Boeing: we won't bid on ICBM; News from the earnings calls; Bulgaria axes F-16 buy; and more...
Boeing says it will not place a bid to build new intercontinental ballistic missiles, saying the U.S. Air Force’s bid requirements favor its sole rival, Northrop Grumman. The $85 billion project is among the Pentagon’s largest and top-priority procurements of the next few years.
It’s the latest example of defense-industry consolidation reducing competition. Boeing says it has been disadvantaged because (among other reasons) Northrop purchased solid rocket motor maker Orbital ATK, a company that Boeing planned to team with.
Orbital ATK and Aerojet Rocketdyne are the only two U.S. companies that make the solid rocket motors used by ICBMs. Two decades ago, there were six, as the Government Accountability Office explains in this report.
Boeing says it still wanted to get its solid-rocket motors from Northrop’s rocket division, now called Innovation Systems (side note: it really needs a better name), but Northrop executives dragged their feet in arranging a way to separate the groups of employees working on the Northrop and Boeing ICBM proposals.
If Boeing doesn’t bid, the estimated $85 billion award could go straight to Northrop: no bids, no competition. The optics, at least, are not good. Northrop is already building the Air Force’s nuclear-armed B-21 bomber; the ICBM contract would give the company two-thirds of the Pentagon’s gargantuan effort to modernize the nuclear triad. (New ballistic missile submarines are being jointly built by General Dynamics and Huntington Ingalls Industries.)
So what’s next? Can the Air Force convince Boeing to bid, perhaps by altering the bidding parameters or something more creative? Might Congress force the two companies to team up? Both companies have already received hundreds of millions of dollars to develop technology for the next generation of ICBMs, which the Air Force calls the Ground-Based Strategic Deterrent.
Boeing, according to a person familiar with their bid, is “open to discussions” about that. But that would mean no competition again — something the Pentagon has stressed that it wants.
You’ve reached the Defense One Global Business Brief by Marcus Weisgerber. It’s been an insanely busy week here, between companies reporting second-quarter earnings and Congress striking a spending deal that could put an end to the Budget Control Act. But don’t stop sending along your tips and feedback to firstname.lastname@example.org or @MarcusReports. Check out the Global Business Brief archive here, and tell your friends to subscribe!
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Finally, a Budget Deal
The Trump administration has been good for the defense industry, boosting defense spending in successive years. On Monday, the White House and lawmakers reached a deal that would increase defense spending to $738 billion in 2020, about $12 billion less than Trump requested, but still higher than the $716 billion approved in fiscal 2019.
Not surprisingly, the deal was welcomed by defense CEOs. “We believe this is an encouraging step in the process to continue to provide the support for the recapitalization of our national defense assets and the investment in our country’s defense,” Lockheed Martin CEO Marillyn Hewson said on Tuesday.
Said General Dynamics CEO Phebe Novakovic: “Well, it’s certainly very good news that it looks like we've got some clarity in our political landscape at the moment.”
Rick Berger of the American Enterprise Institute put together a list of his winners and losers in the budget deal here.
What Matters in This Week’s Earnings
Lockheed downplays loss of Turkish F-35s
CEO Marilyn Hewson wasted no time on Tuesday’s earnings call before noting that Turkish F-35s make up “a modest 8 aircraft per year” over the next three years — just 24 of the planned 478 planned to be built in that time. Four already-built Turkish jets are at Luke Air Force Base in Arizona. Hewson said potential buyers include Poland and Japan.
The cost of replacing made-in-Turkey parts: We told you last week that the Pentagon expects it to cost between $500 million and $600 million to find new manufacturers of the 900-plus F-35 parts made in Turkey. Lockheed CFO Ken Possenriede had this to say about changes to the supply chain: “[W]e have worked very closely with the Joint Program Office, and if there is any harm to industry, we will be compensated for that. So we’re working very closely with them. Regarding cost schedule or any payment terms, we will be fully compensated for that, which is obviously a good thing.”
Classified work is fueling construction at Skunk Works
Classified contracts have led Lockheed to build new facilities in Palmdale, home of its secretive Advanced Development Programs division, Possenriede said. “I will note that, that big classified job we won last year, we did get the second customer order this year, which is great news. So that’s progressing as we like.” Some more on that here from Investors Business Daily, which hints that the work could be related to hypersonic missiles.
General Dynamics still waiting for Saudi armored-vehicle payments
“We're also carrying more commercial paper than anticipated due to delayed payments related to one of our large international vehicle programs in Canada,” CFO Jason Aiken said Wednesday a reference to light armored vehicles built for export to Saudi Arabia. “We were recently told by the customer that we will receive considerable funding next month. We continue to expect to resolve the balance of the arrears by the end of the year.”
Boeing might stop 737 Max production
Not defense-related, but CEO Dennis Muilenburg acknowledged that it could happen. Boeing has not delivered any 737 Max aircraft since March, when the plane was globally grounded following two deadly crashes. Since then, Boeing has been working on a fix, which has yet to receive the approval from regulators.
Top 100 Defense Contractors, Now Featuring China
It’s that time of year again when Defense News compiles its list of the world’s 100 largest defense contractors. Appearing for the first time: eight Chinese firms.
“The inclusion of Chinese contractors recognizes that China has the second largest defense budget in the world,” writes Byron Callan of Capital Alpha Partners in a July 22 note to investors. “These enterprises don’t compete in U.S. and European markets but the data highlights their relative size and that it’s probable that Chinese defense products will compete more in the coming years in Middle East, Asian, African and Latin American markets.”
This year’s list includes just two Russian companies, down from six last year; the publication says the missing firms did not respond to data requests.
Movement in the Top 5: Lockheed Martin, Boeing, Northrop Grumman, Raytheon and Aviation Industry Corporation of China. Boeing Defense moved back into its No. 2 slot, up three slots from last year, when omitted services work from its self-provided defense revenue numbers. Just a few weeks back at the Paris Air Show, Boeing Global Services CEO Stan Deal said defense revenue was about 40 percent of his business. Boeing Global Services reported $17 billion in revenue in 2018, which suggests that about $7 billion is defense-related. Add in defense-related work in Boeing Commercial Airplanes — think KC-46 and P-8, both built in commercial factories — and you get Boeing’s total defense picture.
Bulgaria Hits Brakes on F-16
The nation’s president, Rumen Radev, vetoed a deal to spend $1.2 billion on eight jets. The deal, according to Reuters, “would be the country’s biggest military purchase since the fall of Communism three decades ago.” The State Department had cleared the sale last month, saying that the entire deal could cost $1.6 billion — $400 million more than Bulgarian officials had anticipated.
B-21 Could Fly in Late 2021
The new B-21 stealth bomber is expected to make its first flight in December 2021, Gen. Stephen Wilson, the Air Force vice chief of staff, said Wednesday. (Full story from Air Force Magazine here.) “We believe the next major milestone for the program will be a Production Readiness Review that will clear the way for manufacturing the first prototype aircraft,” Cowne & Company analyst Roman Schweizer wrote in a Wednesday not to investors. “Based on the program's next R&D funding step-up, we expect this could happen sometime later this calendar year to allow manufacturing to begin in FY20. R&D funding stays flat from FY20-FY22 so this could possibly fund one prototype per year.”
The Senate confirmed Mark Esper as Defense Secretary on Tuesday. Navy Secretary Richard Spencer, who served as acting defense secretary for a week, is now performing the duties of the deputy defense secretary as David Norquist awaits Senate confirmation.
David Slaydon, a retired Air Force colonel well-known on Capitol Hill for his Air National Guard legislative liaison work, has left Raytheon to join Advanced Strategic Insight where he will do business development.
Robert Cardillo, former National Geospatial-Intelligence Agency director, has been appointed to the board Analytical Graphics.