The Navy's Next Warship Could Give One Lucky Company a $50 Billion Bonanza

It's been decades since the U.S. Navy built a frigate. Is it time to bring back this classic warship?

May 11, 2014 at 11:55AM

Lockheed Martin's Littoral Combat Ship -- bigger than a bread box, but still not big enough? Photo: Wikimedia Commons.

The U.S. Navy needs a new warship.

Maybe it doesn't need more warships. But the way the Navy has been spending its money lately doesn't make a whole lot of sense.

  • Spending billions of dollars to develop a fleet of Littoral Combat Ships -- then cutting the fleet in half, and increasing the per-ship cost in consequence, after the Pentagon determined the ship "is not expected to be survivable in high-intensity combat."
  • Investing billions more in developing a stealth superdestroyer called the USS Zumwalt, with plans to keep development costs manageable by spreading them out over a fleet of 32 ships ... then reversing course on that one, too -- forcing the entire $9.6 billion program cost to be borne by just three ships.
  • And of course, building what could easily become the world's biggest, and most expensive, floating target for China's new DF-21D "carrier killer" ballistic missile -- the USS Gerald R. Ford supercarrier.

The result of all this one-step-forwarding, two-step-backing is that the U.S. has been left with fewer, and more expensive, warships. Perhaps too few to fulfill its missions.

That's the result. But what's the solution?

China's massive DF-21D carrier killer ballistic missile -- packaged for home delivery. Photo: Wikimedia Commons.

Meet the solution
As I said before, the U.S. Navy needs a new warship. Specifically, a new kind of warship. Last month, the service invited defense contractors to put forward ideas for how to build it, calling the new concept vessel the "Small Surface Combatant," or SSC. And what would SSC look like?

Ideally, SSC would occupy a place in the spectrum of U.S. naval warships somewhere between that of a small Coastal Patrol boat...

Cyclone-class Coastal Patrol boat USS Firebolt (PC-10). Photo: Wikimedia Commons.

... or Littoral Combat Ship...

America's first Littoral Combat Ship, the USS Independence (LCS-1). Photo: Wikimedia Commons.

... and something bigger, like a guided missile destroyer.

At $3.5 billion a pop, the Navy's new Zumwalt-class superdestroyer may be too expensive to risk in combat. Illustration: U.S. Navy.

The SSC needs to be big enough to carry a large arsenal of rockets and missiles, high-tech enough to survive in a modern warfare environment, and yet still cheap enough that we can afford to build a lot of them. reported last month that any ship with a price tag of $1 billion or above will be "far too expensive" to pass muster. (For comparison, when the Oliver Hazard Perry-class frigate was first built in 1978, its cost would work out to about $683 million in today's dollar terms.)

Can we buy off the rack?
Hoping to keep the SSC's price down, defense contractors Lockheed Martin (NYSE:LMT), Huntington Ingalls (NYSE:HII), and General Dynamics (NYSE:GD) partner Austal USA (NASDAQOTH:AUTLY) say they have existing ship designs that might be tweaked to suit the Navy's new requirements.

For example, Lockheed or Austal might take one of their two Littoral Combat Ship designs, scale them up in size, and replace the LCS' fungible "mission modules" with a more permanent package of guns, missiles, and radar systems. Or Huntington, already a preferred provider of "cutter" vessels to the U.S. Coast Guard, could militarize its new National Security Cutter a bit to suit the Navy's tastes.

Recycling designs is not a half-bad idea. Indeed, it already has the imprimatur of Secretary of Defense Chuck Hagel, who has advocated developing "a capable and lethal small surface combatant generally consistent with the capabilities of a frigate." Hagel, at least, sees nothing wrong with tweaking existing ship designs to arrive at that result.

Which company will win the contract?
But at this stage in the process, development of a SSC -- by anybody -- remains up in the air. The Navy has canvassed the industry for ideas, which it expects to begin reviewing later this month. But it has not yet issued an official "request for proposals" from defense contractors looking to bid on SSC.

All three ship designs have their merits. Naval analyst Craig Hooper, writing on the blog, believes Lockheed Martin has the advantage, given that its Freedom-class LCS basically looks like what a standard-issue warship should look like, and that plans to build a larger version of the Freedom as an SSC are already "in the can" and ready to be submitted by the Pentagon's May 22 deadline.

I personally think a scaled-down version of Huntington Ingalls' and General Dynamics' Zumwalt-class superdestroyers could win a bid. With billions of dollars of research and development already sunk into the Zumwalt's design, reworking some of that research into a smaller, "stealth frigate" -- and spreading the costs over multiple copies, might be a good way to maximize returns on the Navy's investment.

How much could the contract be worth?
What might an SSC contract be worth to the lucky winner(s)? It depends on what you think the Navy is aiming for. Say the service thinks the LCS is a good ship, just not capable enough of performing "frigate missions" to justify building all 52 units it initially planned to build. In that case, the Navy might stop at the 32 LCSes presently envisioned and build the rest of the production run as SSCs. That would suggest a 20-ship SSC fleet, and a top value of perhaps $20 billion on the contract.

Alternatively, if the Navy views the entire LCS project as a bust, and decides to start again from scratch, then it might well still believe it needs a fleet of 52 small surface combatants. That would lift the ceiling on the contract value past $50 billion.

For now, we seem to have more questions than answers. But we'll surely know more later this month when the Navy issues an official request for proposals. Stay tuned.

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Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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