Will Boeing's Tanker Destroy Lockheed Martin's F-35?

In a world where sequestration is the norm, and defense spending exists in a proverbial vice, one thing a company doesn't want to do is have a product that's too expensive. And $10 billion above budget is way, way too expensive. Unfortunately for Boeing's (NYSE: BA  ) KC-46A tanker, that's exactly what's happening. But in a surprising twist, this actually may be bad news for Lockheed Martin's (NYSE: LMT  ) F-35, not the tanker. Here's what you need to know.


The KC-46A will replace the aging KC-135, seen here refueling an F-15. Photo source: DefenseImagery/Wikimedia Commons 

The $10 billion breach
In a report given to Congress in May, the Air Force estimated that over the five decades of planned service, the support costs for the KC-46A tankers would be $103 billion. That's 11% more than the previous estimate of $92.7 billion. More pointedly, it breaches a key component of the program's acquisition baseline plan. 

The good news is that this breach isn't something Boeing is liable for -- which is especially good considering Boeing's already liable for an estimated $700 million in cost overruns during the development phase. In fact, this breach is due to the fact that the Air Force intends to increase flying hours on the tanker, as well as assigning 3.5 aircrews to the aircraft, instead of 2.5. What's even better news for taxpayers is that the Air Force stated that it's committed to staying within its budget, and will not seek additional funding for the KC-46A. But that, right there, is bad news for Lockheed.

What's good for Boeing is bad for Lockheed
There have been a number of defense budgets bouncing back and forth between the House and the Senate. But the latest 2014 Defense Appropriations proposal that passed last week in a Senate committee includes funding for the KC-46A development. It also cuts funding for Lockheed's advanced F-35 procurement funding for 2015. 

As Lt. Gen. Charles Davis, the Air Force military deputy for acquisition, said earlier this year, the Air Force would likely "protect the tanker no matter what" which could mean scaling back on F-35 procurements. 

Moreover, Senate subcommittee chairman Sen. Dick Durbin said about the recently passed measure, "We are crafting this support in a highly uncertain and tumultuous budget environment. We cannot continue like this. Across-the-board sequestration cuts are forcing us to play Whac-a-Mole with the defense budget." 

The fact of the matter is that sequestration is reality, and the Air Force has to operate under a reduced budget. So, if something costs more than it is budgeted, then the extra money spent on one program has to come from another program.

What to watch
Fiscal 2014 is fast approaching and, unfortunately, sequestration is still in effect. Consequently, the Air Force, defense contractors, and everyone else, will continue to see defense budgets shrink. That means that even "essential" programs could face cuts, or significant budget restrictions. This will undoubtedly affect defense companies' bottom lines. For Lockheed, which receives an estimated 15% from the F-35 program, these cuts could be very painful -- especially if the Air Force decides that it needs the tanker a lot more than the F-35, and the price for the tanker continues to increase.  

In addition to the much-needed KC-46A, Boeing has a lot going for it, and could make for you an excellent investment. However, there are risks to consider before plunking down your hard-earned cash. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery", outlines three companies, including Boeing, that could take off when the global economy gains steam. Click here to read the full report!


Read/Post Comments (6) | 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 August 06, 2013, at 2:37 PM, dawg1029 wrote:

    I would bet on the tankers. the F-35s are at Eglin AFB, and the people are suing the Air Force.

    Other communities want the Air Force, like Tyndall, Luke, maybe this is an insight of what is in store for Eglin?

  • Report this Comment On August 06, 2013, at 2:50 PM, 2smartforlibs wrote:

    If the media pout as much time into the truth on the sequester as it has letting the left blame everything on it. The TRUTH is the sequester was a reeducation in the rate of growth. The current money was spent already. the baseline increases even with the sequester. The low information types have no idea of this and they drink the left wing kool aid

  • Report this Comment On August 06, 2013, at 4:11 PM, DNMay wrote:

    There are a slew of international agreements with our allies all contingent upon the F-35 being developed under our leadership in partnership with our allies who will also procure it. I don't believe the tanker has anything similar to protect it..

  • Report this Comment On August 06, 2013, at 6:26 PM, Cuencanolenny wrote:

    The tanker replaces fifty year old airplanes and is desperately needed by the Air Force. The JSF on the other hand was a bad idea from the start. The universal airplane that can be used by any branch of the military requires the enemy to devise one defense as opposed to defenses against a multiple of different aircraft. Further, the F35 is a ridiculous concept with the driveshaft powered fan. It looks cool but it is so late, so over budget it needs to be canned outright.

  • Report this Comment On August 07, 2013, at 12:31 AM, LotinElite wrote:

    The Airforce may need the KC-46 more than the F-35 -- they have the F-22. The Navy needs the F-35.

    The JSF was not a bad idea from the start; it makes sense to develop one project for three services rather than three separate projects. As far as the "one defense" notion, ACM is not rocket science and no other force can hang with us air-to-air thanks mostly to our advantage in training hours. SAMs don't care what the airframe looks like so that doesn't wash either; either it sees you or it doesn't and if it does you either get out of its way or you don't.

    The difference here is that the F-35 is more survivable going head-to-head against other 5th generation fighters; the super hornet is 4th generation. The much smaller radar cross-section of the F-35 makes it more survivable against SAMs as well.

    The major operational flaw in the F-35 is that it's missing an engine.

  • Report this Comment On August 09, 2013, at 6:52 AM, Markoolhaas wrote:

    Tankers or fighters.

    What good would al these new tankers be in about 10 to 15 years when the airforce would not buy new fighters (F-35's)...........

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2581233, ~/Articles/ArticleHandler.aspx, 10/20/2014 7:14:11 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement