It's no secret that many American defense contractors are facing difficult times as the U.S. military, the single largest purchaser of defense equipment, scales down its defense spending. However, the major military aeronautics firms do have one extremely bright spot on the horizon: unmanned aerial vehicles.
Drones are already a multi-billion dollar industry, and many observers speculate that civilian and commercial applications for drones, like parcel delivery or real-time mapping, could increase the drone market by orders of magnitude. They well may, but the commercial market has many regulatory hurdles yet to pass, and the Congressional Research Service forecasts commercial drones to make up less than 2% of global drone production through 2022.
The market for military and combat drones, however, is still in its infancy and poised to grow dramatically as armed forces and aerospace companies embrace a new generation of combat drones.
Despite their menacing reputation, today's combat UAVs—particularly the famed General Atomics Predator drones and their successors the Reapers, known as hunter-killers—simply aren't very formidable aircraft. The Predator was originally designed and developed not for combat, but for reconnaissance. The MQ-9 Reaper has a maximum speed of a leisurely (for aircraft) 300 miles per hour, but usually cruises along at under 200 mph, with a relatively light 3,800-pound payload and very little in the way of electronic countermeasures.
The hunter-killer role these drones have assumed is only possible because the enemies they target have virtually no ability to defend or even monitor their airspace. Drifting lazily in the sky stalking a target for days on end is not a viable strategy when your enemy has the ability to take drones down.
A one-sided battle
The American-led "War on Terror" has been marked by perhaps the greatest technological disparity between combatants of any modern encounter, allowing American and allied forced to gain complete control over airspace easily, often uncontested. During this period, military planners have become accustomed to the continuous real-time monitoring of battlefields and targets drones provide. Politicians have come to rely on the ability to strike at foreign targets without endangering the lives of American servicemen.
Military and political leaders want those capabilities in future conflicts as well, but today's drones are too feeble to offer them in contested airspace. According to General Mike Hostage, commander of the Air Combat Command, in a conflict with even "the smallest, weakest country with the most minimal air force," today's fearsome Predators and Reapers would be "useless."
This means, as General Hostage has called for, that the American military needs a new generation of drones. All drones will need to be stealthier, faster, and less susceptible to electronic countermeasures. Reconnaissance drones will need to fly higher, stay aloft longer, travel further, and have better sensing equipment. Combat drones will need to be tougher, deadlier, and more maneuverable.
No unmanned vehicle in regular operation today can meet the high standard of being able to operate successfully in contested air. Top defense contractors are already racing to produce an aircraft that can, and the market ahead of them is as vast as it is opaque.
A cloudy market
An important fact to grasp about the military drone market is that civilians don't really know how large it is or how quickly it's growing. Including the international market it's likely that nobody has a complete picture of the resources being put into drones. Many ongoing drone development programs utilize cutting-edge military technology, and the Pentagon has nearly $60 billion to spend on classified projects, more than half of which is officially allocated to the Air Force.
What's very clear is that it is growing. Various estimates put the size of the combat drone market at about $5 billion-$7 billion in 2013, projecting growth in the range of $18 billion-$20 billion through 2022. While dramatic, that growth could actually be conservative if next-generation UAVs can match or exceed the performance of manned combat craft, which consume over 90% of program funding allocated to military aircraft, $34 billion in 2013.
With the drones of the future requiring such dramatically different capabilities from the drones of today, this multi-billion dollar market is largely up for grabs. Today, General Atomics and Northrop Grumman (NYSE:NOC) are by far the United States' largest military drone providers, but their products are quickly becoming obsolete. They are racing to provide updated offerings even as other established aeronautical defense contractors, namely Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), are introducing their own new revolutionary UAV designs.
With a massive new market opportunity and no clear incumbent, defense contractors accustomed to years of declining military revenue now have a blue sky opportunity ahead of them.
Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Daniel Ferry has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. 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.