French Air Force tests UAV control via SATCOM

June 28, 2014 by · Comment
Filed under: EADS, France, IAI, Syndicated Industry News 

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System Upgrades are Turning the Typhoon into a Multi-Mission Eurofighter

December 16, 2013 by · Comment
Filed under: BAE Systems, EADS, Syndicated Industry News 

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EADS: Seoul Could Benefit from Splitting Fighter Buy Between F-35, Typhoon

December 14, 2013 by · Comment
Filed under: EADS, Syndicated Industry News 

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Increased Operational Capabilities for Eurofighter Typhoon

October 30, 2013 by · Comment
Filed under: EADS, Syndicated Industry News 

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Boeing F-15SE Silent Eagle to be Seoul’s Next Generation Fighter

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Is Seoul Underestimating its Fighter Procurement Costs?

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European Aerospace Industries Call For a European MALE Program

MALE-UAS_PAS2013Paris, Le Bourget: European aerospace industries and defense establishments are promoting pan-European collaboration in launching a collaborative development of Medium Altitude, Long Endurance (MALE) drone capability that will rely on the collective...

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France Opts for U.S. Reapers

reaper_gsFrance has decided to buy two MQ-9 Reaper medium-altitude long endurance (MALE) drones from the USA, to extend the strategic reconnaissance capability of the French Air Force after the current Harfang drones end their planned mission in 2014. The two...

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Egypt Buys C-295M Air Transports

January 16, 2013 by · Comment
Filed under: EADS, Industry Analysis, Syndicated Industry News 
C295 EAF

EAF C-295M concept
(click to view full)

In addition to its larger AN-74 and C-130 military transports, Egypt also operates a small fleet of very old DHC-5 Buffalo aircraft, which need replacing. Canada’s Viking Air has a notional design for an modern DHC-5NG re-launch, but it has no customers and no prototype yet. The EAF wanted a more standard product, which left it with 4 plausible options: Airbus Military’s C295, Alenia’s C-27J Spartan, Antonov’s AN-32, or Xian’s Y-7H.

Egypt chose to become a new Airbus Military customer, and they’ve been adding to their fleet ever since.

Jan 16/12: +6 C295s. Airbus Military receives a 3rd order from Egypt, for 6 more C295s. As has been true throughout, the contract’s value is not disclosed. This batch of aircraft, plus their associated spares and support equipment, training and field support, are to be delivered from the end of 2013 onwards. Once they all arrive, the EAF will have 12 C295s in their fleet.

Note that this information implies a 2nd, unannounced order for 3 aircraft, placed after September 2011.

With the collapse of the USA’s Joint Cargo Aircraft program, the C295 is the clear leader among Western light tactical transports, though it remains behind the AN-32 in overall global sales. Airbus Military says that 90 aircraft are currently serving in 15 countries. Orders on the books that will bring the total to 121 planes and 17 operators, 7 of whom have placed repeat orders. Airbus Military | EADS.

Sept 23/11: 1st delivery. The Egyptian Air Force (EAF) takes delivery of its 1st Airbus Military C295, ahead of contract schedule. The other 2 aircraft are to be delivered during the last quarter of 2011. EADS.

Oct 29/10: 3 C295s. Airbus Military announces an Egyptian Air Force (EAF) contract for 3 of its C-295M light tactical transport planes. Price was not mentioned, but based on past contracts, a figure of EUR 75-90 million is likely. Deliveries will begin in 2011, and Airbus Military contends that:

“The Egyptian Air Force selected the C295 because of its ease of maintenance and proven operational capabilities, especially in desert areas. Furthermore, its versatility and adaptability to the most varied type of conditions and operations were another key element in the selection of the Airbus Military C295.”

The EAF is a new customer for Airbus Military’s wares. With respect to the C295 family, Egypt’s order raises the type’s book to 85 planes ordered by 13 countries, including Egypt’s near-neighbors Algeria and Jordan. | EADS.

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India to Buy Airbus Tankers Over Russian Proposal

It is being reported that India has gone ahead and selected the Airbus A-330 Multi Role Tanker Transport (MRTT) for its new aerial tanker mission. This aircraft is manufactured by EADS and has been chosen by the U.K., Australia and some Middle Eastern states as well. The aircraft was proposed for the new U.S. Air Force tanker but that contract went to Boeing (BA) with a version of the 767 aircraft 2 years ago.

India selected the A330 to augment a small fleet of Russian Il-76 based tankers rather then buying more of those aircraft in a blow to Russian military overseas sales.

While the aircraft has been selected to fulfill the requirement the final contract has yet to be negotiated and should be some time in the next year. As the new fighter program shows, won by France’s Rafale, it may take some time to compelte final negotiations and actually award the contract.

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Airbus Selects ATK to Manufacture Composite Wing Cover Stringers for the A400M Military Transport Aircraft — Press Release

Agreement in Excess of $100 Million Demonstrates ATK’s Position as World-Class Supplier in Manufacturing Composites

ARLINGTON, Va., Oct. 29, 2012 /PRNewswire/ — ATK (NYSE: ATK) announced today that Airbus Military has selected ATK for a contract in excess of $100 million to produce composite wing cover stringers for use on the A400M Military Transport Aircraft. The A400M is a new generation, four-engine turboprop military transport aircraft designed by Airbus Military, with its first aircraft delivery planned for the second trimester in 2013. This aircraft is already in full production and Airbus has selected ATK, a demonstrated expert in composite manufacturing, for this specific work package.

The A400M work package will be produced in the Aircraft Commercial Center of Excellence (ACCE) facility used for commercial aircraft and engine programs in Clearfield, Utah. The A400M work will use many of the same manufacturing processes already deployed within the ACCE facility.

“ATK is excited to continue expanding the scope of our relationship with Airbus,” said Joy de Lisser, vice president and general manager of ATK’s Aerospace Structures Division. “This scope complements the success we’ve already created with Airbus and demonstrates their confidence in our people and processes.”

The contract between ATK and Airbus includes 122 wing cover stringers per aircraft for 180 aircraft. Airbus has already achieved sales for 174 aircraft. ATK may have the opportunity to grow as more A400M aircraft are sold.

ATK is an aerospace, defense, and commercial products company with operations in 21 states, Puerto Rico, and internationally. News and information can be found on the Internet at www.atk.com.

Airbus Military is a subsidiary of Airbus, an EADS Company, a leading aircraft manufacturer with the most modern and comprehensive product line. News and information can be found on the internet at www.airbus.com and www.airbusmilitary.com.

Certain information discussed in this press release constitutes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Although ATK believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those factors are: future levels of business in the aerospace and commercial transport industries or in the number of aircraft to be built; the success and timely progression of our customers’ new programs; the success and timely execution of key certification and delivery milestones; the company’s competitive environment; and economic conditions. ATK undertakes no obligation to update any forward-looking statements. For further information on factors that could impact ATK, and statements contained herein, please refer to ATK’s most recent Annual Report on Form 10-K and any subsequent quarterly reports on Form 10-Q and current reports on Form 8-K filed with the U.S. Securities and Exchange Commission.

Photo via PR Newswire.

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Exclusive Article at Seeking Alpha on EADS Move to Alabama And Spirit Aerosystems

This is an article I wrote for Seeking Alpha discussing the decision by EADS to build a facility in Mobile, AL and its potential affect on Spirit AeroSystems.

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Hamilton Sundstrand A400M Propeller System Certified by European Aviation Safety Agency — Press Release

WINDSOR LOCKS, Conn., April 5, 2012 /PRNewswire/ — The European Aviation Safety Agency granted to Ratier-Figeac, a Hamilton Sundstrand Corporation subsidiary, the FH385/386 propeller system type certificate for the Airbus A400M Military Transport Aircraft on Mar. 22, marking a major milestone in the A400M’s eight-bladed propeller program. Hamilton Sundstrand is a subsidiary of United Technologies Corporation (NYSE: UTX).

The A400M features a 17.5 ft. diameter propeller system that is all-new, and features eight, all-composite blades. This advanced design propeller system is the largest all-composite propeller in production.

“Hamilton Sundstrand is pleased to celebrate this important certification milestone with Airbus,” said Tom Saxe, vice president and general manager, Actuation & Propeller Systems, Hamilton Sundstrand. “Both design and manufacturing innovations have been essential to our production of this advanced propeller system.”

Driven by an 11,000-horsepower engine, Hamilton Sundstrand’s FH385/386 handles twice the power of any existing in-service propeller and offers a thrust efficiency peak close to 90 percent at high cruise speeds. Each wing features a pair of clockwise and counter-clockwise rotating propellers, which enhance overall aircraft stability and control, and further contribute to overall operating efficiency.

In addition to the propeller system, Hamilton Sundstrand and its subsidiaries supply the A400M’s Secondary Electrical Power Distribution Center (SEPDC), Auxiliary Power Unit (APU), Ram Air Turbine (RAT) emergency power system, Trimmable Horizontal Stabilizer Actuator (THSA), and the Throttle Control Assembly (TCA).

With 2011 sales of $6.2 billion, Hamilton Sundstrand is headquartered in Windsor Locks, Conn. Among the world’s largest suppliers of technologically advanced aerospace and industrial products, the company designs, manufactures and services aerospace systems and provides integrated system solutions for commercial, regional, corporate and military aircraft. It also is a major supplier for international space programs.

United Technologies Corp., based in Hartford, Conn., is a diversified company that provides high-technology products and services to the aerospace and building industries.

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New Light Air Support Contest for Sierra Nevada and Hawker Beechcraft?

Late last year the U.S. Air Force awarded a contract to a team of Sierra Nevada and Brazil’s Embraer to provide light attack aircraft for use by the Afghan military. The contract also had the potential for further orders to support the U.S. military and other potential foreign customers. The only other company to submit a bid was Hawker Beechcraft.

The award was controversial as the Air Force eliminated Hawker’s bid for not being in the competitive range as well as denied their attempts to protest the decision. Hawker sued in Federal Court and it came out that the contract had already been awarded to Sierra Nevada. After reviewing the process the decision was made four weeks ago to cancel the contract and begin an investigation into the contracting process.

The Air Force has stated that the investigation will conclude next week and that it focused on documentation of the decision and not the actions of either contractor. Based on the data gathered so far the Air Force has decided to reinstate Hawker, allow new proposals and may conduct another evaluation. The service also may reserve the right to conduct a whole new competition with a new request for proposals and new bids.

At the same time there are reports that Hawker may have to file for bankruptcy due to its current debt load. If that is true then the Light Air Support contract may be key to keeping the company viable.

The Air Force has struggled over the last decade with evaluating bids and awarding contracts for new aircraft. The KC-X aerial tanker took three tries before Boeing (BA) won it with a version of their 767 airliner over Europe’s EADS. The CSAR-X rescue helicopter had two different competitions with no satisfactory result and the program ended up being cancelled. This contract follows in a similar vein.

The review seems to indicate that the Air Force found enough issues with the source selection process to warrant a new competition. Hopefully this one when it is completed will be conducted in such a way to avoid protest and strife and the service can move out with buying the aircraft.

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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.

Recriminations in Kansas for Boeing

As can be expected with Boeing’s (BA) decision to close their Wichita, KS facility and move work to Washington and Texas the politicians who represent the state are not happy. Many Congressman and Senators who provided support to Boeing to win the KC-46A contract from the U.S. Air Force feel betrayed.

They cite the fact that Boeing executives basically promised the work would be done in Kansas if the contract was one creating thousands of jobs in that state.

The Mayor of Wichita, Carl Brewer, feels the same way. He claims Boeing has betrayed the city by their decision. Wichita has invested millions of the taxpayers money in the plant which has been open since the 1930′s and built bombers during World War II and the Cold War. Now in about 24 months it will stop work and the jobs will be eliminated or moved.

The decision by Boeing based the company claims on cost considerations alone highlight what may happen across the U.S. as the defense budget shrinks and programs are cut or eliminated. Similar scenes have happened before in the 70′s and 90′s as military spending has been reduced. Wichita may be the first of many cities this time around.

That, of course, does not make those who supported Boeing feel better but now they may join the Florida and Alabama representatives who tried to aid Northrop Grumman (NOC) and EADS North America, part of EADS (EADS:P) who worked for those companies to win the KC-X contract. The goal for them of course was investment and jobs in a time when manufacturing ones are hard to find.

As government spending is cut back there will be many other politicians crying foul.

Joint Cargo Aircraft (JCA) Facing Uncertain Future

The C-27J Spartan is a twin engined light transport aircraft purchased for the U.S. Air Force from a team made up of L-3 Communications (LLL) and Alenia North America, part of the Italian defence and industrial group Finmeccanica. The C-27 is not only used by the U.S. but other countries across the world.

The C-27 was the result of a program originally called the Joint Cargo Aircraft (JCA) which was conceived by the Army as part of their plans caused by the decision to cancel the RH-66 Comanche helicopter in 2004. The Comanche was going to be a new attack and reconnaissance helicopter utilizing many new technologies to maximize its stealth and performance. In development for almost twenty years it finally had begun serious testing when it was cancelled. The money freed up was used to by systems like the UH-60M, the AH-64D Block III, CH-47F and UH-72A helicopters.

The Army suffered from a lack of internal heavy lift for intra-theater missions unlike the Marine Corps who possessed their own C-130 transports. The JCA was meant to add this capability and relieve the pressure on the rotary wing fleet primarily being used to carry cargo in Afghanistan and Iraq. Fixed wing assets would be more efficient and economical.

In 2007 the Army and Air Force selected the C-27 from L-3 and Alenia over bids by Raytheon (RTN), who had teamed with EADS North America, offering a Spanish made C-295 and Lockheed Martin (LMT) who proposed a C-130 version. An initial contract worth about $2 billion for 78 aircraft was awarded to the winners.

The JCA was made a joint program and it was originally planned to issue it to Army and Air Force National Guard units to operate. In 2010 the Obama administration decided to transfer the program wholly to the Air Force to manage and operate. The number of aircraft was potentially reduced and only the Air Force Guard would receive it.

The first unit stood up in 2011 in Ohio where four aircraft will be based at Mansfield. In 2013 the Connecticut and the North Dakota Guard are supposed to received the aircraft.

There are now concerns that the C-27 program may be on the chopping block due to budgetary pressures. The Connecticut unit may be the first to feel this pain although the 2012 budget as submitted does contain the funding for the aircraft it may not make it into the final budget.

The C-27 is not a priority for the Air Force and new equipment for the Guard also sometimes takes hits. If the Air Force leadership is forced to sacrifice some of their funding it may be the C-27 is what is given up. It is also a small program and is primarily oriented towards non-combat missions at this time further making it easier to give up.

As the budget goes through these machinations over the next few years other programs similar to the C-27 may be on the chopping block. That does not mean they will be eliminated but they could see cuts, delays and changes to their size, missions and deployment plans. These programs will have to rely on the Congressmen and Senators who represent the states where they are made or based to protect them through trading of priorities and support.

The size of the cuts the Defense Department must make dictate that whole programs whether in development of production will have to be cut. The C-27 might just be one of them.

Photo from Blyzz’s Flickr photostream.

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Dubai Air Show Disapoints So Far

The Dubai Air Show held in the United Arab Emirates (U.A.E.) every year has become one of the three most important air shows and military exhibitions. It joins the alternating Paris and Farnborough air shows that take place in France and the U.K. ever other year and the Singapore Air Show as one of the ways defense contractors market their wares to a wide variety of customers. The Dubai due to its location obviously focuses on the U.A.E. and other Gulf States.

In the past the show has been the scene for announcing major defense contracts. In 2009 the U.A.E. bought military transports from Lockheed Martin (LMT) and Boeing (BA) as well as made a major investment in missile defenses with planned purchases from Lockheed and Raytheon (RTN). These contracts whetted the appetites of the companies for further deals with a goal of offsetting the coming reductions in domestic defense spending.

In 2010 there were no major contracts announced although the U.A.E. did make some investments in joint ventures between domestic companies and foreign ones to provide support to existing systems and build new ones at home. It was safe to say that 2010 was not what the U.S. and European defense contractors had hoped for.

The current 2011 edition has seen many different contracts for civil aviation. EADS (EADS:P) and Boeing have sold airliners to various Gulf based companies as well as different maintenance and upgrade plans have been signed but so far no real military contracts.

There is hope that the U.A.E. will commit finally to a new fighter with France’s Dassault and Eurofighter considered top contenders but that has been talked about for many months. The same story was being discussed at last year’s show. The U.A.E. did discuss its plans for upgrading and improving its air defenses next year including plans to add a UAV to its military in 2013. While the state is negotiating supposedly with Dassault it also expressed interest in another more advanced fighter.

Boeing was also hoping to announce that a contract for their new version of the OH-6 helicopter, the AH-6I, could be executed. So far that has not happened. Jordan and Saudi Arabia are considered contenders for the light attack aircraft.

While there are different things being considered by the Gulf States none of these have yet to come to fruition. It may be another disappointing show for the Western defense contractors. Faced with the potential for reduced sales in their home countries these types of foreign deals will become more necessary to maintain revenue and earnings.

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Germany Receives First Euro Hawk UAV

Northrop Grumman (NOC) has been building the Global Hawk large, long range Intelligence, Surveillance & Reconnaissance (ISR) Unmanned Aerial Vehicle (UAV) for the U.S. Air Force for over a decade. The systems have seen a great deal of use since 9/11. Versions are also being developed for the U.S. Navy and Germany.

Unlike the Predator or other smaller UAV used by the Army, Air Force and other U.S. agencies the Global Hawk is designed to conduct high altitude, long range missions gathering different types of intelligence rather then flying low level surveillance and strike missions. The Global Hawk demonstrated its capabilities early in the program by flying from the U.S. non-stop to Australia.

Germany this week took delivery of their first system which is equipped with an intelligence collection package made by Cassadian, part of EADS (EADS:P). That aircraft had earlier this summer flown across the Atlantic and was then received the Cassadian developed Signals Intelligence (SIGINT) package.

This variant of Global Hawk is called “Euro Hawk”.

As with all programs any sales to other customers aids the overall program health by reducing production costs. This is why overseas and FMS sales are important to the U.S. The Euro Hawk will end up making the Global Hawk cheaper for the Air Force to buy and operate.

Photo from Sugarmonster’s Flickr photostream.

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Boeing Contracts for Up To 2 More WGS Communications Satellites

The U.S. Air Force and Boeing (BA) signed a contract for the seventh Wideband Global SATCOM (WGS) satellite last week. The contract has a value of over $1 billion and includes the advanced procurement materials for the eighth satellite as well.

The WGS, also called the “Wideband Gapfiller Satellite”, is a new communication system used by the U.S. military as well as the Australian Ministry of Defence. The first of the systems was launched in 2007 and so far two others have been launched. With this contract Boeing will have up to five in production of the new communication system.

The U.S. military is increasingly dependent on satellite communications for its war fighting needs. Not only has it been investing in its own systems to support this need but has also been buying large amounts of commercial capability. The fighting in Iraq and Afghanistan has required large amounts of this support.

Recently the U.S. government began issuing omnibus contracts for commercial time for communications. This is a joint contract between the Department of Defense and the General Services Administration (GSA). It will allow any agency or part of the government to buy commercial satellite time from a variety of providers and the contract could have a value of over $5 billion.

This type of support is considered a growth area for defense contractors and is part of the reason that EADS (EADS:P) acquired the second largest commercial satellite provider recently.

At the same time the U.S. military will continue its investment in internal capability with systems such as WGS.

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IBM Expands Security Offerings Through Acquisition

IBM (IMB) expanded its capabilities in the area of security analytical support through the acquisition of British company i2 yesterday. i2 provides software that does data analysis in support of law enforcement and military operations. The value of the transaction was not announced.

IBM has invested several billion since 2006 on companies that provide this and other types of security related services in order to bolster its capabilities in this market. The move also illustrates the further commitment of government and defense contractors to what is to be an expected growth area in the future as the U.S. military and others invest in more sophisticated computer security and intelligence support functions.

While IBM did not say how much they paid for i2 in 2008 it was last sold for $185 million indicating that this deal would be substantially more as the company has had some growth since then.

It is expected that Merger & Acquisition (M&A) activity will be accelerating and the deals will be getting larger. Recently there have been two deals in the billion dollar range by larger aerospace and defense companies. First, General Dynamics (GD) acquired Vangent a health IT company for $980 million and EADS’ (EADS:P) satellite division, Astrium, agreed to acquire satellite communications company Vizada for $960 million.

These two deals expand the company’s capabilities in less traditional markets for them but ones that it is felt the U.S. especially will be spending billions on in the near future. This is move away from their past efforts in developing, producing and supporting large platforms such as aircraft, vehicles and military communication systems.

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Better Price Does Not Lead to More Profit

The Department of Defense uses different source selection criteria for different programs depending on what phase they are at in the acquisition cycle or how stable a product they are. One factor that is constant though is they are looking for the best price and value for their dollar. This doesn’t mean that they will always accept the lowest bid but they will accept the most technical constant at the lowest bid.

This means that in some cases companies can win work by aggressively offering a low price by minimizing their overhead costs and factoring in a small amount for profit. This pricing strategy does have as an issue that while it may lead to the contractor winning the work it may mean little or even no profit on the contract. With the new focus by DoD on price this means that margins are going to be squeezed even more while budgetary pressures may reduce the amount of large contracts available for any contractor to win.

Two recent contracts illustrate this issue for different companies.

The first is the Family of Medium Tactical Vehicle (FMTV) truck production for the U.S. Army and U.S. Marine Corps. Oshkosh (OSK) aggressively bid on this work to win it away from BAE Systems (BAE:LSE). Oshkosh’s win was protested by the losers, including BAE and Navistar (NAV), with one of the concerns being the low price offered. The GAO denied the protest and Oshkosh has now built hundreds of the trucks and trailers for the U.S. military.

Oshkosh hoped to offset declines in its commercial specialty truck business with military work and was able to win this contract and another for Mine Resistant Ambush Protected (MRAP) vehicles. The two led to large amounts of revenue for the company but unfortunately the MRAP work is winding down and it turns out that Oshkosh’s price is so low on the FMTV that they are struggling to make money off of it. Their revenues and profit saw steep declines in the last quarter partially due to this issue.

Boeing (BA) recently won the new aerial tanker contract with their 767 derivative KC-46A. They bid $3.6 billion for the development and early production contract that the Air Force estimated would cost $3.9 billion. It was hard for the other bidder, EADS (EADS:P), to match this price. There were concerns raised that Boeing had deliberately bid low to make sure that they won since the contest would ultimately come down to price.

The current estimate for this phase is now around $5.2 billion. It may end up being lower in the end but not by more then a few percent. This means that the Government and Boeing share the cost of the first billion increase and Boeing pays everything above $4.9 billion. If the current price is correct Boeing will lose $300 million. Boeing recently reported a good quarter with earnings up 20% and profits nineteen cents a share.

In Boeing’s case commercial sales as well as their diverse defense product line will offset the overruns in the KC-46A. Oshkosh does not necessarily have that luxury with the FMTV as their commercial vehicle sales are dependent on construction activity and government investment in equipment. Both have fallen off with the current economic situation in the U.S. and probably will be down for a few more years.

While the Government wants companies to make profits and stay in business they are not going to factor that in when they make awards. If a companies offer a low, best price they will take that. It is up to the bidder to calculate the price that offers the best chance of winning while generating revenue and profit. These examples show that is not always the easiest thing to do.

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Boeing and DoD Release Latest Estimate for KC-46A First Phase Contract

The Hill is reporting that Boeing (BA) currently estimates the first phase of the KC-46A contract at about $5.2 billion or 6% above the $4.9 billion ceiling price. All of that increase if that is what it turns out to be will be paid for by Boeing. The cost share of the difference between $3.9 billion target price and the $4.9 billion ceiling will be split between the Government and Boeing.

There was some consternation when the reports of Boeing’s efforts costing a great deal more then the $3.6 billion price at which the contract was awarded. This led to charges that Boeing “bought in” the contract by bidding deliberately low so that competitor EADS North America, part of European aerospace giant, EADS (EADS:P), could not win.

As the contract goes forward the total cost will change depending on what challenges the program faces and if it needs more time and investment to develop the variant of the Boeing 767 airliner. It may end up being less then $5.2 billion or even more as the program evolves.

Crisis of Confidence as Questions Arise About U.S. Aircraft Program Costs

As the debt limit discussion plays out in the background two major U.S. defense aircraft programs being led by two of the biggest defense contractors faced scrutiny these past few weeks as the extent of their cost growth becomes clear. In the past depending where the program was in its cycle the Government would absorb most of these costs protecting the contractor’s earnings and profits. In today’s budget environment that may not be the case which will have an affect on Boeing (BA) and Lockheed Martin (LMT) near term performance.

First was the new aerial tanker, the KC-46A, being developed and then produced by Boeing. The company won a hard fought contest with European rival EADS (EADS:P) last year for the first 179 new tankers to replace the aging KC-135 fleet. This was the third attempt by the U.S. Air Force to award this contract since 2001. First Boeing received a sole source lease that was overturned after investigations showed issues between the company and high ranking Air Force officials. Then in 2008 Northrop Grumman (NOC) and EADS won the contract but this was overturned by Boeing’s protest. Finally the third contest was won as Boeing bid a modified 767 airliner at rock bottom prices.

Now it looks like those prices were too good to be true. Boeing actually bid $300 million below the Air Force’s estimated cost for the initial development contract that includes the first 18 aircraft. In the last month the company and Defense Department have begun to inform Congress that not only will Boeing need the $300 million but that they may go over that to at least $4.3 billion. The first billion dollar increase over the $3.9 billion figure will be shared by the Government and the contractor and then Boeing will have to eat everything beyond that. While right now there is no guarantee that the costs will go up that much it does mean the U.S. could be on the hook for another $600 million in costs beyond what was budgeted. Needless to say Congress, especially Ranking Member of the Senate Armed Services Committee and budget “hawk”, John McCain (R-AZ), did not react positively to the announcement.

The situation with the premier aircraft acquisition program, Lockheed Martin’s F-35 Joint Strike Fighter, is even worse. This past week the Defense Department submitted a routine reprogramming request to Congress in order to move money around in their budget to fund priorities. Part of this was to move $264 million to cover cost overruns in the production of the JSF. On top of that a further $450 is needed to be found in the JSF budget as well as costs on the first three production batches have increased over $700 million. McCain almost immediately tweeted that fact and called it “Disgraceful”. He and the Democratic Chairman of the SASC followed this up with a letter to the Defense Department asking among other questions what the bill would be if the JSF program was terminated.

That is an extreme reaction to the situation although the JSF program has a history of schedule delays and increased funding requirements that have seen the total cost balloon to hundreds of billion of dollars and the entry into service delayed by years. Lockheed, if the program really was cancelled, would lose one of their major contracts with a significant affect on earnings and revenues. At a minimum they are facing the possibility of paying themselves for much of the cost increases, especially on future orders, which would have a negative effect on their near term performance.

Programs in their early development and production such as the KC-46A and F-35 often have cost sharing built in to cover these kinds of issues. The problem these two program face is that Congress is not willing to keep sharing. They feel at a time when the defense budget will be reduced that these types of increases are difficult and will put pressure on the rest of the budget. They also put more blame on the contractors then the Government who may have caused requirement or testing changes that increase schedule and cost.

In the KC-46A situation there are already concerns that Boeing deliberately bid it low to win with the goal of making up the costs through the cost sharing process and in production. That is a cynical path to go down and the Air Force needs the KC-46A as the U.S. needs the F-35 now as there are no other potential replacements without the increased cost of starting over.

No matter what the two important aerospace programs will face greater scrutiny and more pressure to keep costs down. Congress will also look at transferring risk and increases to the contractors rather then the Government as has been proposed with the next buy of F-35 production where Lockheed would be responsible for 100% of all cost growth beyond the initial contract price if the Senate gets there way.

Will Congress cancel either of these programs due to the budget difficulties? That is very doubtful but five years ago if you asked the Army if Future Combat Systems (FCS) would be gone they would have said no as would the Navy with the DDG-1000 program. The military has spent billions on programs that never reached fruition for a variety of reasons and cost growth certainly has been one down through the years.

Article first published as Boeing and Lockheed Face Crisis of Confidence: Cost Growth Questioned by Congress on Technorati.

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KC-46A Costs Reportedly Increase

A few weeks ago it was reported that Boeing (BA) had already informed the U.S. Air Force of at least a $300 million increase in the costs of the first phase of the KC-46A aerial tanker program. This led to Reuters asking the Air Force some follow up questions on the situation.

They are now reporting that the way the current contract is structured the Government and Boeing would share in the first $1 billion increase beyond the target price of $3.9 billion for the EMD contract which will also deliver 18 tankers. The original contract value was about $3.6 billion.

Once the price gets beyond $4.9 billion Boeing would be responsible for all costs. Up to that they would pay 40% and the government 60 or $600 million. The reports last month had Boeing predicting that they would spend at least $4.2 billion.

This was the third attempt by the Air Force to award the new tanker contract since 2001. An attempt to award a sole source lease to Boeing was derailed by fraudulent activity by Air Force acquisition chief Darleen Druyun and Boeing’s CFO. In 2008 EADS teamed with Northrop Grumman (NOC) won a contest that was overturned on protest by Boeing. This latest contract is the result of the new competition held due to Boeing’s successful protest. EADS was not able to match the price that Boeing offered which is now seemingly controversial due to the reported cost increases.

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