest.  They decided that the Air Force failed to properly apply its source selection criteria and did not calculate some of Boeing’s costs correctly.  See a story here.  The GAO recommended that the competition be reopened.  This is what happened with the CSAR-X contract, ironically enough won by Boeing but now back in source selection.  The Air Force is not required to follow the GAO’s recommendation, but if it does not Boeing is sure to go to the Court of Appeals and Congress could make it very difficult for the Air Force to execute the contract.

According to this article the Indian Navy is canceling its procurement of Druhz helicopters. This light aircraft made indigenously by HAL is failing to meet the operational requirements. The Navy will now look to buy a new, most likely foreign aircraft, to meet its needs. The Indian Army and Air Force are also planning to buy new aircraft, and the original plan was to make a joint Indian-Eurocopter aircraft but that deal fell apart due to corruption issues. For more on that see this.

The US Air Force placed a contract wit Lockheed Martin for six HC/MC-130J aircraft. This $470 M award was using the FY08 Advanced Procurement with the rest of the order being paid for in FY09. See a press release here. These aircraft will most likely support operations by US Special Forces Command, and are a variant of the C-130J that has been purchased by the USAF, Marines and foreign companies for the last few years.

Boeing has been building a modified B737 aircraft to act as an Airborne Early Warning and Control (AEW&C) aircraft. Delivery of the first has now slipped four months according to this report. Any issues Boeing has with these types of contract only serves to reinforce the US Air Force’s belief that they could not meet the KC-45 timeline as well as Northrop-Grumman and EADS will. The contract is a fixed price one so a delay will eat into Boeing’s profits as well. The company is also building a similar aircraft for Turkey.