Is Boeing About to Lose Its C-17 Military Transport Contract?

Great news! Wars in the Middle East are winding down. Unfortunately, they're shifting to other parts of Asia. Still, wars mean a need for military equipment, and for defense contractors that means profits -- usually, that's accompanied by a boost to stock value. However, for Boeing's (NYSE: BA  ) C-17 U.S. military transport contract, the shift from the Middle East to other parts of Asia is not proving lucrative. Here's what you need to know.

Source: Matthew Hannen, via Wikimedia Commons. 

The money is running dry
Defense spending is being slashed left and right, which means the Pentagon is making hard decisions when it comes to military needs. Currently, there are a number of programs that the Pentagon is unwilling to sacrifice, such as Lockheed Martin's (NYSE: LMT  ) F-35 fighter, Huntington Ingalls Industries' (NYSE: HII  ) CVN-78 aircraft carrier, and Northrop Grumman's (NYSE: NOC  ) RQ-4 Global Hawk drones -- good news for these guys. Then, there are other programs that the Pentagon has deemed less critical. That includes Boeing's C-17 contract.

Richard Aboulafia, an aviation analyst with the Teal Group, said about the C-17, "The growth drivers are there, but the economic resources are not." Boeing's U.S. military C-17 contract is slated to end in 2014, and while the need for military transports is still there -- in fact. it's growing -- the money needed for the transports, is not. Consequently, a renewal for the C-17 contract doesn't look promising.

Oversees spending to the rescue?
With U.S. defense spending cuts looking to take a bite out of C-17 profits, oversees spending has become more important. Last week, Boeing delivered the first in an order of 10 C-17s, to India -- a contract worth a reported $1.78 billion. Additionally, Boeing's vice president of business development for mobility, surveillance, and engagement, Tommy Dunehew, stated that "five to six" new countries have shown interest in purchasing the C-17. 

The India deal, and expressed interest from other countries, is great for Boeing. However, Boeing rival EADS' (NASDAQOTH: EADSY  ) Airbus seems to be making progress with its troubled military transport plane, the A400. That could result in more competition for overseas sales.  

So far, the A400 is four years behind schedule, and billions over budget because of a number of issues, but according to Airbus' Flight-test engineer, Eric Isorce, those issues have been solved. Boeing maintains that it doesn't see the A400 as a competitor, but considering that Airbus already has 170 orders to countries across Europe and plans to "aggressively" market the A400 to the Middle East, Asia, and Latin America, as soon as the A400 comes online, Boeing may want to take notice.  

Set your sights on the horizon
Defense spending has to decrease; that's the reality of the sequestration. For Boeing, that may mean the end of its C-17 contract with the U.S. military. Still, there are lots of overseas opportunities that could prove lucrative to Boeing's bottom line. But as always, Boeing's chief rival, Airbus, is looking to be the recipient of those profits.

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  • Report this Comment On June 22, 2013, at 3:55 PM, Tyeward wrote:

    I´m not so sure I would consider dismissing the C-17 just yet. People must remember that the U.S is not the only customer of this particular type of aircraft. Military aircraft are just like civilian aircraft. They have life cycles and get to the point where it´s actually cheaper to just get a new one instead of pulling preventive maintenance constantly. If the market for the C-17 is saturated, then Boeing can move towards contract maintenance on those aircraft. Civilian contractors are still the primary source of manpower at Depot level sites so I would expect to see Boeing still maintain contracts that are relative to this specific aircraft concerning that. Airbus is coming along and their cargo transport has merit in the areas in which it was designed to cover. They are both technically not really in the same league. What Airbus has would more than likely be a threat to the C-130 than anything else.

  • Report this Comment On June 22, 2013, at 9:02 PM, hunter3203 wrote:

    The military has been trying to shut down the C-17 for years. The politicians won't let them and have kept putting in funding for additional C-17s. On the other hand, the Air Force wanted to buy additional F-22s and was turned down. Cargo aircraft are often operated by the reserves and that means basing opportunities for Congressman.

  • Report this Comment On June 23, 2013, at 4:32 AM, rairden wrote:

    Oversees spending?

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