Boeing's Brinksmanship

On Friday, Boeing (NYSE: BA  ) announced that it has taken the first step toward shutting down production of the famed C-17 "Globemaster III." The military cargo plane, hero of crises ranging from the Iraq War to Katrina to the Islamabad earthquake of last year, now looks to be on course for extinction in mid-2009. Or is it?

An article in Saturday's Wall Street Journal scratched the surface of this story, reporting that the long lead time (34 months) on ordering some of the parts needed to build the aircraft compelled Boeing to announce the shutdown now, three years before production would actually cease. But the more I examine the global airlift environment, the less I believe this story is what it seems. Let's briefly review the surface story first, and then I'll explain why I think last week's announcement was less a Boeing bow-out and more a Boeing bluff.

The surface story
The company has been engaged in a tussle with Congress and the Air Force for some time now, arguing that the latter must place more orders than the 180 planes already under contract for Boeing to be able to afford to keep C-17 production lines up and running. Specifically, management is bending ears and twisting arms, trying to get Congress to dedicate $2 billion in additional funding in the fiscal 2008 budget toward the purchase of 10 more C-17s. Congress has counter-offered to fund three more C-17s, but Boeing says that even with additional orders from the international market, Congress isn't anteing up enough to make continuing C-17 production worthwhile.

If management does indeed shut down production as threatened, the Journal notes that this could have "immediate impact" on major parts suppliers such as Honeywell (NYSE: HON  ) , Goodrich (NYSE: GR  ) , and Vought Aircraft. To this list, I'd add United Industrial (NYSE: UIC  ) , which provides maintenance training devices for the C-17, and United Technologies (NYSE: UTX  ) , which builds the plane's Pratt & Whitney engines.

Dig a little deeper
This is all true, but as Sir Isaac Newton famously observed about the demise of the 15th-century crossbow industry: "For every action hurting one member of the feudal-industrial complex, there is an equal and opposite reaction that helps another member." So let's continue assuming that the C-17 shutdown is a real possibility and examine who it might benefit.

First up, Lockheed Martin (NYSE: LMT  ) . Before the Globemaster III, its C-130 Hercules and C-141 Starlifter were the transport aircraft of choice for the U.S. military. According to Boeing, once it shuts down its program, the action is "reversible," but the longer Congress delays in funding new C-17s, the more expensive they'll become. Any relative rise in the cost of Boeing's airlift champion seems likely to make a competing offering from Lockheed relatively more price-competitive.

Fly a little further
But if the epic duel between Boeing's Dreamliner and Airbus's mega A380 passenger jet has taught us anything, it's that competition in the manufacture and sale of aircraft is global. Beneficiaries of the C-17's demise won't be limited to U.S. shores. Overseas, a dearth of shiny, new C-17s in aircraft dealership lots could provide an opening for Ukraine's Antonov Aeronautical Scientific-and-Technical Complex to begin making, leasing, and selling more of its popular An-225, the world's largest aircraft (yes, it even dwarfs Airbus' latest flying barn). Like most European governments, when the U.S. military needs to move something truly mammoth very quickly, it gives Antonov a ring and asks to rent an An-225 "Cossack."

The C-17's exit from world markets could also give Antonov's struggling An-70 program a lift. Although the An-70 has received international certification, it has yet to announce any sales to Western buyers.

Just a bit further to the east, Russia would likely put forward Ilyushin's Il-76 as a viable candidate to take up slack from a missing C-17. I suspect, however, that the Ilyushin is the less likely of the two Slavic candidates to benefit from a Boeing withdrawal. Having completed his renationalization of the nation's oil and gas industry, Mr. Putin has turned his attention to the defense industry. He's currently trying to push Ilyushin together with Mikoyan, Irkut, Sukhoi, Tupolev, and Yakovlev to form a new Russian national champion (state-owned, of course) by the imaginative name of "United Aircraft Corporation." Until this latest reshuffling is complete, I expect the affected aircraft manufacturers will be too distracted to spend much time, you know, building and selling airplanes.

Which brings us to Airbus, and the real story
Admit it. You just knew this story would wind up back in France.

Over in Europe, the French have their own solution to the C-17 issue: the Airbus A400M. Since the early 1980s, France has wanted to build a European replacement for the Continent's U.S.-built Hercules and Transall aircraft. The A400M is intended to be that solution, and Airbus already has 195 orders in hand for the A400M, the vast majority coming from European buyers. The plane is scheduled to make its first test flight next year, and deliveries are supposed to begin in 2009.

What year was that, again?
A-ha. You caught that, did you? Yes, indeed, Fools. Boeing's announcement last week was that it would deliver its last C-17 in 2009 -- the very same year that archrival Airbus will make its alternative available. And personally, I find Boeing's timing a bit suspicious.

It's well known that, although both sides deny this vociferously, the European and American governments are deeply nationalistic about their military-industrial complex champions. (As governments, how could they feel otherwise?) Now consider: Boeing has chosen to stop producing C-17s at the exact same moment as Airbus begins producing the A400M. Moreover, Boeing is publicly blaming Congress for the shutdown, the implication being that by not buying enough C17s, Congress will allow Airbus to capture the military transport aircraft market by default. To me, this "feels" like a ploy to pressure Congress to buy more C17s.

Tanks in advance for your patience
That's essentially my thesis, and it feels like the right way to end this piece. But I'm going to stretch your patience for just a few more lines and tell you one more practical reason why I don't see the C-17 going away any time soon, so please "weight" just a moment longer.

Probably the biggest selling point for the C-17 is its ability to lift one of General Dynamics' (NYSE: GD  ) M1 Abrams main battle tanks to a combat theater. That's something that neither the An-70, nor the Il-76, nor the A400M can do. Weighing in at 60-70 tons, modern American and European main battle tanks such as the Abrams, Britain's Challenger 2, Italy's Ariete, Germany's Leopard 2, and, yes, even France's Leclerc can't get off the ground on anything smaller than a C-17. Meaning that until Airbus makes a military version of the A380, the choices for airlifting tanks into battle are: buying C-17s, or asking the Ukrainians to borrow a Cossack.

Between those two options, I expect demand for the C-17 will stay strong, and Boeing will continue to meet that demand.

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Fool contributor Rich Smith does not own shares of any company named above. Disclosure is a weighty burden, but one that Fools bear lightly.


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