#ParisAirShow: How the Raytheon-UTC merger came about; Patriot vs. S-400; Predicting when planes will break and more.
If 2017’s Paris Air Show was about networking, this one was about news. Even if some defense executives said their calendars weren’t as jam-packed as in previous years, events in and around this year’s Paris Air Show will play out for months to come.
There was lots of small talk about the planned merger of Raytheon and United Technologies. In my conversations with defense executives, no one seemed particularly in favor of or against the deal — only curious about who might be the next top-tier companies to merge. (Read on for more about how RTX happened.)
Lots of new tech was showcased: stealth fighters, hypersonic missiles, and counter-drone systems. Check out my analysis about how great power competition with Russia is fueling a new generation in European weapons. One of those new stealth-jet projects belongs to Turkey, which is currently staring down a July 31 deadline to eschew Russia’s S-400 air defense system or be ejected from the F-35 program. The Turkish Aerospace Industries CEO boasted that Ankara will be able to build its own new warplane thanks to its work building F-35 fuselages.
The show’s other leading drama centered on Boeing and its grounded-since-March 737 MAX airliner. The company opened its Paris events on Monday by trotting out its CFO and three business unit CEOs to talk about the Max. (Boeing CEO Dennis Muilenburg was at the show, but did not attend the press conference.)
The commercial shocker of the show arrived on Tuesday, when British Airways’ corporate owner announced that it would buy two hundred 737 Maxes — apparently without even asking Airbus to bid on the deal. Airbus officials on Thursday vowed to compete for the order.
There’s still no word on when the 737 Max will fly again, but our colleague and pal Jon Ostrower of The Air Current notes that Boeing has begun a quiet rebranding of the aircraft. The IAG press release about its 200-plane order refers to 737-8 and 737-10 aircraft — a reference to the variants more fully known as 737 Max-8 and 737 Max-10.
In non-Paris Air Show news, the U.S. Senate on Thursday voted to block the sale of bombs worth billions of dollars to Saudi Arabia. Recall that President Trump sidestepped Congress last month using emergency powers to green-light the sale, which Congress opposes. Despite Thursday’s vote, Trump is expected to veto the legislation if it comes to his desk.
You’ve reached the Defense One Global Business Brief by Marcus Weisgerber. Greetings from France where I’m at the Paris Air Show. Not much to report on the flying side; the Dassault Rafale was pretty much the only flying demonstration to note. Dare I say the Airbus A350-1000 was impressive. Send along your tips and feedback to email@example.com or @MarcusReports. Check out the Global Business Brief archive here, and tell your friends to subscribe!
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How the Raytheon-UTC Proposal Came Together
The merger of the aerospace and defense titans was expected to dominate discussion at the Paris Air Show, and it did not disappoint. Raytheon CFO Anthony “Toby” O’Brien spoke to Defense One on Tuesday about how the merger came about and what to expect as the firms look to close the deal in the next year.
O’Brien said Raytheon’s interest in UTC began in early 2018, as the latter was looking at spinning off its Carrier air conditioners and Otis elevator businesses. Raytheon began doing analysis of what a combination of the two companies might be able to accomplish.
Then in May 2018, Raytheon CEO Tom Kennedy contacted Greg Hayes, his UTC counterpart, and “threw the proposition on the table,” O’Brien said.
Hayes put the proposal on “back burner” for a few months, O’Brien said, while UTC closed the deal with Rockwell Collins and decided to spin off Otis and Carrier. At the end of 2018, Kennedy and Hayes linked up to discuss the merger.
Early this year, Raytheon and UTC began “mutual analysis around each other”; in late April, they started “putting pen to paper on a contract and a negotiation thereof,” O’Brien said.
They kept their talks under wraps for about six months, until they planned to reveal the proposed merger on June 10 — a date moved up one day when the Wall Street Journal caught wind of it.
So far, the main significant objection has come from activist investor Bill Ackman of Pershing Square Capital Management.
As well, President Trump questioned whether the merger would create less competition in the sector, but Wall Street analysts and executives say the companies only have about 1 percent in overlapping business. Kennedy and Hayes met with President Trump in the Oval Office on June 10, the day after the sale was announced.
Since then the two CEOs have been talking to investors and analysts, as they did here in Paris on Monday.
“Our modus operandi here is really to inform and engage with shareholders and provide them as much information as we can on the transaction,” O’Brien said.
Executives are touting the merger of equals as creating a company that has its business roughly split equally between commercial and defense work. It’s also evenly split between U.S. and international business.
“The thing we like about [is] that it’s balanced in both those aspects,” O’Brien said.
While the commercial aerospace and defense sectors are both in an upswing right now, historically they tend to run countercyclical.
The companies believe the even split between commercial-defense and domestic-international “provides resiliency and it allows the company to be a stronger competitor in any cycle,” O’Brien said. “[B]ecause of the financial strength of the company out of the gate, [it] allows us to continue to invest mutually in technologies — whether it be on the commercial, the defense side or a technology that benefits both — and at the same time, in parallel continue to shareholders.”
Executives have also touted how both Raytheon and UTC are “platform-agnostic,” meaning they sell their technology to plane, ship or vehicle makers.
“It’s a once-in-a-lifetime opportunity,” O’Brien said. “We’re coming at it from a position of strength. We didn’t have to do this. We feel that this helps to accelerate technology for us.”
One market where both sides could benefit is in the air-traffic control business. Raytheon makes air traffic control radars and command and control for air traffic systems. UTC’s Collins Aerospace does cockpit avionics and aircraft communications equipment. With billions of dollars in FAA contracts up for grabs in the coming years the merger “gives us a better competitive positioning,” O’Brien said.
Patriot vs. S-400
As the United States presses Turkey to abandon plans to Russia’s S-400 missile defense system, it is offering a stick — it will boot Ankara from the F-35 Joint Strike Fighter program — and if not a carrot, at least an alternative: the U.S.-made Patriot missile system
Ralph Acaba, president of Raytheon Integrated Defense Systems, the company’s business unit that makes Patriot, said Raytheon is following the U.S. government lead and answering U.S. officials’ questions when they come up.
Asked his argument for buying Patriot over S-400, here’s Acaba’s response:
“Patriot is the combat-proven missile defense system … It’s the only one that’s been combat proven over and over again. We think that brings state-of-the-art performance, but it also brings the benefits of interoperability with NATO [and] with the U.S. It brings that continuous upgrading of the technology, both parts obsolescence over time and software upgrades. I think there’s just a lot of benefits of Patriot over that system because it’s just not as broadly used and the performance is, in my mind, questioned.
“I’m talking about the long term. It’s not just how does this do in a flight test. It’s, what capability do you have over 10 years, over 20 years,” he continued. “We try and make sure we’re bringing that whole lifecycle story to our customers so they understand that entire thing. You can’t always judge something by the sale price of the initial acquisition cost.
Predicting When Warplanes Break
The U.S. military is expanding its use of artificial intelligence and analytics to determine when planes will break. At the Paris Air Show, Raytheon and Boeing each touted separate efforts for this type of work.
“My dad taught me very well: every 3,000 miles I change the oil in my car,” Todd Probert, vice president of mission support and modernization at Raytheon Intelligence, Information and Services, said at a Monday briefing. “Today, I don’t wait for 3,000 miles, I wait for my car to tell me it’s time to change the oil. It’s sensing when the oil viscosity is at a point that it’s no longer viable and it tells you to go get an oil change.”
This type of predictive maintenance technology is being increasingly used in commercial aviation, but is now slowly being adopted by the military.
Raytheon has signed a cooperative research and development agreement with the Navy to predict when CV-22 Osprey radars will break, and signal the need for maintenance.
In addition to the CV-22 effort, Probert said the Raytheon is working with 24 different tech companies “that have been advancing AI concepts and capabilities in the commercial market.” And he’s looking for more partnerships with tech firms in this area.
“We’re continuing to advance discussions in all the branches on propagating what’s happening commercially,” Stan Deal, president and CEO of Boeing Global Services, said during a Wednesday roundtable. “I think the quantum of benefit will be similar to commercial.”
Commercially, for every dollar spent on analytics, there is $5 to $10 savings, Deal said. “That math seems to keep playing out commercially. I can’t imagine why it won’t translate that way in the government arena, but we’ve not sized the market potential.”
Boeing uses analytical technology on the C-17 cargo plane and V-22, a tiltrotor it jointly makes with Bell. The company is also incorporating analytics into its logistics work in the U.K., Denmark and the Middle East, Deal said. Singapore is using Boeing’s analytics technology to manage how it manages and flies its F-15 fighters.
Seeing a booming market for aircraft maintenance and upgrade work both commercially and militarily, Boeing launched the services division in July 2017.
“The nice thing about having commercial and military combined [is] learnings transfer much easier,” Deal said. “Certainly in the digital environment, I’d characterize the commercial world much further ahead than in the defense segment.”
But there is a growing interest in governments to use analytics to predict when planes will break, manage logistics and in other areas.
“Every major command is faced with the same problem: aging assets [and a] fixed budget for sustainment,” Deal said.
Here’s some of my previous coverage about using analytics to predict when planes will break.
- Defense Firms to Air Force: Want Your Planes’ Data? Pay Up
- The US Air Force Is Adding Algorithms to Predict When Planes Will Break
- Predicting When Weapons Will Break is a Hot New Market. Microsoft Wants In.
At 50, Leonardo DRS Eyes More Growth
Bill Lynn, the former deputy defense secretary who now runs Leonardo DRS, continues seeing growth. Leonardo DRS, the U.S. arm of the Italian aerospace and defense firm turns 50 years old this year, so Lynn, who I chatted with in Paris, wanted to reflect on the past and look into the future.
When Leonardo, then-known as Finmeccanica, purchased DRS Technologies in 2008, the company’s business was 65 percent Army-related, after growing considerably since hundreds of thousands of American and coalition troops were deployed to Iraq and Afghanistan. About half of that Army business was funded through the Pentagon’s overseas contingency operations war budget, also known as OCO.
“As OCO dropped from $160 billion to $60 billion over the course of a couple of years, so too did the revenue base, not because DRS was losing programs or doing anything wrong, it was the programs were ending because the conflicts were winding down,” Lynn said. “That caused us to rethink the structure of the business.”
DRS grew over the years through acquisitions, similar to how L3 Technologies has grown over the past 20 years. When Lynn became CEO in 2012 there were 27 business units, which he consolidated to eight. Today, the company’s business is about 35 percent Army, 35 percent Navy, 10 to 15 percent Air Force, about 15 percent international, with some Coast Guard and commercial work as well.
“It’s a much more stable customer base — much more diverse,” Lynn said. “We’re no longer dependant on any of the wartime spending, these are all programs in the base [budget].”
The restructure has allowed the company to grow faster than the market. As the defense budget has grown 5 or so percent per year, last year Leonardo DRS grew 20 percent, Lynn said. The year before that, it grew 11 percent.
“With a mid-sized company, we don’t have to be in every market. We choose our markets,” Lynn said, pointing to the company’s eight, tailored business units. “Those eight [business units], tend to be growing faster than the defense budget as a whole, so we grow faster than the defense budget as a whole.”
Lynn is predicting that 2019 will bring a fifth straight year of largely organic growth. The growth last largely been in the company’s Army and Navy work. It expanded its Air Force work last year as company’s MH-139 helicopter was chosen to replace the service’s UH-1 Huey security and transport helicopters. Leonardo is working with Boeing on that project. But it lost its bid to make the Air Force’s next pilot training jet, which would have been a potential $15 billion score.
Clearly the big one this week is acting Defense Secretary Patrick Shanahan, who has pulled his name out of the running for the SecDef nomination following the revelation of a messy divorce. Shanahan also resigned his position as deputy defense secretary effective this weekend. Army Secretary Mark Esper is slated to be sworn in as acting defense secretary.
John Stopher, principal assistant to the secretary of the Air Force for space, will step down on July 19, when he will return to private sector work. He was former Air Force Secretary Heather Wilson’s top space advisor and the person in charge of planning to incorporate a Space Force into the Air Force.
Jarrod Agen, Vice President Pence’s communications director, will soon take a senior communications post at Lockheed Martin.