Boeing executives often tout the company’s “One Boeing” vision, meaning the firm’s divisions aren’t stovepiped. It appears we’re seeing another example of this in the way Boeing is approaching big defense contracts.
“I'd actually say the MQ and T-X are really more looking at it like we typically do and you would on a commercial-type opportunity,” CEO Dennis Muilenburg said Wednesday.
That means: win initial contracts with bids that deliver razor-thin profits — and plan to make it up with decades of sales.
Boeing’s aggressive bidding is believed to have won three recent Pentagon deals: the Air Force’s T-X pilot training jet ($9.2 billion), the Navy MQ-25 refueling drone ($805 million) and Air Force Huey helicopter replacement ($2.4 billion).
By comparison, Lockheed Martin CEO Marillyn Hewson said her firm would have lost “in excess of $5 billion” if it had it bid the same prices as Boeing.
Muilenburg’s response: “[O]ur mindset around this is to focus on those key defense franchises that create long-term value, sustained decades of opportunity, so these are a few very select very targeted areas, and as we've mentioned over several years now, T-X and MQ-25 are in that category.”
That’s because Boeing believes that the Air Force’s order of 351 T-X jets is just the beginning. It could sell up to 2,600 aircraft in training or attack configuration globally over several decades, he said. That could be worth $40 billion. It sees potential for 200-plus MQ-25 drones. That could be worth $20 billion.
We’ve seen this approach from Boeing before, when it competed against Airbus to build an aerial refueling tanker for the U.S. Air Force. Boeing won, signing a fixed-price development contract for the KC-46, but has since had to eat more than $3.5 billion because of problems during development. (Just this week, the company’s earnings statements reported that its KC-46 costs had grown by another $179 million, pre-tax.) The current tanker deal is for 179 aircraft, but Boeing envisions global sales well beyond that — just as it now does with the new T-X trainer.
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This Week’s Earnings
More Raytheon growth expected in 2019: “We’re focused on the initial 2019 outlook where [Raytheon] points to 6-8% growth (best of the primes) on top of 2018 which is set to finish ~+7% itself,” Citi analyst Jon Raviv writes in a note to investors this morning.
How Northrop Grumman’s next CEO views 2019: “[A]s we are approaching the end of this year and looking forward into 2019, I mentioned that our programs have been well-supported in the 2019 budget, and we do feel as if we will continue to see the kinds of growth that we have experienced in 2018 into 2019,” said Kathy Warden, now president and COO. She takes over CEO Wes Bush on Jan. 1. What does Bush plan to do when he retires? “Unlikely that I'll just disappear. But I have a number of things outside of our industry that are of great interest to me, both on a personal level and, hopefully, in terms of being helpful to others.”
Muilenburg reacts to supply chain study: I had the chance to put a question to Boeing’s CEO during his Oct. 24 earnings call. (Note to other defense companies: We reporters would appreciate the opportunity to do the same on yours.) It was: Is Boeing reassessing anything in light of the White House’s Oct. 5 defense industrial base assessment, which warned about Chinese-made content in American weapons?
His response: “We are very much connected into the defense industrial base policies and plans, working hand-in-hand with the Pentagon and our U.S. customers. We, as a matter of normal business, have great visibility into our supply chain and all of the export/import rules and regulations that get applied to that are built in and are something that's built into how we do business every day.
“So as we look at deep supply chain capabilities and supply sources, this is not new to us. In fact these are things that we completely understand and govern our business today, and we'll be continuing to work jointly with the Defense Department as we define sources for the future and ensuring that we have, I'll say the diversity of supplier sources that we need here in the U.S. to satisfy our defense customer needs. I don't see this as anything that's going to substantially change our business model or our supply chain going forward. It will just add additional discipline to ensure the security of that supply chain.”
Space Council: We Need to Educate Americans
The National Space Council this week sent recommendations to President Trump that called, among other things, for creating a Space Force and standing up a U.S. Space Command. At their Tuesday meeting, the council also talked about ways to educate the American public about how space is relied on in daily activities.
After the meeting I asked Rep. Brian Babin, R-Texas, who chairs the House Science, Space and Technology space subcommittee (and attended the National Space Council meeting) how to spread that message.
“Three’s just so much that we’ve gotten out of our space program,” he said. “I think we just have to communicate that. I think the public is getting more excited as they see things happening … with the commercial end. I think that SpaceX launching the Tesla — I think that fired up the imaginations of a whole lot of young people around this country.”
Spotted in the audience at the Space Council meeting:
- Wes Bush, Northrop Grumman CEO
- Fatih Ozmen, CEO Sierra Nevada Corp.
- Bob Smith, Blue Origin CEO
- Rick Ambrose, executive vice president of Lockheed Martin's Space business area
- Eric Fanning, Aerospace Industries Association CEO
Trump Meets With Defense CEOs in Arizona
The Oct. 19 meeting at Luke Air Force Base is just the latest time the president met with defense executives. There, Trump toured an Apache attack helicopter and F-35 Joint Strike Fighter. He also saw a number of guided bombs, per a White House pool report.
Among the executives Trump met:
- Tim Mahoney, Honeywell Aerospace CEO
- Dennis Muilenburg, Boeing CEO
- Marillyn Hewson, Lockheed Martin CEO
- Jerry DeMuro, BAE Systems CEO
- Taylor Lawrence, Raytheon Missile Systems president
- Chris Brady, VP of engineering for General Dynamics Mission Systems.
- Chad Parkhill, Nammo Talley president
Germany: No New Saudi Arms Deals
Germany said it would not approve new arms deals with Saudi Arabia this week in response to the death of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul. Here in U.S. there’s an effort to halt weapons deals with the kingdom, even though President Trump has said he wants to preserve $110 billion in pending deals with Riyad. (We told you last week how it’s more likely Congress could slow the arms deals that outright block them.) Trump cites the loss of defense jobs as the prime reason for not canceling the arms deals. (Our former colleagues at Quartz point out that the president’s defense jobs numbers are largely inflated.) Separately, Canada’s Prime Minister Justin Trudeau said a contract with Saudi for General Dynamic-made light utility vehicles, makes it difficult for Ottawa exit the arrangement. Asked by an alaysyst about “potential backlog exposure you have is to Saudi Arabia and whether this is having any impact on your near-term order prospects” on GD’s earnings call, CEO Phebe Novakovic said: “I will tell you the largest contract we have is with the government of Canada. We are continuing to build that vehicle on schedule, and we see no indication that that contract has changed, the status of that contract has changed in the moment. So, steady as she goes.”
AM General Gets Humvee Deal
Even though the Army has started replacing Humvees with Joint Light Tactical Vehicles, it’s not the end of the road for the iconic vehicle. The Army National Guard has placed and $89 million order with AM General for 740 new vehicles. The deal is for a M1152A1 version of the humvee, which has a single cab with open cargo area in the back, kind of like a pickup truck. Deliveries are expected in the second quarter of 2019. The Army also awarded the company a $121 million, five-year support contract.
Successful Standard Missile Tests Disclosed
South Korea’s navy successfully fired five SM-2 missiles during summer drills that were disclosed this week, the weapon’s maker Raytheon said in a statement. Two of the firings tested the missiles' “advanced semi-active radar seeker technology.” The other three were fired from a South Korean destroyer. The SM-2s “destroyed three aerial threats using the Block IIIB variant,” according to Raytheon. The ship-launched SM-2 can shoot down aircraft and missiles up to 90 nautical miles away. Raytheon restarted the SM-2 production in 2017. New deliveries of more than 280 missiles are expected in 2020.