Congress, Defense Budget and Contractors — Seeking Alpha

Here is an exclusive article I wrote for Seeking Alpha on Congressional changes to the defense budget and how they will aid contractors.

More V-22 Engines for Rolls-Royce

Following the second operational crash of a V-22 during exercises in Morocco there was the usual hand wringing about the safety of the V-22 Osprey tilt-rotor made by Boeing (BA) and Bell, part of Textron (TXT). Even so the program continues with planned expanded deployment and new missions including support of Presidential movement operations.

It has been reported that as part of the planned reductions in spending starting next year that V-22 quantities will be reduced. The total purchased should remain the same but it will be spread over more years. The next five year multiyear production contract is still being negotiated as the current one ends.

Even so the Pentagon went ahead and place orders for engines to support delivery of over 100 more aircraft with Rolls Royce (RR). The almost $600 million contract for 268 engines will have one base and four options years. The base contract will be for 70 engines.

The company has delivered over 500 engines for the V-22 program.

The V-22 offers unique capabilities compared to traditional rotary wing aviation assets. It has served in Iraq and Afghanistan with no combat losses although an Air Force one crashed in Afghanistan and now a Marine one has crashed as well. It is planned to replace Navy logistics aircraft as well as serve more with the Marines and Air Force Special Operations.

Boeing and Bell are obviously looking for new missions and customers for the aircraft. Certainly there may be pressure as the Pentagon reduces its budget to cut the number of V-22 to buy as they are expensive to buy and operate. The more that are sold, though, drives down the price for every customer.

Air Force Will Attempt Second Contest for Light Air Support Aircraft

Following up on its decision to cancel the initial contract to Sierra Nevada and Brazil’s Embraer for the initial order of Light Air Support (LAS) aircraft for use by the Afghan military the U.S. Air Force now plans a new contest. The contract was protested by Hawker Beechcraft whose T-6 based proposal was removed from the competition. After the start of an investigation into the source selection which continues the service’s leadership decided to end the first attempt and begin again.

The Air Force investigation found that there was not sufficient justification for the decisions to remove Hawker and award the $300 million contract to Sierra Nevada. This company teamed with Embraer which would see their Tucano based system assembled in Florida.

Now it is expected that an amended Request for Proposals will be issued in the near future allowing the two companies to compete again.

If the program goes as planned it could be worth up to $1 billion in orders.

With the new proposal process it is hoped that a decision will be made next year.

Hawker is struggling and may face bankruptcy in the near future and the LAS win would be a major boon for the company. Brazil is looking at buying a new fighter and Boeing’s (BA) F/A-18 is one of the major contenders and a win for Embraer is believed to be helpful for that contest.

The Air Force has struggled over the last decade with awarding new contracts. There was the long running KC-X tanker program which took three attempts to award finally to Boeing. The new combat rescue helicopter, CSAR-X, went through two iterations but is now currently on hold. The cornerstone of the new Air Force, Lockheed’s (LMT) Joint Strike Fighter, is facing cost and schedule problems. The Light Air Support program seems to continue that trend.

Canadian F-35 Controversy Continues

The fall out from the controversial decision by the Canadian government to commit to the F-35 Joint Strike Fighter without conducting a competition continues. The execution of the contract with Lockheed Martin (LMT) and the U.S. has been placed on hold as a new group outside the traditional defense procurement organization re-examines the contracting process.

The latest fall out from the Auditor report released earlier this year is that the Government underestimated the total cost of the program by $10 billion. Rather then then fixed costs being in the $15 billion range they are actually close to $25 billion. This is because ten years of operational costs (training, personnel, fuel, etc) were not included in the original estimate.

With the current issues it is not inconceivable that Canada could re-start their procurement process. This may lead to a new competition for the contract to replace the current CF-18 fighters that could include multiple competitors like the Eurofighter Typhoon, the Dassault Rafale and American aircraft like Boeing’s (BA) F/A-18.

The loss of 65 aircraft to the F-35 program is a small part of its over 2,000 planned deliveries but the loss of Canada’s participation would be a blow to the whole concept of the program with its shared development, production and operational cost. If Canada reconsiders then other nations who have hinted they could might follow. This could include Japan and the Netherlands both of whom have questions about the cost increases and schedule delays facing the program as a whole.

Joint Air to Ground Missile (JAGM) to Remain in Development

With the expected reductions in U.S. planned defense spending there have been different discussions and rumors of programs being cancelled or ended. One of these is the new Joint Air to Ground Missile (JAGM) which is a replacement for the Hellfire and Maverick missiles. These are launched from a variety of helicopters and fixed wing aircraft and had an original mission of destroying enemy armor. Over the last several years different warheads have been developed to attack personnel and buildings.

The JAGM itself was a new program that replaced the earlier Joint Common Missile (JCM) which was cancelled itself a few years ago. The JCM was being developed by Lockheed Martin (LMT). They and a team of Raytheon (RTN) and Boeing (BA) were competing for the JAGM contract.

The Army had demonstrations of the two competing design and last summer received bids for the next phase of the program which was to be Engineering, Manufacturing and Development (EMD). One of the two designs would have been selected to enter this phase and then move on into production. Those proposals were received in June.

The production contract would be worth several billion dollars due to the amount of missiles that needed to be procured.

Now it is being reported that rather then moving out with this phase or cancelling the program the Army will continue to pay for a small amount of continued development and risk reduction. Available R&D funds would be used for this program. This would allow further refinement of the concept and designs and allow a decision to enter the EMD phase at a later date.

Those contracts would be awarded at the end of this summer.

The U.S. is going to be facing a number of situations like this. If there need to be severe cuts to investment programs it makes sense to cancel whole ones before they enter production. This saves the most money. It also means that the technology developed is still available for use if needed. It also continues to support some of the industrial base that might go away if whole sale cuts were made.

Canada’s F-35 Contracting Process Criticized

The Government of Canada’s Auditor General released a report this past week looking at how the country came to the decision to invest in Lockheed Martin’s (LMT) F-35 Joint Strike Fighter. The aircraft as with many other U.S. allies will be used to replace older American aircraft, in this case the CF-18 variant of Boeing’s (BA) F/A-18 fighter.

The report made clear that in the eyes of the Audit the government failed to provide legislators correct or sufficient cost and schedule information to support the decision. The decision made in the summer of 2010 will see Canada by up to 65 of the advance fighters. The estimated costs for acquisition will be about $10 billion and another $15-16 billion on maintenance and modernization.

The reports says that this cost estimate was not properly developed or reviewed and was not properly documented. Continued delays in the schedule for the aircraft which will be purchased in the thousands by the U.S., Canada, the U.K., Australia, Norway, Holland and other countries have already led the U.S. to delay production and caused large price increases. These would also have the potential to affect the price Canada will pay.

The government defended itself by stating that no formal contract has yet to be entered into for the aircraft leaving open either outright cancellation or re-negotiation. The Canadian military like others could look to existing platforms like the F/A-18 Super Hornet or Europe’s Eurofighter and Dassault Rafale.

The F-35 has proved controversial and the current price and schedule issues are not going away anytime soon. Canada like other planned buyers may be reviewing their commitments and plans.

Update on Boeing’s (BA) Military Programs — Seeking Alpha

This is an exclusive post I wrote for Seeking Alpha on the current state of Boeing’s military aircraft programs.

Annual Reports to Congress Detail JSF Cost Growth

Each year the Pentagon submits reports on their major programs to Congress. These are called the Selected Acquisition Reports (SAR) and detail program’s costs and schedules. The SAR reports give a good picture of where the bulk of U.S. investment funds are going.

This year they were dominated by the one for the F-35 Joint Strike Fighter (JSF) made by Lockheed Martin (LMT).

This year the F-35 has been split into two programs to explain cost with the F135 engine made by Pratt & Whitney, part of United Technologies (UTX), being detailed separately. For this report the total price of the program which is for acquisition only the aircraft cost increased just over three percent to $331.8 billion. The majority of this increase was driven by plans to reduce production quantities in the near term causing a higher price.

The engine estimate increased almost ten percent to $63.9 billion because of an increase in the price of the initial sparing package for the system. The reduction in production quantities increased cost by just under a billion dollars.

The JSF has made some progress in testing and development. The initial low rate production contracts are delivering aircraft. The costs are going to increase in the short term due to the decision to stretch out production and reduce the near term quantities. This means a higher individual price for the aircraft.

Overall there was some increase to the total planned spending because the Pentagon is predicting higher inflation in the next several years. This causes annual growth in program’s budgets to reflect this growth.

Interestingly three programs were reported as having their planned production cut significantly. These are Raytheon’s (RTN) AIM-9X air-to-air missile, Boeing’s (BA) C-130 Aviation Modernization Program (AMP), and the Joint Land Attack Cruise Missile Defense Elevated Netted Sensor System (JLENS) also made by Raytheon. JLENS is a tethered aerostat that provides sensors and data link capability to support air defense systems for the Army.

There is probably no near term solution to the JSF cost increase until steady state production is reached and quantities become economic. By then development will be almost complete and the design fairly mature. That though could be several years.

Pratt & Whitney and Boeing Representatives Sign Engine Contract to Power U.S. Air Force’s KC-46 Tanker — Press Release

MUKILTEO, Wash., March 27, 2012 /PRNewswire/ — Bennett Croswell, president of Pratt & Whitney’s Military Engines division, and Maureen Dougherty, Boeing vice president and program manager, KC-46 Tanker Program, hosted a ceremonial engine contract signing event today at Boeing’s Tanker Program Office in Mukilteo, Wash., for contracts previously awarded to Pratt & Whitney. The contracts support PW4062 engine purchases to power Boeing’s KC-46, the U.S. Air Force’s new airlift tanker. Pratt & Whitney is a United Technologies Corp. (NYSE: UTX) company.

“The PW4000 engine family that will power these aircraft has an exceptional track record of performance and reliability with numerous commercial customers operating the engine globally,” said Croswell. “We are confident these engines will continue to perform exceptionally well in a military application for Boeing and for our ultimate customer, the men and women in uniform.”

Two Pratt & Whitney PW4062 engines, each with a 94-inch fan blade diameter, will exclusively power each U.S. Air Force KC-46 aircraft. The program’s scope, if fully exercised, calls for as many as 368 PW4062 engines to be delivered between 2013 and 2027. Actual production engine procurement quantities will be determined over the life of the program as established by future purchase orders.

“Pratt & Whitney’s PW4062 engine offers the KC-46 program an engine that has proven performance, fuel economy, and durability – qualities that make it the clear choice to power the KC-46 Tanker,” said Dougherty. “These engines bring tremendous capability to the KC-46, which supports superior multi-role mission performance by delivering more fuel, transporting more passengers and cargo, and offering enhanced aeromedical capabilities to our United States Air Force customer.”

Pratt & Whitney has delivered more than 2,500 PW4000-94″ engines that have collectively logged nearly 110 million flight hours on commercial aircraft around the world. The PW4062 is the highest thrust model in Pratt & Whitney’s PW4000-94″ commercial engine family and is offered for both commercial freighter and military tanker applications. The two PW4062 engines that will power the KC-46 each deliver 62,000 pounds of thrust.

The PW4000 engine family has an outstanding safety record, high reliability, excellent performance and low maintenance costs. The PW4000-94″ family meets emissions and noise regulations, and offers superior fuel economy and maintainability. The PW4000-94″ engine operates commercially on the Boeing 767, MD-11 and earlier Boeing 747 models.

Pratt & Whitney is a world leader in the design, manufacture and service of aircraft engines, space propulsion systems and industrial gas turbines. United Technologies, based in Hartford, Conn., is a diversified company providing high technology products and services to the global aerospace and building industries.

This press release contains forward-looking statements concerning future business opportunities. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to changes in government procurement priorities and practices, budget plans and availability of funding, and in the number of aircraft to be built; challenges in the design, development, production and support of advanced technologies; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the companies’ Securities and Exchange Commission filings.

GAO Expresses Concerns with KC-46A Development

The Government Accountability Office (GAO) released a report on the KC-46A new aerial tanker program and expressed some concerns with the schedule. Boeing (BA) won the contract to develop a version of their 767 airliner and deliver 17 aircraft after a long struggle with EADS (EADS:P).

GAO is worried that some of the software that is being developed to control the mission planning, defense and routing of the aircraft is being done at the same time as production and testing. GAO also considers the new fuel boom operating station and control higher risk as it has yet to be demonstrated in normal operating environment and at a high maturity. Similar systems are in use on only 3 tankers operated by non-U.S. military.

The KC-46A contract as expected has had some cost increases and earlier this year the Director, Operational Test & Evaluation (D,OT&E) also expressed that the test schedule was not adequate and the program did not allow enough time for the necessary testing.

The Air Force and Boeing dispute the reports claiming the program is on track and risks manageable.

Canada Reconsidering F-35 Buy?

Canada like many of the U.S. allied nations that purchased U.S. fighter aircraft in the 80′s is facing the need to upgrade their forces. They have used the CF-18 now for several years. They like others joined the Joint Strike Fighter (JSF) program early on providing R&D funds for the new aircraft. In 2010 the Conservative government decided to go ahead and commit to the production part of the contract with plans to buy 65 of the advanced fighters from Lockheed Martin (LMT). The move was controversial with the opposition ending up forcing a vote of no confidence in the government over the decision.

The Conservatives did well in the following election and actually increased their hold in Parliament.

The JSF program has seen major schedule slips as well as cost increases. This is why it is controversial in Canada, the U.S. and other potential buying nations. The U.S. has recently announced in their upcoming budget plans to reduce the annual buys of the aircraft in order to save money. This will stretch out the delivery times and further increase the price of the aircraft. Their also continue to be nagging technical problems common in any development program that has restricted testing and training.

Now there are reports coming out of Canada that it may be reconsidering their plans to buy the JSF. In testimony to Parliament defense officials stressed that they are still intending to buy the aircraft but there is no contract and they could leave the program if they wanted to. Canada has already stated that they will not spend more then they currently plan on the JSF which could lead to reduced numbers if the prices continue to increase.

If Canada does not buy the F-35 they will be faced with deciding between a variety of current aircraft. These include the Boeing (BA) F/A-18, Eurofighter Typhoon and France’s Rafale. The U.S. remains committed to the program and it will replace the F-16, F/A-18, and other aircraft.

If Canada does leave it would be a blow to the program and might encourage other purchasers like Holland and Japan to reconsider their choice.

AeroVironment Wins More Raven Production

update – Edited the post to make clear that the contract is just for logistics support and not new systems.

The U.S. Army awarded AeroVironment (AVAV) a contract for further production of the hand-launched Raven small Unmanned Aerial Vehicle (UAV). The Ravens are used by small units for local area reconnaissance and surveillance.

The contract is worth a little over $11 million and will provide logistic support for deployed Raven systems not only for the Army but also the Marine Corps and any Foreign Military Sales (FMS).

AeroVironment makes a series of different UAV’s for use by military, law enforcement and other government agencies. The company is also investing in electric vehicles and power management solutions. They manufacture a home charging station for electric vehicles as well as supporting electric car design and development.

As with all OEM companies they also provide training and engineering support for their products.

The UAV market has done well over the last decade as the U.S. military especially has invested in thousands of systems to support operations in Afghanistan and Iraq. This investment should continue even as the U.S. withdraws its troops and fighting ends. There will be focus on improving UAV payload, range and capabilities.

AeroVironment is working to develop the ultra long range, persistent Global Observer UAV which is powered by hydrogen fuel rather then a conventional engine. Boeing (BA) is also working on a similar system utilizing solar and other renewable fuels.

C-130J Production Continues

Even though as part of the FY13 budget the Defense Department is proposing to restructure the existing C-130 fleet and cancelling the Aviation Modernization Program (AMP) production of the C-130J continues. With this the Air Force place a contract with Lockheed Martin (LMT) for 7 more of the capable transport for use by itself and the Marine Corps.

The $70 million option will procure 4 MC-130J tankers, 2 AC-130J gunships and a HC-130J for the Coast Guard. This is under the current production contract.

The next five year budget, though, due to the desire to cut several hundred billion in spending over the next five years is not so kind to the program. It sees a forty-one percent cut to the planned spending for production while also ending the AMP.

The AMP had been developed by Boeing (BA) but the plan was to have another contest to award the production and retrofit contract. Boeing under the development contract would have done some of the upgrades but the bulk would have been done by the winner of the new effort.

The budget also ends the C-27J Joint Cargo Aircraft (JCA) program which was buying twin engined transports from L-3 Communications (LLL) for use by the USAF Guard. This capability will be replaced by C-130 performing that mission. With the ending of fighting in Iraq and Afghanistan the planned use of the C-27J would have been much less then intended.

There is no guarantee that any of these budget proposals are final until Congress votes on the 2013 defense budget this year. They are the final say on what is cut and what is kept but generally they follow the Pentagon’s proposals.

Photo from kingair42′s flickr photostream.

Boeing Awarded Large Maintenance Contract for ROK F-15

One of the reasons that the Indian, Brazil and U.A.E. new fighter contracts are being so hard fought among the various U.S. and European defense contractors is not only the size of the initial procurement but also because they offer long term requirements and revenue.

India has so far chosen the Rafale fighter from Dassault although there are reports that Eurofighter with the encouragement of the U.K. government is trying to offer a better price in the hope of winning that contract. Brazil is considering the Rafale and Boeing’s (BA) F/A-18 and the U.A.E. seemed committed to the French aircraft but at the Dubai airshow earlier this year seemed to have second thoughts.

South Korea chose to buy some F-15 fighters from Boeing (BA) last decade. This was a significant procurement for the company as the U.S. had stopped buying the aircraft concentrating on the F-22 and JSF. Now they have signed a contract for long term logistics support for the advanced fighters and strike aircraft. This is worth about $300 million and last five years.

Korea can be expected to use the aircraft for a few decades and Boeing along with its Korean partners should consistently receive contracts to support the systems. Often as the U.S. has demonstrated the long term support, modernization and modification of aircraft can easily cost more then the initial purchase price. Often this goes to the OEM so they have several years of revenue after production is complete. With overseas contracts the chances are even higher that this kind of work will be needed.

Modern combat aircraft are now having service lives measured in decades. The B-52 for example is approaching its 60th year of service. The U.S. F-15 over 30 and so on. Boeing can expect South Korea to pay a great deal of money for their support as time passes.

Photo from Bundeswehr-Fotos Wir.Dienen.Deutschland.’s flickr photostream.

Defense Industrials as Dividend Stocks – Seeking Alpha

Here is an exclusive post I wrote at Seeking Alpha on defense industrials as dividend stocks.

Lockheed Martin (LMT) Protests Award of Navy Contract to Northrop Grumman (NOC)

At the beginning of the month the U.S. Navy awarded the first in a series of contracts to begin installing consistent networks on ships. The initial value of this contract is for $36 million and would be for installations on 3 ships.

The Consolidated Afloat Networks Enterprise Services (CANES) program is to undergo testing this year and have a Milestone C Low Rate Initial Production Decision to support completion of the first install by the end of the year.

Northrop Grumman (NOC) beat out Lockheed Martin (LMT) for the production contract. Both had been awarded development contracts a few years ago. If all options on the contract are exercised it could be worth over $600 million and be installed on 54 ships. Next year after more testing there will be a Full Rate Production Decision leading to the award of a much larger contract.

Yesterday though Lockheed formally protested the award citing a belief in flaws with the Navy’s evaluation of the two proposals. The protest will be reviewed by the Government Accountability Office (GAO) who have one hundred days to come to a decision. Normally the protested contract is placed on hold while the GAO conducts its review. If Lockheed disagrees with the result then they may appeal to the Federal courts.

Protests have been rising consistently over the last two decades as the Pentagon issues fewer contracts and company’s fight harder for market share. They are disruptive but Federal law allows almost any decision to be protested although the GAO often denies them. The biggest factor for now is that it delays the start of work by Northrop and disrupts the program’s schedule.

Unfortunately for the Services and the Defense Department many cases are decided in favor of the company protesting which continues to highlight the need for the process as some selection decisions have proved flawed for many reasons. The KC-X tanker contract originally awarded to Northrop was successfully protested by Boeing (BA) who won the contract upon a new competition was ordered.

FY13 Defense Budget Hits Aircraft Procurement

The Obama Administration submitted its FY13 budget to the Congress today and as expected the defense budget took some hits. Trying to keep spending flat compared to the 2012 budget the Administration has proposed some cuts to investment, personnel programs and benefits. Chief among these were cuts to the most expensive program in the budget: the F-35 Joint Strike Fighter (JSF) as well as some other aircraft and Unmanned Aerial Vehicle (UAV) programs.

Even though the F-35 saw production reduced from only 31 to 29 this saved an estimated $1.6 billion. Over the next five year budget plan 179 less F-35 would be purchased then planned. Lockheed Martin (LMT) is the prime contractor on the advanced aircraft.

The V-22 which has gone into use with the U.S.M.C. and Air Force as a transport and search-and-resuce aircraft saw its planned production cut to 21 from 27. This should save about $500 million. The V-22 made by Boeing (BA) and Bell Helicopter, part of Textron (TXT), was on the downslope of the current multi-year production contract with the second in negotiation. This possibly could see reduced quantities.

All of this adds up to reduced revenues for Lockheed, Boeing and Textron although Congress does not need to accept the proposed cuts. It is expected though that a great deal of them will make it through the budget cycle as the need to reduce the deficit and government spending as a whole will require some reductions in defense spending.

Photo from Secretary of Defense’s flickr photostream.

Raytheon Delivers First International Maritime Surveillance Radar to Boeing — Press Release

Raytheon Delivers First International Maritime Surveillance Radar to Boeing

Delivery marks addition of new technology with air-to-air surveillance mode

SINGAPORE, Feb. 13, 2012 /PRNewswire/ — Raytheon Company (NYSE: RTN) has delivered the first international version of its APY-10 surveillance radar to Boeing. The radar will be installed on the P-8I aircraft Boeing is building for the Indian navy.

“Our APY-10 radar will provide the Indian navy with proven, low-risk technology built on generations of successful Raytheon maritime radar systems,” said Tim Carey, vice president for Intelligence, Surveillance and Reconnaissance Systems at Raytheon’s Space and Airborne Systems business. “Adaptable and configurable, the APY-10 radar is a premier example of Raytheon’s ability to meet key customer requirements.”

The APY-10 radar delivers accurate and actionable information in all weather, day and night, for anti-submarine and anti-surface warfare, and for intelligence, surveillance and reconnaissance missions.

To meet unique requirements for the Indian navy, Raytheon has added an air-to-air mode, which provides the detection and tracking of airborne targets, allowing customers to detect threats in the air as well as at sea. In addition, an interleaved weather and surface search capability has been added to provide the cockpit with up-to-date weather avoidance information while performing surveillance missions.

With reduced weight and power consumption, the APY-10 radar has improved the average mean time between failure by six times over earlier generation radars. In addition to the new capabilities, the design can accommodate significant future growth. Raytheon is under contract to produce eight APY-10 radars for the Indian navy.

About Raytheon

Raytheon Company, with 2011 sales of $25 billion, is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world. With a history of innovation spanning 90 years, Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as a broad range of mission support services. With headquarters in Waltham, Mass., Raytheon employs 71,000 people worldwide. For more about Raytheon, visit us at www.raytheon.com and follow us on Twitter at @raytheon.

Reports that Next V-22 Production Contract Will See Reduced Quantities

The V-22 Osprey tilt rotor aircraft is a unique capability to the U.S. armed forces. Built by Boeing (BA) and Bell, part of Textron (TXT), in a joint venture the twin engined aircraft have seen a great deal of use in Iraq and Afghanistan since entering service in 2006 with the U.S. Air Force and Marine Corps. The system had a lengthy development timeline being cancelled more then once and then revived.

The first five year production contract saw 174 aircraft ordered and late last summer the government and contractor began entering into negotiations for the second one. That would be for a further 122 Ospreys at an estimated cost of close to $8 billion.

Now there is word that as part of the planned reductions to the defense budget over the next five years the U.S. Defense Department will cut 24 of the next batch of V-22. This would reduce the next five year contract to 98 aircraft at a cost of roughly $6.5 billion. The reports indicate that the hope is to save $1.75 billion but if 122 cost $8 billion the back of the envelope calculation would show only about $1.5 billion in savings.

Normally reducing the quantity bought over the same time period would lead to higher unit costs as there would be the loss of savings reduced with buying larger numbers of parts but it seems the Pentagon is hoping to not only cut aircraft but to negotiate a better price with Boeing-Bell. If that is possible remains to be seen. The delay in retiring the CH-46 and other aircraft the V-22 is replacing may also lead to higher operational costs for those as some will have to remain in service for a longer then originally planned timeline.

At least for the companies the program is not being eliminated or delayed. That means there will still be some revenue and earnings off of the program.

The cut will also illustrate how hard it is to reduce the budget just by slicing programs. There are enough sunk and recurring costs that savings are not directly tied to the amount of items being purchased. It is easier to eliminate whole programs which is reportedly being done with the Joint Air-to-Ground Missile (JAGM, C-27 JCA transport and the C-130 Avionics Modernization Program.

Photo from Beige Alert’s flickr photostream.

Rafale Wins One As India Accepts Dassault’s Bid for MMRCA

The long running sage of India’s new fighter contract took a major step closer to completion yesterday as the Indian government announced that Dassault Rafale will be considered for the South East Asian country’s Medium Multi-Role Combat Aircraft (MMRCA) contract. In November there had been a decision to start the process to select the final winner of the contract with the choice between the Rafale and the Eurofighter Typhoon.

The MMRCA started over two years ago and companies from across the globe submitted bids. The original proposals came from America’s Lockheed Martin (LMT) and Boeing (BA) along with the two Western European contractors as well as Sweden’s SAAB and Russia’s MiG. A series of trails and evaluations were conducted along with analysis of the proposals and the decision was made in November to eliminate all but Dassault and Eurofighter.

The contract for 126 advanced fighters could be worth well over $10 billion including the cost of support, spares and engineering.

The next few months will see the Indian government negotiating the final terms of the contract including the key provision of offsets. Dassault is proposing to transfer the production capability for the aircraft to India with over 100 of the aircraft being at least partially manufactured and assembled there.

Previously India had relied primarily on British and Russian equipment while trying to invest in an indigenous arms capability. Recently they have realized that in order to gain access to more advanced technology they would need to buy U.S. and European weapons from less traditional suppliers. These have included transports and patrol aircraft from Boeing and Lockheed Martin as well as exploring helicopter and artillery buys from Western Europe.

India has always demanded strict offsets and investment in their economy and have had to adjust these rules to allow companies like Boeing and others from the U.S. to bid. Even so it is good business for a winning bidder to be able to set up production facilities in India as it allows access to that growing market.

The win is significant for Dassault which has struggled to find a buyer beyond the French military and faced issues with keeping their employees busy and revenues up. The Indian contract will aid in both.

Photo from Ronnie Macdonald’s flickr photostream.

Boeing and United Technologies Earning Reports

I wrote an exclusive post on Boeing’s (BA) and United Technologies (UTX) recent earnings report for Seeking Alpha which may be found here.

DoD Testers Express Concerns with KC-46A Schedule

One of the issues facing Boeing (BA) and the KC-46A new aerial tanker program is that it is already behind schedule. The Air Force originally planned to award a contract in 2001-2002 timeframe and have new tankers flying before 2010. The contract was not awarded until almost a decade later and the first aircraft will begin service in 2017. This was caused by three attempts to conduct the source selection with Boeing winning the third round from EADS North America, part of EADS (EADS:P).

This has meant the current initial development contract is very short. Boeing is planning on taking commercial B-767 aircraft off of their line, installing a new cockpit from the 787 as well as necessary military gear. They also need to demonstrate that the aircraft is able to meet the requirements of the Air Force and keep it all within cost as Boeing agreed to a fixed price development contract.

The Director, Operational Test & Evaluation (D,OT&E) which is an independent body within DoD responsible for evaluating programs performance as well as their overall test plans releases an annual report reviewing major defense programs and their test plans. They expressed concerns to Congress that the KC-46A is hoping to conduct a very aggressive test campaign. In their report, which may be found on their website here, they write that in their opinion “The DOT&E review of the post-Milestone B draft TEMP indicates the KC-46 test program is not executable.”

This is due for the following reasons:

 

• The plan requires 42 hours of testing a month compared to an average of 30 on similar large aircraft military programs.
• It assumes that only 15 percent of the tests would be repeated.  A higher repeat rate adds time to the overall testing program.
• There is not time in the schedule to fix issues found in Developmental Testing (DT) prior to Operational Testing (OT).
• There is not enough time allocated to test the fuel boom with Air Force and Navy aircraft.
• The OT time is too short for the 750 flight hours planned to be flown and D,OT&E calculations estimate that 1,250 hours is the minimum required.

 

The organization recommends a new Test & Evaluation Master Plan (TEMP) be developed that includes a more realistic schedule for testing.

The Air Force, of course, disputes D,OT&E claims and believes the testing schedule is appropriate and executable. They feel that they have structured the program to support a proper OT decision and then into production and service.

The other pressure is on Boeing as an extension of the test program will cost them money. The fixed price contract has already reached a point where there is little slack or money left in it. More flight hours, more tests and more re-work will cost Boeing and reduce the potential for any profit on this contract. The Air Force recognizes this as they add in their defense of the program that they “structured the KC-46 development contract as a fixed price contract to protect the DoD and taxpayers from any cost growth on the program if the test program is not executed as planned.” So Boeing will pay for these issues if any.

D,OT&E can tend to be very conservative when it comes to these types of assessments but that does not mean they are right. One of the biggest issues affecting program development timelines is the need for more testing. Problems are discovered that were not necessarily anticipated and they take time to fix and then there is also time added to do the test again. The KC-46A is probably looking at a test program that will take some amount of time between their estimate and D,OT&E. Even if there is only a little growth it will affect Boeing’s cost and bottom line.

Boeing to Build More WGS Satellites, Follows With Successful Launch of WGS-4

The United States military and government relies heavily on satellite communications to support their operations. Boeing (BA) has been building the Wideband Global SATCOM (WGS) satellite for several years. Yesterday the aerospace contractor received a contract from the Air Force for more of the systems as well as successfully launching the 4th system into space.

The contract for WGS-9 follows on one recently awarded for number 8 and has a value of about $377 million. This is the exercise of an option on a production contract Boeing won late in FY11. Combined with that for the 8th system Boeing has received contracts worth almost $700 million for WGS birds. Boeing had previously delivered 4 WGS systems.

Also last night Boeing saw a Delta IV rocket successfully place WGS-4 into orbit. WGS-1 was launched in 2007, WGS-2 in 2008 and WGS-3 in 2009. Ultimately a constellation of 9 of the WGS satellites will be launched. Boeing now has received production options for all of them.

The U.S. is also buying two other communication satellites under the Advanced Extremely High Frequency (AEHF) and Mobile User Objective System (MUOS) programs. WGS was originally a “gapfiller” to provide temporary capability to bridge until AEHF were ready. Now due to their capability and time pressures WGS is becoming a primary communication system.

Lockheed Receives Battle Management Contract from Missile Defense Agency

The FY12 defense budget while it did not grow much did keep spending at the high levels generated by the Iraq and Afghan fighting. There are certain key areas that remain highly funded as well in the U.S. budget. Future cuts are expected but it is hoped by contractors that these areas will maintain their funding even as other parts of the U.S. military are shrunk. One of these is in missile defense.

The Missile Defense Agency (MDA), the successor to the Ballistic Missile Defense Organization (BMDO) created under President Reagan, is responsible for managing development and deployment of systems for this mission. Although technically many of the programs belong to the Services MDA provides their funding and direction. The Army has three major ground based systems and the Navy has a ship one as well.

MDA is also responsible for building a network of sensors and the software that links all of these parts together.

Lockheed Martin (LMT) is the lead contractor on the Command, Control, Battle Management and Communications (C2BMC) program which has as a goal the integration of the different sensors and weapon systems to most efficiently detect, identify and engage a target. Lockheed is assisted by several other major contractors on this program including Northrop Grumman (NOC), Boeing (BA), Raytheon (RTN) and General Dynamics (GD).

Lockheed has just received further funding for this effort close to a billion dollars as MDA executes the latest option on this contract. It can be expected as long as the MDA wants to keep developing its system of systems that the C2BMC will keep going as it is necessary for the best use of them.

This means despite the defense cuts there will be some funding for this program so that it may be kept going to completion which favors Lockheed Martin and does provide some core revenue.

Photo from the U.S. Missile Defense Agency Flickr Photostream.

Army Orders More CH-47 from Boeing

The U.S. Army and other services have made heavy investments in their rotary wing forces over the last decade. Due to the terrain and the situation in Iraq and Afghanistan heavy use of helicopters were required to provide fire support and logistics transportation. This meant that not only was the existing fleet of aircraft being heavily used but more were needed as well as new systems.

The U.S. Army cancelled the RAH-66 Comanche program in 2004. This was an advanced scout attack helicopter. They utilized the funds to build new programs such as the UH-60M, UH-72A and CH-47F aircraft. The Marines and Air Force also made a heavy investment in the V-22 OSprey tilt rotor aircraft.

One aircraft that has made a major contribution to the fighting is the large, cargo helicopter CH-47 Chinook. Not only has the U.S. Army increased its inventory of these aircraft but also many other countries have bought it to support their combat troops in Afghanistan. These have included the U.K., Canada and Australia. Due to the altitude and temperature conditions the CH-47 is the most capable aircraft for carrying large loads of supplies or troops.

The CH-47 is manufactured by Boeing (BA) at their plant in Pennsylvania and they just received yet another production contract for the aircraft. A further 14 were ordered with an value of around $370 million.

These aircraft will be used by the U.S., Australia and the U.A.E. continuing to demonstrate the FMS value of the CH-47.

The expected budget cuts will most likely slow down the investment in aviation by the Army but not end programs. The U.S. needs to either re-capatilize or replace systems that have seen a great deal of use in Iraq and Afghanistan. Even with smaller ground forces it makes sense to continue to increase aviation assets as it is easier to quickly build up infantry units then rotary winged ones.

The CH-47 due to its demonstrated capability will remain a core component of the U.S. Army’s aviation forces and will continue to see steady overseas sales.

Photo from The California’s National Guard Flickr photostream.

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