As the Black Hawk Fades to Black, Who Will Build the U.S. Army's Next $100 Billion Helicopter?

America needs a new top (helicopter) model.


Boeing Apache attack helicopters: Time to fly off into the sunset? Photo: Boeing.

First flown in 1975, our fleet of Boeing (NYSE: BA  ) Apache attack helicopters is "pushing 40," and beginning to show its age. United Technologies' (NYSE: UTX  ) Sikorsky Black Hawks are no spring chickens either. Having been around since 1974, they passed the 40-year mark just this year.

Indeed, according to National Defense Magazine, "the helicopter designs used by the various military branches are at least 30 to 50 years old." Rounding out the list of America's most popular combat helicopters, NDM notes that Boeing's CH-47 Chinook and Textron's (NYSE: TXT  ) UH-1 "Huey" helo both date from the early 1960s.

The upshot: Many models are expected to reach the end of their operational lives in the 2030-2040 time frame -- but fear not. The U.S. Army has a plan to upgrade the fleet... for a reported $100 billion price tag

The Army has a plan
The Army's plan, dubbed "Future Vertical Lift," calls for the introduction of as many as four new helicopter models over the next 20-odd years. These will all be designated "Joint Multi-Role" (JMR) helicopters, and will include:

  • A "light" scout helicopter to replace the Textron's OH-58D Kiowa Warrior
  • A medium helo, in attack and utility versions, to replace the Apache and Black Hawk, respectively
  • A heavy lift helicopter to replace Boeing's Chinook
  • And a new "ultra" helo that, according to the Army, will be so huge in size that it can substitute for missions that currently only Lockheed Martin's (NYSE: LMT  ) fixed-wing C-130 transport plane can perform

In true Army fashion, they've decided to start this process in the middle -- with the medium JMR.

Introducing the Apache and Black Hawk replacement
Last week, the Army announced it has picked two teams to design demo versions of helicopters that might fit the bill for its planned medium JMR helicopter. Boeing and United Technologies' Sikorsky will team up to build one prototype, and Textron will fly solo on the other.

Boeing and Sikorsky are calling their version the SB>1 "Defiant," and say it will feature counter-rotating rigid main rotor blades for lift, boosted by a "pusher propeller" at the rear to increase the aircraft's ability to accelerate and decelerate, thus increasing both airspeed and maneuverability. The Boeing-Sikorsky team expects to have a prototype ready for first flight by 2017, and it should look a little bit like this:


United Technologies' Sikorsky X2 technology demonstration helicopter. Photo: Sikorsky.

Textron, meanwhile, is doubling down on the popular V-22 Osprey design (currently built in collaboration with Boeing), to field a next-generation tiltrotor aircraft that Textron calls the "V-280 Valor." Textron says the Valor will offer the Army "unmatched speed, range and payload, operational agility, and low speed maneuverability." Here's a first look at it:


Artist's rendering. Source: Textron.

Who will win?
United Technologies and Boeing build, respectively, the No. 1 and No. 4 best-selling helicopters in the world -- the Black Hawk transport and the Apache attack helicopter. They're both strong contenders to win the Army's new FVL helicopter contract, and are made stronger by their alliance. The companies boast that their "Defiant will fly faster and farther than any current medium-lift helicopter today and also carry a heavier payload."

It will need to, if Boeing and Sikorsky are to have a shot at winning this competition. The Army says it wants its new helicopter fleet to cruise at at least 230 knots, and Textron is already promising them a 280-knot cruising speed from the V-280 Valor -- a 100% improvement over current helicopter speeds.

What does it mean to investors?
With an anticipated servicewide need for as many as 4,000 medium-class FVL helicopters, and a projected price tag of $100 billion to buy them all, the Future Vertical Lift project is a really big deal for these defense contractors. But as investors, which one should we want to win?

Let's look at a few numbers.

Textron earns 12.7% profit margins on its Bell business. Bell is also Textron's single biggest revenue generator, and absolutely crucial to the success of the company as a whole.

By way of contrast, S&P Capital IQ data show that United Technologies only earns about 9.5% pre-tax profits from its Sikorsky helicopter division -- and Sikorsky is United Technologies' smallest revenue generator. (It may also be for sale). Similarly, Boeing earns only a 9.2% operating profit margin from its military aircraft division -- which is three times smaller than Boeing's commercial aircraft business.

So the way I look at it, a win on Future Vertical Lift is worth more to Textron than it would be to either Boeing or Sikorsky. What's more, since Textron is better at squeezing profits out of its helicopter business than are its two rivals, a win by Textron would benefit Textron shareholders more than a win for Boeing or United Technologies would help their respective investors.

Long story short: This early in the game, it's hard to say who will build the Army's next top helicopter model, and collect the $100 billion prize at the end. But there's no doubt which stock offers the most potential to reward shareholders.

That's Textron by a mile.

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Textron could fly away with this $100 billion contract -- and that might be a good thing. Source: Textron.


Read/Post Comments (4) | Recommend This Article (14)

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 24, 2014, at 11:32 PM, ospreycbk wrote:

    First of all why do we need a $100B dollar helicopter, why not spend $30B building new Chinooks, Blackhawks, and Apaches and incorporate the new technology(if it is really needed) in the new models. First of all the people that will build the new helicopters are the ones that tell the Pentagon that they(the Pentagon) need this new helicopter with all the latest bells and whistles. And for some reason nobody will asked the DUMB QUESTION "could/can these new bells and whistles be incorporated into an existing weapons system". We "retire" tried and tested weapons system that we know work strictly because they are old and replace them with something bigger and better. Bigger isn't always better.

  • Report this Comment On August 25, 2014, at 5:44 AM, Mathman6577 wrote:

    The helicopter business of UTC is small potatoes as compared to the rest of its aerospace business and building systems segment. I don't think the new helicopter will be make or break for the company.

  • Report this Comment On August 25, 2014, at 10:26 PM, rcmpvern wrote:

    How many US aerospace firms were competing in 1974 ?

    Lots.

    And competition in the US used to breed excellence.

  • Report this Comment On August 27, 2014, at 8:41 PM, Bluetugboat wrote:

    FVL-TD is worrisome for the future of American A&D. Put simply, Bell and Sikorsky have both been victims of their own success: by shaping their product lineup around enormous, slow-moving Army/DOD projects, they have let their lead in the civilian markets slip terribly. Bell and Sikorsky used to own the civilian rotorcraft markets; now they are dominated by Eurocopter, now Airbus Helicopters. The Army's last two attempts to run acquisition programmes (AAS and Comanche) amounted to little more than disastrous bloodletting, with nary a new airframe entering service.

    According to the last Rotor and Wing survey I saw, civilian operators still associate innovation with the European airframer, with American players in the catch-up role.

    I know this article was focussed on defence, but I think there are profound implications for A&D investors. FVL has already cast out the potentially disruptive innovators (Karem Aerospace and AVX), leaving the Sikorsky-Boeing team and Bell as the key players. The glacial pace of pricey defence programmes and the politically charged environment leave a lot to be desired for investors seeking solid returns.

    Finally, bear in mind that Sikorsky-Boeing and Bell were selected as winners for the FVL-TD, (Technology Demonstrator) not the full-blown FVL. So we are talking about putting together competing proposals, essentially, in 2014, for a programme that might not deliver any airframes until 2025-2030.

    I am steering clear of Textron for these reasons. If you want to invest in A&D, I'd look more closely at major subcontractors such as GE, who will win because they supply the underlying technologies and are diversified.

    Great article, glad you're on Facebook as well.

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