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I Remember When Britain Had a Military

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Maybe I'm just old, but I remember when Britain actually had a military. When it stood shoulder-to-shoulder with the U.S. Army and Marine Corps in the liberation of Kuwait. Or earlier, when it faced down aggression in South America, defended its citizens, and reclaimed its stolen territory in the Falkland Islands.

But like I said, I'm old. That world doesn't exist anymore.

Royal Air Force, royal figurehead
England began as a monarchy, I'm told, and it's still nominally so. Dubbed the "royal family," this monarchy is basically a figurehead -- a ceremonial institution that doesn't really do much anymore. And that's fine. What's less fine is what we recently learned about that other "royal" institution -- the Royal Air Force.

According to a report just out on, the same economic crisis that's threatening to reduce defense spending in the U.S. is about to absolutely decimate defense spending in Merry Olde England. Across the pond, the Ministry of Defense is about to embark on a round of spending cuts that will reduce the size of the RAF to a grand total of six fast-attack jet-fighter squadrons.

Six. Viewed in isolation, that doesn't mean much, so let me give you some context: In the waning days of the Cold War, as Britain stood on the front lines of the war against Communism, just a short ICBM-hop from oblivion, the RAF boasted a force of 33 fast-jet squadrons. Thirteen years later, when the Royal Marines rolled into Iraq, the planes giving them ground support belonged to an RAF barely half the size of its Cold War-era forbears -- 17 squadrons in all.

Already, this force has shrunk to a bare dozen squadrons, and by decade's end, says Air Vice-Marshal Greg Bagwell, commander of the RAF's air combat group, "We are heading for five Typhoon squadrons and one JSF squadron. … It will be a six-squadron world."

And … ?
By this point you're probably thinking this is disturbing news, but what does it have to do with investing? Well, a few months back, I penned a column on the subject of U.S. defense cuts. I argued that whatever your views on the military, and spending thereon, it's inarguable that there are certain functions only the military can perform: protecting international shipping lanes, shooing Somali pirates away from oil tankers, and combating international terrorism.

I further noted that if the U.S. cuts back on defense spending and as a result is less able to cross items off the international "honey-do" list, then someone else must. China's interested in expanding the role it plays abroad. Russia's military, and its arms-export industry, are resurgent. But my real hope was that Europe might finally do its share of the global security chores. I argued that even if Boeing (NYSE: BA  ) and Textron (NYSE: TXT  ) saw their Pentagon sales slip, we could still hope Europe would step up its arms buying and that these stocks could still remain good investments.

Ahh …
Yes. Now you see we're I'm going with this. At the time, frequent commenter AnotherNavyFool suggested I was overoptimistic:

I have worked with too many Europeans to think they … have what it takes to take up the slack (except for England, maybe). That and they are dealing with their own economic issues. Same with Japan. They are still gunshy from military rule in WWII -- as are many Asian countries who are not anxious to see them with a large military.

It seems AnotherNavyFool was right. Whether from lack of will or simple lack of funds, the U.K. is declining to "stand up as the U.S. stands down." It's retiring Harriers, mothballing carriers -- and cutting (gutting?) the RAF by 80%. All of which means we need to revise our expectations for defense stocks.

Bangs for bucks
Make no mistake: Britain knows what it's doing. It recognizes the risks. As Vice-Marshal Bagwell put it this week: "Am I happy to be down at that number [eight squadrons] next April? No, it worries the hell out of me because it's a small combat air force."

So the UK's focusing on what it can afford. In particular, knowing that unmanned aerial vehicles are cheaper to buy and fly than manned fighter jets, Britain is doubling the size of its Reaper UAV fleet. This bodes relatively well for companies that cater to such cut-price arms -- first and foremost General Atomics, which builds the Reaper, but also Honeywell (NYSE: HON  ) , which makes the engines, and Lockheed Martin (NYSE: LMT  ) and Raytheon (NYSE: RTN  ) , which make the munitions it carries.

But still, supplying cheaper weapons promises smaller revenue streams for these stalwarts. Small UAV gains for Raytheon or Lockheed are outweighed by cancelled F-35 fighter orders and the revenue gains that come with those more expensive jets.

Better bets in a shrinking defense-budget world might be smaller companies with more room to grow from the we-hope-less-is-more trend. L-3 Communications (NYSE: LLL  ) , for example, is pitching its King Air turboprop surveillance plane as a low-cost alternative to pricier fighter jets. iRobot (Nasdaq: IRBT  ) and its PackBots are another obvious robots-are-cheaper-than-people play -- as is Britain's homegrown iRobot competitor, QinetiQ (London-listed under ticker "QQ").

That's my read on the situation, at least. What's yours? Tell us about it below.

See a stock in this story you'd like to follow? Add it to My Watchlist, which will find all of our Foolish analysis on it.

iRobot is a Motley Fool Rule Breakers selection, and Fool contributor Rich Smith owns shares of it as well. The Fool owns shares of L-3 Communications Holdings. Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2010, at 3:35 PM, busterbuddy wrote:

    YOu live in a vacuum. Britain still has a military you are just living behind the safe wall not really understanding what is happening in the world. You look at the world in Economic terms thinking that is the real game. Its not. Economics and trade will not stop a military once it is placed into momentum. Until it runs out of fuel, food and bullets.

    These are dangerous times we live in. Dangerous because they have come and gone before. Liberal, Central planning theories, we don't need no big Army because who's going to attack us, Japan, Germany, (Those were the comments in the 1920's.

    But the total Foreign Military sales are roughly 20% of the U.S annual military sales. So you logic is like, well heck let them eat my cake.

    That lady thought she was doing good. She lost her head later.

  • Report this Comment On December 19, 2010, at 4:12 AM, SeeknDestry wrote:

    "Economics and trade will not stop a military once it is placed into momentum." Uh yes it will as soon as, "it runs out of fuel, food and bullets." This is driven by economics or really, in a more basic fashion, by money. Dollars, cents, $$$$. This drives war, or at least this is what war lives off, feeds off.

    I have a feeling you read the headline and went right into your rant. It has a lot of good facts in it which should be read by anyone interested in the military or defense sectors.

  • Report this Comment On December 19, 2010, at 5:44 AM, whereaminow wrote:

    From the country's economic interests, reducing the size of the military, especially the RAF, is good for England. Even from a military strategic standpoint, since England (along with America) never actually fights anyone who has a comparable Air Force (or sometimes even any planes at all), it doesn't hurt their position in terms of military might.

    If I were investing in defense contractors, I wouldn't be too distressed either. There will always be some other sucker, um I mean patriot, willing to step up and bolster their military, thereby replacing the orders no longer emanating from England. I don't suspect that the Krupp family shed too many tears when they found out a country was downsizing their military 100 years ago (because 10 others were willing to upsize.) The same is true today. Humans insatiable blood lust continues unabated and L-3, LM, Boeing, etc will have ample customers for a long time.

    David in Qatar

  • Report this Comment On December 20, 2010, at 9:04 AM, endorendil wrote:

    "Whether from lack of will or simple lack of funds, the U.K. is declining to "stand up as the U.S. stands down.""

    It isn't a lack of will. There is a lack of funds, but if there were a need, funds would be found. Everyone politician *should* know something better to do with a billion bucks than to buy army gear that may never see any action.

    Europe has many unresolved issues, but it is not facing a threat that requires - or even benefits from - a large, well-equipped conventional army. It is instructive to look at what the European armies have been doing for the last few decades, which is to say: nothing that matters to their national defense. In the one case where they actually did something useful (policing the break-up of Yugoslavia), they did it poorly, but not from lack of military equipment. Europe needs to get a lot of things in order before it has to worry about re-arming.

    As has been pointed out, there are many buyers for military equipment, as long as you don't mind what they are going to do with it, or how they got the money to pay for it. That's how it has always been, and there's no slowdown in the total amount spent on military material.

    International competition for these deals isn't new either: Russia, Israel and China have been grabbing in the same cookie jar for decades.

    The problem for the US (and EU) arms industry is no different than that of any other high-tech industry: the competition is catching up. The most compelling reason to sell holdings in western military suppliers is simple: they have a hard time justifying their premium over the competition.

  • Report this Comment On December 21, 2010, at 4:21 AM, yosemitebean wrote:

    I believe the new incoming tea party members may influence the way we fight wars completely differently than their predecessors did. Possibly surprising both sides.

  • Report this Comment On December 21, 2010, at 10:47 AM, TMFDitty wrote:

    @endorendil: Good comments, but I would disagree on one point: "In the one case where they actually did something useful (policing the break-up of Yugoslavia), they did it poorly, but not from lack of military equipment. "

    Fact is, the Europeans have a chronic deficit of transport aircraft (a hole the A400M is supposed to fill.) Whenever a need to move troops around arises, they have to call the USAF, or rent transports from Russia/Ukraine.

    Also, you need to consider where Yugoslavia sits on the timeline. The Bosnian War, for example, ran from 1992 to 1995 -- a time when the RAF still had a couple dozen squadrons in operation. Even if, as you argue, this was sufficient to the task, the question is whether *six* squadrons would still be sufficient.


  • Report this Comment On December 21, 2010, at 12:14 PM, rfaramir wrote:

    The incoming tea partiers have a chance to influence things towards liberty, but I don't know if there are enough of them, nor do I have confidence that they are sufficiently liberty-aware to know what to do.

    What I'd suggest for them is to privatize all that they can. Especially in small-time defense functions, like in the article: "protecting international shipping lanes, shooing Somali pirates away from oil tankers, and combating international terrorism". These are all better done by issuing Letters of Marque and Reprisal to private security firms. The use of a State force is overkill, expensive, inflexible, and imprecise.

    On a related note, ending the government-enforced monopoly 'enjoyed' by the TSA in airline security would go a long way towards serving instead of violating travelers.

    Similarly, ending embargoes, eradicating tariffs, and decriminalizing all trade so there is no need for smuggling, will go a long way towards reducing the causes of war. "When goods do not cross borders, armies will."

    We already cannot afford the amount and kind of State we have. Let's at least try Liberty, the founding principle of our country and original cause of her greatness.

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