Threat From the North: Canada May Ax the F-35

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For months, we've heard the rumblings from on high: the Canadian Department of National Defence is displeased with the cost overruns on Lockheed Martin's (NYSE: LMT  ) F-35 fighter jet. In fact, if the plane winds up costing as much as it looks likely to, Canada just might not buy it at all.

Originally, Canada planned to buy 65 units of Lockheed's new fifth-generation fighter to replace the aging CF-18 fighter jets built for it by Boeing (NYSE: BA  ) years ago. Problem is, when Canada drew up these plans, it was counting on the planes, plus associated upkeep costs, totaling $16 billion over the life of the program. However, an audit by KPMG last month suggested the bill will be closer to $30 billion -- sparking sticker shock up north of the border.

$30 billion there, $1 trillion here -- anywhere, that's talking real money
Even if it's not quite as much as the $1 trillion the U.S. ultimately plans to spend on the F-35, $30 billion is a pretty big number. It's apparently big enough to have given the Canadians second thoughts -- even though they, along with seven other countries, are jointly developing the plane with the United States.

Canada's solution: According to a Reuters report out Friday, the country is floating a plan to seek bids from five companies -- Lockheed, Boeing, France's Dassault Aviation, Sweden's Saab, and the pan-European EADS -- to see if anyone wants to build it an air force for something closer to the originally budgeted price ($8.9 billion, exclusive of upkeep costs).

What does this mean to you?
The risks to its F-35 franchise are mounting. Last month, I wrote about ominous comments from the U.S. Air Combat Command, suggesting the Air Force is no longer committed to building an all, or almost-all, F-35 airfleet. That it's instead decided it wants a "family of systems," each one tailored to the mission it will be asked to complete.

I still think that's the biggest risk to Lockheed Martin going forward. Next to it, Canada's threat to "take its business elsewhere" is just one more small blip on the threat radar.

Still, that doesn't mean we get to ignore it. If Lockheed's to salvage its flagship program, it needs to keep costs down, and ramp production up -- to quickly move toward a production scale that helps it to produce planes cheaper, the more planes it builds. Otherwise, Canada may not be the only F-35 partner looking for an exit.

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9/27/2016 2:56 PM
LMT $246.18 Up +0.65 +0.26%
Lockheed Martin CAPS Rating: ****
BA $131.44 Up +0.87 +0.66%
Boeing CAPS Rating: ****