Lockheed Martin's F-35: Finally Ready for War?

Lockheed Martin's future looks brighter with the F-35. Image source: Lockheed Martin.

It's game time for Lockheed Martin's (LMT 1.71%) F-35 stealth fighter jet.

Earlier this month, the U.S. Air Force declared the 15 F-35A "Lightning II" aircraft of the 34th Fighter Squadron based at Hill Air Force Base, Utah, to have reached initial operational capability (IOC). The designation trails a similar Marine Corps assessment regarding its F-35B short-take-off-vertical landing variant aircraft one year ago and leads an expected Navy IOC for its F-35C carrier-variant fighters, expected in 2018. 

The Air Force's IOC, however, is the one most important to Lockheed Martin -- for the simple reason that the Air Force plans to buy 1,763 F-35A variant aircraft -- more than twice as many as the 420 F-35B and -C variants that the Marine Corps plans to buy, and the Navy's 340 -Cs, combined. With IOC now established, the Air Force says its F-35As can now be dispatched to perform "basic" close-air support, air interdiction, and ground attack missions anywhere in the world.

In theory.

A work in progress

The practical picture looks a bit different. You see, the F-35 was designed to enter into operations as a sort of work in progress, and to receive upgrades in its capability over time. Thus, even the fighters of the 34th lack "3F" software upgrades that they will need in order "to launch certain types of weapons such as the Small Diameter Bomb," reports DefenseNews.com.

That upgrade is not expected to roll out until next year, and the Air Force does not plan to send the F-35 into combat until it does. Later, a subsequent upgrade dubbed 4F will not be complete until 2022 -- three years after Lockheed Martin expects to receive the go-ahead to begin full-rate production of the aircraft.

Despite these caveats, pilots who have flown the F-35 out of Hill AFB have reported that over the course of 88 recent sorties flown, the planes suffered zero "glitches" in their software. That may sound like faint praise for a combat that's supposed to outclass everything else in the air, but it appears to be good enough for the Air Force. Commenting on the IOC announcement, Gen. Hawk Carlisle, head of Air Force Air Combat Command, waved off worries over the plane's quality, saying instead:

My problem is buy rate. We need more faster [...] to replace legacy airplanes that are going to require money for service life extensions if I don't replace them with F-35s [...] I would like at least 60 a year; 80 would be optimum.

What it means for Lockheed Martin

That must be music to Lockheed Martin's ears. Its key customer, the Air Force, isn't worried about the quality of its product at all -- but only about how many planes it can buy, and how quickly Lockheed will let it buy them! And in that regard, too, Lockheed is making good progress toward satisfying its customer.

Last month, in its post-earnings conference call, Lockheed confirmed that it's on track to build and deliver 53 F-35s this year -- not all to the Air Force, granted. Some will probably go to the Marines, the Navy, and foreign customers. But Lockheed is closing in on Gen. Carlisle's hoped-for "60 a year" target -- and making good progress toward 80.

What it means for investors

How big of a deal is this for Lockheed Martin? Think about it this way: According to Lockheed Martin management, the U.S. Air Force, Navy, and Marines intend to purchase a total of 2,443 F-35s over the course of a 60-year production run. International customers who partnered with the U.S. in developing the aircraft are expected to purchase a further 600 or so F-35s, while countries that were not part of the original development team (Israel, Japan, and Korea, for example) may end up buying as many as 1,000 more. 

In total, therefore, there's at least the potential for 4,000 or so F-35s not yet in existence to roll off Lockheed Martin assembly lines over the next several decades. At Lockheed's targeted average price of $85 million, that's a $340 billion revenue opportunity -- that swells into the range of $1.5 trillion once you factor in revenues from maintenance and servicing and upgrades to aircraft as they age.

$1.5 trillion. At Lockheed Martin's current revenue rate of $49 billion per year, that means the F-35 program alone could account for about 30 full years' worth of revenue for Lockheed Martin. Spread out over a 60-year service life, it could account for about half of Lockheed's business. Simply put, Lockheed Martin and its shareholders have placed a very big bet on the success of the F-35.

And at long last, it's starting to pay off.