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Should the U.S. Navy Spend $10 Billion to Build a Fleet of Floating Gas Stations?

"An army marches on its stomach," Napoleon Bonaparte once said. But what about a navy?

It floats on a sea of oil. And in the modern U.S. Navy, it's America's fast combat support ships, built by General Dynamics (NYSE: GD  ) , that bring the oil to the warships.

USNS Supply (T-AOE-6) -- the first of its line. Photo: U.S. Navy.

Dubbed "T-AOEs" by the Navy's Military Sealift Command (MSC), fast combat support ships such as the USNS Supply, shown above, can carry as many as 177,000 barrels of fuel in their hold -- and 2,150 tons of ammunition, 500 tons of dry food, and 250 tons of refrigerated food besides. Manned by civilian crews, the four vessels of the T-AOE class serve in the MSC's Naval Fleet Auxiliary Force, keeping U.S. carrier battle groups fueled and supplied while at sea.

But this mission may be in jeopardy.

Mandatory retirement?
Defense News reported that the Navy plans to retire two T-AOEs -- half the fleet -- over the course of the next year. Complaining that the ships are too expensive to operate in an era of constrained defense budgets, the Navy proposes replacing the all-in-one vessels with smaller, slower "T-AO" oil-supply ships and "T-AKE" dry goods-and-ammunition carriers. But this could be problematic.

Cruising at 25 knots, T-AOE-class vessels are 25% faster than the MSC's T-AKEs, and T-AOs, both of which max out at 20 knots. That's still not as fast as a nuclear-powered aircraft carrier tooling across the ocean at 30 knots or more, but it's a closer match. Defense News also noted that it takes a pair of T-AOs and T-AKEs about 50% longer than a T-AOE, working on its own, to "fill up" a carrier with ammo and jet fuel.

T-AKE dry cargo/ammunition ship USNS Lewis and Clark (T-AKE-1). Photo: U.S. Navy.

But there may be a solution to this problem. Even as it plans the T-AOE's retirement, the Navy is angling to get a new class of support vessel built, tentatively monikered "T-AO(X)." These are planned to be an improvement on the 14 T-AO oilers currently in the fleet.

Meet the T-AO(X), America's newest, fastest floating gas station
With an estimated speed of between 20 and 26 knots, the new T-AO(X) class of oiler could well turn out to be fully as speedy as the T-AOE. The new vessel is also said to have increased capability to carry dry goods and ammunition, so it could theoretically perform the T-AKEs' mission as well.

According to a Congressional Research Service report, the Navy plans to buy its first T-AO(X) tanker in 2016 for an estimated $682 million, and to put it in service four years later. However, Strategic Mobility Combat Logistics Division chief Scott DiLisio, who reports to the chief of naval operations, said costs could rise as high as $690 million per T-AO(X) oiler. Current plans call for a 17-ship build out, enough to replace all the current T-AO vessels, as well as one of the retired T-AOEs.

At $682 million a pop, we'd probably be looking at roughly an $11.6 billion program, beginning with a first purchase in 2016, pausing to evaluate any changes necessary in 2017, then resuming with a build out of one ship per year, through 2033 (with final delivery in 2037). 

DiLisio's calculations notwithstanding, the Navy is counting on seeing costs come down over time -- so its cost estimate is closer to $10.1 billion for the 17 ships.

What it means to investors
Potential builders include T-AOE incumbent General Dynamics, rival defense contractor Huntington Ingalls (NYSE: HII  ) , and VT Halter Marine -- which S&P Capital IQ says is a subsidiary of foreign-listed Singapore Technologies Engineering. Last summer, the Navy awarded all three companies small contracts to begin working up proposals for the T-AO(X) program.

Of the three, General Dynamics probably has the edge on winning this contract by virtue of (a) its incumbent status and (b) the fact that GD has been building out its expertise in this space with a series of recent contract wins to build tankers for civilian companies such as SEACOR Holdings  (NYSE: CKH  ) and Kinder Morgan (NYSE: KMI  ) . With an operating profit margin of nearly 10% in its marine systems business, a win for GD could mean as much as $1 billion in extra profit. Huntington Ingalls, with a profit margin of just 7.5% from shipbuilding, would get significantly less out of a win, and thus benefit investors proportionately less.

The upshot: Defense investors should probably be rooting for General Dynamics to win this one -- and invest appropriately.

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USNS Guadalupe (T-AO-200) dwarfs its customer as frigate USS Ingraham (FFG-61) pulls alongside for a fill-up. Photo: U.S. Navy.

Read/Post Comments (22) | Recommend This Article (4)

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 September 01, 2014, at 10:37 AM, dekerivers wrote:

    We as a people are as dumb as a mule never learn from history. We need control all water ways in the world at what ever cost. He who controls the oceans controls the most important asset goods and services. for the young people that worry abot the next judge on the voice don't worry about it you will never understand world economics and therefore pronounce yourself a disavowed liberal

    big g

  • Report this Comment On September 01, 2014, at 10:39 AM, croberts11117 wrote:

    These are a waste. We need to invest in rapid deployment aircraft and drones. A couple of A-10's in drone configuration with F-15 support plus maybe some Puff the magic Dragons is all we need.

  • Report this Comment On September 01, 2014, at 11:11 AM, vet212 wrote:

    Yes it should, and while it is building ships it should invert in large Cruisers as well, say up ti 100,000 tons and 12 or 14 16" guns and at least as fast as the old Iowa's now that would be a true littorial combat ship and a real force projector solid visible and indestructible just off your coast waiting to arrack when you fail to come to terms

  • Report this Comment On September 01, 2014, at 11:34 AM, rlv1 wrote:

    What about a small nuclear power plant in our warships, which means they could be at sea for an extended time and cut the cord on dependence on fossil fuels. We would not need the oilers, but would still need ammunition and food supply ships.

  • Report this Comment On September 01, 2014, at 12:00 PM, vanman54 wrote:

    Being a retired Navy vet I am a bit biased but it is essential that the worlds oceans stay open and free to trade, 200 years ago this job belonged to the British fleet it now belongs to us like it or not. when UNREP's are in progress the carrier slows to the oilers speed and become quite open to attack so a faster speed is good. We need all of our fleet to protect our interest's and to provide a rapid response to world situations and could do with less fancy multi-tasking weapon's systems like the F-35 what a waste of money.

  • Report this Comment On September 01, 2014, at 12:02 PM, vanman54 wrote:

    @riv1 its not the carriers that need fuel its the planes all carriers are now nuke powered and also some of the bigger frigates and such, the smaller destroyers run of jet fuel as they are now turbine powered.

  • Report this Comment On September 01, 2014, at 12:09 PM, peterwolf wrote:

    Now why on earth would this article be asking the ignorant public this question?? The overwhelming majority of the population of this country is so ignorant of defense affairs that it would like asking them should we build a particle accelerator in Berkley or Switzerland??

  • Report this Comment On September 01, 2014, at 12:14 PM, 67alfa wrote:

    No, we shouldn't blow $10 Billion on this project. I'm a vet, spent time in Viet Nam in the day and, more recently, went to both Iraq and Afghanistan as a contractor. So, I have a long relationship with DoD and the uniformed services and, with that background, I can say that we need to stop buying into every blue sky project that comes along. We simply can't afford all this stuff any more!

  • Report this Comment On September 01, 2014, at 12:15 PM, Navyguy62 wrote:

    Having served in the Navy aboard the USS Santa Barbara (AE-28) I can speak to this issue with some knowledge. Any force is only as strong as the support system that keeps it going. Of course this means food, clothing, mail and other essentials. Add to this the fuel and ammunition that any fighting force (even drones) require and you can start to see the magnitude of this challenge.

    Two points to consider as we update our support fleet, speed and costs. While I was in the Navy the support fleet was primarily manned by active duty sailors. Granted nobody signs up for a support ship as everyone wants a fighting ship. I could never understand the reasoning behind switching the supply fleet over to civilian crews as a 'cost saving' measure. It cost quite a lot more in pay and benefits for a merchant sailor than it does for a fleet sailor. The price of the ship remains static but the operating cost is considerably higher. The only rational I can find to do this is to be able to place the supply fleet on a non-Navy budget. This just does not seem reasonable.

    The 2nd point, SPEED! AE's, AO's, AOE's and other supply ships are notoriously SLOW... Our rated speed on our AE was 22 knots. I can attest that on our best day, cruising down hill with the wind behind us and everyone manning the oars, our best speed was 17 knots. This may not seem like a big difference but when trying to catch up to a battle group who averages 30+ knots it is a very big deal. Our maximum speed during replenishment's was just above many other ships requirement for steerage way. I realize that Supply ships are built for stability but there must be a way to increase speed and maintain stability.

    In summation, I believe that the supply fleet should be returned to the active Navy and I would love to see America return to a 300 ship Navy. Our Navy represents freedom around the globe and a modern fleet will only strengthen that image. On top of that a truly 'Fast Replenishment Fleet' can be an example for the next century.

  • Report this Comment On September 01, 2014, at 12:28 PM, MoreBS wrote:

    In Viet Nam we would unrep every other day because all the supplies came on different ships. Oil on one, food on another and bombs on a third. Things have changed so that now they get everything on one. The Navy is now looking for another generation sense the '70's for only 10 billion. Let's increase the utilization, and cut that in half by parking half the carriers which still leaves us six and as far as I know we only have one or two in operation at any one time (In Nam we had only one on a 3 or 4 month rotation and I think there is only one flying operations in the gulf today) while the rest drive around looking big and bad or being rebuilt. That would cut billions from the Navy by making these multi-billion dollar investments actually work reliably.

  • Report this Comment On September 01, 2014, at 12:36 PM, SergeyNY wrote:

    The Navy is the only big advantage we have in military. It took resources and should be maintained. There is no secondary role in war and all ships should be maintained by military, because contractors are likely to leave the ship when it becomes a high risk operation (events in Black Sea showed it).

  • Report this Comment On September 01, 2014, at 12:43 PM, TMFDitty wrote:

    @Navyguy62 -- thanks very much for chiming in. "Everyone manning the oars." Love it.


  • Report this Comment On September 01, 2014, at 1:03 PM, cityperson wrote:

    The only problem with the military manning these supply ships, The Navy always puts more people on these supply ships the needed. In away we do save money on people with half the crew with civilians the Navy personal. The Navy could do the same thing with their personal. This would really test their skills.

  • Report this Comment On September 01, 2014, at 1:10 PM, pwm02176 wrote:

    The devil is always in the details. Those of you suggesting we not build these supply vessels are essentially saying, we should not build any more destroyers as well as other war ships. There would be no point if there is no way to refuel or resupply at sea.

  • Report this Comment On September 01, 2014, at 1:12 PM, jpcali wrote:

    "Our Navy represents freedom around the globe and a modern fleet will only strengthen that image"

    The only "freedom" this propagandist is pushing would be corporate globalization of goods and services. Not our personal freedom.

    Someday, the world will stop fighting corporate wars.

  • Report this Comment On September 01, 2014, at 2:05 PM, luther10 wrote:

    The US military exists to assure the lining of the pockets of US corporations, and yes, those profits do trickle down to the US taxpaying public.

    Why not decide to continue to scale back the US military…maybe give peace a chance?

    Can't hurt.

  • Report this Comment On September 01, 2014, at 2:42 PM, James902 wrote:

    Seems to me the carrier admirals today are like the battleship admirals prior to Pearl Harbor.

    Advances in technology (anti-ship missile/mine warfare/submarine) will make carriers an endangered species.

  • Report this Comment On September 01, 2014, at 2:48 PM, TrustyScout wrote:

    Yes, of course we should do this. We will probably need them if a fight breaks out between us and China or Russia. Clinton moth balled half the US Surface Fleet in 1997. They can use the 16.6 Billion dollars they got from Bank of America.

  • Report this Comment On September 01, 2014, at 4:55 PM, jpcali wrote:

    Spent the 10 billion on US infrastructure.

  • Report this Comment On September 01, 2014, at 5:31 PM, FrankenBeans wrote:

    Trustyscout- The $16.6 billion is already spent. How do you expect Obama to pay for all the vacations he is taking? Also, with the foreign policy of banging his gums for 20 years to stand by a country's side IF and only IF they destroy ALL their weapons and dismantle their military and when they need the U.S. to fulfill the promise that Obama made when he was a senator, then reassured the promise after he became president, only to go on vacation and sit on both thumbs and do nothing. Now he wants to throw money and weapons at the problem and hope it goes away. It's a start, but what good is it when their government is as corrupt as ours and there is nobody over there trained and capable of using the weapons?

  • Report this Comment On September 01, 2014, at 7:29 PM, TheAncient wrote:

    Good to see the military industrial complex making yet another decision for our military, free and easy with the tax payer dollars. "the Navy plans to retire two T-AOEs -- half the fleet -- over the course of the next year. Complaining that the ships are too expensive to operate in an era of constrained defense budgets"

    Then why are you doing it you morons? Because the military industrial complex told you to cut 2 ships and impair your mission capability by 50% then wait 3-5 years for their replacements? How stupid can you get. Maybe the AKE's are 'slow' but you have them to use NOW. Maybe wiser use of your 'limited budget' and not buy those beer can hulled Littorals.

  • Report this Comment On September 02, 2014, at 7:02 AM, ronvan wrote:

    What ever happened to "upgrades or retrofit"? Not the expert here but what would it cost to bring in 1 or 2 ships at a time, install current electronics, weapons, engines, a new coat of paint? Upgrade the remaining battleships! Their presence along with our carriers Are intimidating! The Navy will always need supply ships no matter how they are powered! How many supply ships are in mothball that could be upgraded and used?

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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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