Will Boeing Get Kicked out of the Defense Business By 2016?

"Current orders maintain F/A-18 production through 2016 [but] additional domestic and international orders could extend production ..." -- Boeing spokeswoman Karen Fincutter

"When your home market implodes or terminates, it's tough to sustain the exports."
-- Teal Group vice president Richard Aboulafia

Boeing's best-selling F/A-18 fighter jet. Preferred plane of the Navy's Blue Angels. Source: Wikimedia Commons

This past weekend was a grand one for Boeing (NYSE: BA  ) , no doubt. In a 51-49 vote, the Seattle airplane maker's machinists union voted to accept strict wage controls and abandon its pension program, all in the interests of continuing to build commercial aircraft for Boeing in Washington state. But in an explosive exposé that's not getting nearly the attention it deserves, reported over the weekend about significant risks arising for Boeing's other major business -- defense.

Lockheed Martin and other competitors
In a nutshell, here's how the story goes. There are currently five major builders of warplanes in the Western world, and seven fighter jets that they build in significant quantities, namely:

  • Saab Gripen
  • Eurofighter Typhoon
  • Dassault Rafale
  • Boeing F-15 Strike Eagle
  • Boeing F/A-18 Super Hornet
  • Lockheed Martin (NYSE: LMT  ) F-16 Falcon
  • Lockheed F-35 Lightning II

Out of these seven, three rank among the 10 best-selling fighter jets in the world -- respectively, Lockheed's F-16, and Boeing's F-15 and F/A-18. But this could soon change.

Already, Saab's single-engine Gripen is the cheapest fighter jet of the seven, and has begun winning competitions away from Boeing's more expensive offerings. In just the past few months, Gripen was chosen to replace aging Mirages in Brazil's air force (36 jets), upgrade Sweden's existing Gripen fleet (60 upgrades), and outfit Switzerland with 22 new jets.

Meanwhile, at the top end, Lockheed's F-35 recently beat out Boeing's most advanced version of the F-15, the F-15SE -- for a massive $7.7 billion contract.

The F-35 is expected to maintain momentum as Lockheed begins switching customers over from its old line of F-16s to the shiny new F-35 warbirds, and Boeing loses contract after contract to Lockheed's F-35.

As Boeing goes into decline, Lockheed's F-35 looks ascendant. Source: Wikimedia Commons

Grasping at straws
Already, the militaries of Denmark and Canada are planning to upgrade their fighter jet fleets with F-35s. This leaves Boeing engaged in a cutthroat dogfight over price, competing against rival twin-engine fighters from Eurofighter and Dassault for the relatively minuscule sales opportunities available in Australia, Bahrain, Bulgaria, India, Kuwait, Malaysia, Poland, Qatar, Saudi Arabia, and the United Arab Emirates.

Some of which may (or may not) decide to upgrade their air forces over the next few years. India and Saudi Arabia are said to offer the biggest opportunities for fighter jet sales, with anticipated demand for 126 and 72 fighters, respectively. But even with those two in the mix, press reports suggest the total number of planes that may be bought by all these countries -- combined -- adds up to perhaps 420 jets. That's fewer than the 563 F/A-18s that the U.S. Navy alone says it needs for its aircraft carriers.

Boeing... going... gone?
How bad is this situation for Boeing? Already, the Navy is more than halfway through its F/A-18-buying program. The Navy may need to buy as many as 135 of the F-18's sister ships, the EA-18G "Growler" electronic warfare aircraft. But even so, absent other significant contract wins, it looks like Boeing may have to begin thinking of shuttering fighter jet production as early as 2016.

The moral of this story? As Teal Group VP Aboulafia opines: In this world, "there's room for one very successful program, two very modest programs or three desperately flailing programs." Unless it wants to find itself stuck behind door No. 3, it may be time for Boeing to get out of the fighter jet business.

Boeing's F/A-18 Super Hornet. Due to go below-decks for good? Source: Wikimedia Commons

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Read/Post Comments (4) | Recommend This Article (2)

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 January 06, 2014, at 1:00 PM, JoshG wrote:

    First off, Boeing inherited the fighter business with takeovers of General Dynamics and McDonnell Douglas. McDonnell Douglas has been a prime manufacturer of fighters dating back to the early 1960's with the Phantom II in use with navy and Air Force and later with the F-15 and F/A-18 in the 70's thru today. You are talking 50 years of steady contracts. Boeing primnarily besides being the world's biggest maker of commercial planes and their militry variants also was resposnible for the bombers in use dating back to the 1930's.

    Lockheed is the big fighter producer these days with its strong work in the area of stealth and back projects. Lockheed to also had a stake in commercial aviation but to my knowledge hasn't been relevant since the L-1011 which is basically almost completely out of service.

    Big companies like Boeing can survive. these days companies have learned to "spread the wealth" by sharing in the building of aircraft. Based on my knowledge of military aircraft history I think the US gov't would better serve the military by awarding multiple contracts to defense companies. Lots of excellent designs have been discarded and never really given a chance due budget constraints having to choose a winner take all type of contract.

  • Report this Comment On January 06, 2014, at 1:05 PM, ADObserver wrote:

    This completely overlooks the unmanned systems space and cyber divisions also squarely within the 2014 defense realm...and also immensely profitable sides of the business for the adaptable A&D companies mentioned - all of whom have embraced changing force modernization requirements globally. Drones as they're popularly called are not the only unmanned systems employed, nor is this market driven by General Atomics alone. As Export Control Requirements adapt to allow a more competitive domestic manufacturing base and defense export regime, unmanned systems (ISR etc.) may also enable export opportunities beyond the fighter jet.

  • Report this Comment On January 06, 2014, at 2:23 PM, TMFDitty wrote:

    Not really, AD. Boeing is really a very small player in drones so far. It just hasn't gotten much traction there -- and hearkening back to Josh's comment, what traction Boeing does have in drones, it got from acquiring Insitu.

    In drones, it's GA in the lead, as you note. But also Northrop, and to a lesser extent, Textron. I'd say Raytheon could be a potential fourth-place candidate. It's curious that Lockheed and Boeing haven't been able to make headway in drones, but that's how it is.

  • Report this Comment On January 06, 2014, at 4:38 PM, HamnBeans wrote:

    Just to square up the facts: General Dynamics originated the F-16. Lockheed, not Boeing, took over GD's fighter business and continues (now as Lockheed Martin) limited F-16 production today.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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