Trump’s AF1 & F-35 tweets, one year on. Canada-Boeing feud deepens. Global arms sales rise, and more.

Remember when then-President-elect Donald Trump threw shade at a new Air Force One and the F-35 Joint Strike Fighter? A year ago, those tweets had defense firms “shaking in their boots,” as I said at the time.

So how have Boeing and Lockheed stocks responded since then? On Dec. 6, 2016, the day of the Air Force One tweet, Boeing opened at $150.84 per share. Today, it is trading near $291. Trump’s F-35 tweet came on Dec. 12, when Lockheed opened at $251.78. Today, it is trading around $318 per share.

In fact, most major defense stocks are still trending upward despite the federal budget uncertainty (keep reading). And Trump loves the “invisible” F-35.


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Budget Crisis Averted, Until Next Week

The new budget deadline: Dec. 22. Absent a yearlong deal or short-term continuing resolution, or CR, the government will shut down on Dec. 23. Merry Christmas! Byron Callan at Capital Alpha Partners has issued new odds:

  • 10 percent probability of a budget deal by late December
  • 55 percent probability of a shutdown from Dec. 23 through early January & then a CR through late January or early February
  • 35 percent probability of a CR by Dec. 22, avoiding a shutdown.

Now, some better news for defense watchers. President Trump signed the fiscal 2018 National Defense Authorization Act, which OKs $692 billion for the Pentagon. But without Congress passing an appropriations measure, it’s pretty moot.

NDAA brings new rules for bid protests

The law launches a pilot program in which contractors with more than $250 million in revenue will have to reimburse the government’s costs of they protest a contract award and lose the protest. From my Nexgov colleagues Frank Konkel and Heather Kuldell: “The pilot begins in 2019 and will last for three years.  Before the pilot, the department will have to determine exactly what costs losing vendors would be forced to pay. For the first time in five years, bid protests decreased in fiscal 2017 after an all-time peak last year.”

Who's Up, Who's Down

JP Morgan analyst Seth Seifman upgraded Northrop Grumman from neutral to overweight on projections of more profitable F-35 growth. But he downgraded General Dynamics from underweight to neutral on Gulfstream uncertainty. Seifman also downgraded Raytheon from overweight to neutral.

Canada May Drop Boeing From Defense Work

Just when you thought the rift between the Canadian government and Boeing couldn’t get worse, it has. In formally announcing it would buy used F/A-18 Hornets from Australia instead of $5 billion in new Super Hornets from Boeing (which we already knew), Ottawa threw yet another dagger: a hint that Boeing has no chance of winning a contest to build 88 new fighter jets for the Royal Canadian Air Force.

“When bids are assessed, any bidder responsible for harm to Canada’s economic interests will be at a distinct disadvantage,” the government said in a statement. “This new assessment, as well as guidelines for its application as an ongoing procurement tool, will be developed through appropriate consultations.”

The language is a clear reference to the trade battle between the U.S. government and Canadian aircraft manufacturer Bombardier. The U.S. government — at Boeing’s urging — is considering slapping high tariffs on new Bombardier jetliners purchased by by American air carriers.

After reports leaked last week that Ottawa would buy used Hornets instead of new Super Hornets, Boeing said it “respects the Canadian government’s decision and applauds the government’s continued use of a two engine fighter solution, which is a critical part of their northern Arctic border defense, NORAD cooperation, and coast to coast to coast security.”

But at the same time it shows no sign of backing down in its trade dispute.

“Our commitment to creating a level playing field in aerospace remains,” the company said. “Therefore, we will continue to support all efforts to build an environment of free and fair competition marked by compliance with agreed upon rules.”

Two data points

  • Boeing employs about 2,000 people in Canada who work on both commercial jetliners and defense projects. It also says it has a $4 billion annual economic impact in Canada.
  • Canada does not plan to pick a plan to replace all of its Hornets until 2022.

So which fighter jet will it pick?

A year ago Ottawa made headlines when it ditched the F-35 Joint Strike Fighter for the Super Hornet. That decision could actually help the F-35 in the long run since production will be in high-swing and the price of the plane keeps falling.

Boeing’s mention of a “two-engine” jet in its statement is noteworthy because it is one of only three companies (from NATO countries) that make twin-engine warplanes. Boeing has the Super Hornet and F-15, France’s Dassault makes the Rafael, and a European consortium makes the Eurofighter.

Global Arms Sales Up in 2016

That’s for the first time since 2010, according to the Stockholm International Peace Research Institute. Some highlights from the report, which does not factor in China arms sales:

  • Arms sales to the top 100 arms suppliers totalled $374.8 billion in 2016.
  • U.S. firms increased their share of global arms sales by four percent to $217.2 billion.
  • Western European firms accounted for $91.6 billion is sales.
  • Arms sales to Lockheed Martin rose 10.7 percent.
  • “The U.K.’s decision to withdraw from the European Union did not seem to have an impact on the arms sales of British companies, which rose by 2.0 percent in 2016.”
  • Arms sales by Russian companies grew 3.8 percent $26.6 billion in 2016, but the pace of Moscow’s increases has slowed.

Bomb-and-Missile News

  • Raytheon finished building the first order of Small Diameter Bomb IIs for the U.S. Air Force. Unlike the regular Small Diameter Bomb (which is made by Boeing), the newer version can hit moving targets in bad weather. Of note, Raytheon builds SDB II on a “fully-automated manufacturing facility” in Tucson, Arizona.
  • A U.S. Air Force B-1B bomber hit two targets with one Long Range Anti-Ship Missile apiece on the Point Mugu Sea Range, “meeting the primary test objectives,” the weapon’s maker Lockheed Martin said in a statement. Here’s a picture of the launch. The missile is the U.S. military’s response to the lethality of new Chinese and Russian warships.

Making Moves

  • Andrea Thompson will be nominated for undersecretary of State for arms control and international security, according to a Dec. 12 White House statement. She’s currently a special advisor in the Office of Policy Planning at State.
  • President Trump also plans to nominate Lisa Gordon-Hagerty as undersecretary for nuclear security at the Energy Department, according to a Dec. 11 White House statement. Gordon-Hagerty is president of Tier Tech International, Inc., a national security consulting company. She also serves as president of LEG Inc.
  • Philip Breedlove, a retired U.S. Air Force general who was most recently the NATO supreme allied commander, will join the board of advisors at the Center for a New American Security think tank in Washington.
  • Former Homeland Security Secretary Jeh Johnson has been elected to Lockheed Martin’s board of directors. Johnson, who was also the general counsel at the Pentagon during the Obama administration, is a partner at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Johnson will serve on the corporation's Classified Business and Security Committee and the Ethics and Sustainability Committee.
  • James Taiclet, chairman, president and chief executive officer of American Tower Corporation and former president of Honeywell Aerospace Services, has also been elected to Lockheed’s board. He will serve on the company’s Nominating and Corporate Governance Committee and Strategic Affairs Committee.