The good news: As of today, it's been more than a month since the engines on any F-35 fighter jets have spontaneously burst into flame, "severely damaging" the plane, and grounding most of the U.S. military's F-35 fleet while the incident was being investigated.
That's good news for Lockheed Martin, which has upwards of $1 trillion in future revenues riding on the successful rollout of the F-35 over the next 60 years. It's good news, too, for United Technologies, which builds the F135 jet engine which powers the F-35 Joint Strike Fighter.
And the bad news? Even though F-35s have returned to normal flight operations, and their F135 engines appear to be operating normally, there's a movement afoot to resume work on an alternate engine for the F-35 -- an alternate engine that would not be built by United Technologies.
The trouble with the F135
That's the upshot of a recent story in DefenseNews.com, which reports that the U.S. Senate Appropriations defense subcommittee is recommending that the Pentagon "reassess the value of an alternate engine program creating competition to improve price, quality and operational availability."
Why? On June 23, the United Technologies-built F135 engine of an Air Force F-35A fighter caught fire while taxiing toward take-off from Eglin Air Force Base in Florida. Blame for the incident has been attached to one of the integrally bladed rotors, or IBR, within the F135 engine, which apparently rubbed excessively against the engine shell, creating friction and bursting into flame.
This was actually the second such incident with United Technologies' F135 -- although the one that got the most attention, affecting as it did an operational airplane. Late last year, a test engine that UTC had been running suffered a similar failure with its IBR. Investigation of the Eglin incident, which grounded F-35s across the nation for more than two weeks, revealed that several other F-35s were affected by "mild rubbing" in their engines.
Nevertheless, the flight ban was lifted on July 15. But the Senate doesn't seem convinced that this was a good idea.
Reintroducing the General Electric and Rolls-Royce F136 jet engine
Were money no object, the Senate seems to think that it would be a good idea to reintroduce competition to the F-35 engine market by allowing General Electric (NYSE: GE ) and Rolls-Royce (NASDAQOTH: RYCEY ) to restart development of their alternative engine for the F-35, dubbed the F136.
GE and Rolls-Royce shut down development of the F136 in December 2011, ending a five-year effort to develop an alternative F-35 engine (and to grab a piece of the trillion-dollar F-35 program for themselves). At the time, the Pentagon cited the estimated $2.9 billion cost of completing development work on the F136 as a key reason for canceling the program.
Restarting the program today would probably cost at least that much to complete development, and probably more, since it would have to ramp up from a standing start.
That figure alone -- $2.9 billion -- is probably a good reason why Congress will not authorize new funding for the F136 unless absolutely necessary. Loren Thompson, chief operating officer of the defense-oriented Lexington Institute, argues that the cost of restarting development would mean "the prospects for having an engine competition anytime soon are zero." And over at the Pentagon, where the Air Force is already famously strapped for cash, acquisition executive Frank Kendall says he has no interest in footing this particular bill.
The upshot for investors
The chances of Congress voluntarily voting to refund F136 development work seem slim, and will remain so, as long as the federal purse remains light, and the threat of sequestration looms over Pentagon budgets. Simply put, no one wants to spend $2.9 billion on a new engine unless they absolutely have to. The logic of saving money by sticking with a single engine, however, could go up in smoke the next time an F-35 jet engine bursts into flames.
With every headline describing an incident such as Eglin's in the future, expect to see United Technologies stock take a hit -- and expect to see the share prices of General Electric and Rolls-Royce tick a little higher.
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