Aircraft carriers such as the USS Nimitz can carry aircraft, helicopters, and drones on deck. But what about smaller warships? Photo: U.S. Navy.

The United States Navy boasts a "battle force" of 273 ships. Of these, only 10 are actual aircraft carriers. But what if every U.S. warship could become an "aircraft carrier" in a pinch?

Last month, the Pentagon's Defense Advanced Research Products Agency, or DARPA, announced progress on an idea that promises to do just this -- after a fashion. Wrapping up phase 1 of its Tactically Exploited Reconnaissance Node, or TERN, program, DARPA said it is ready to proceed to phase 2. Two companies have been tapped to do the work: megadefense contractor Northrop Grumman (NYSE: NOC) and tiny drone maker AeroVironment (NASDAQ: AVAV).

These two companies will compete to create a new system that will permit drone aircraft "to take off and land from very confined spaces in elevated sea states and ... to transition to efficient long-duration cruise missions," according to DARPA TERN program manager Daniel Patt. The ultimate goal, Patt said in a press release, is to "make it much easier, quicker and less expensive for the Defense Department to deploy persistent [surveillance] and strike capabilities almost anywhere in the world."

Introducing TERN -- DARPA's Big Bird
So what is the big deal about TERN? Ordinarily, when you read about "drones" in the news, you're talking about a little civilian dingus like this:

AR Parrot drone. Photo: Wikimedia Commons.

In other words, a 1-pound flying toy, roughly 1 foot square in size and able to land 'most anywhere." What DARPA is looking to create, though, is a system capable of landing and launching, from a ship rocking over 10 foot waves at sea, a "drone" that looks more like this:

General Atomics MQ-9 Reaper. Photo: U.S. Army.

It's called a Reaper, and it's a 36-foot long, 2.5-ton behemoth boasting a wingspan of 66 feet -- and ,more often than not, sporting a payload of Hellfire missiles and Paveway laser-guided bombs under its wings. Trying to catch something like this aboard a moving ship at sea is like trying to stop a 2.5-ton Ford F-150 pickup truck as it hurtles toward you at 230 miles per hour. (with the added complication that its cargo could explode).

And yet, landing Reapers and other medium-altitude, long-endurance, or MALE, drones at sea, so that they can refuel, relaunch, and continue to hopscotch across the ocean, is key to extending the reach of America's drone aircraft on a global scale.

Because these military drones are roughly the same size as full-size combat aircraft, they can theoretically land on and take off from aircraft carriers. What DARPA wants, though, a system to permit MALE-sized drones to operate off ships as small as an Arleigh Burke-class destroyer -- or even a smaller Independence- or Freedom-class frigate. (To put this in context, at its greatest point, a destroyer's deck is only as wide as the wingspan of a reaper.) If successful, this contract could be worth billions of dollars to the winner.

What it means to investors
Now, as a market niche, MALE UAVs are dominated by General Atomics' line of Predator, Gray Eagle, and Reaper drones. So why are we telling you to focus instead on AeroVironment and Northrop Grumman today?

Honestly, the chief reason is because here at the Fool, we focus on investing -- and we want to provide "news you can use" when investing in stocks. Because AeroVironment and Northrop Grumman are both publicly traded -- while General Atomics is not -- they're the two UAV players that interest us most.

We also focus on these two companies because, while General Atomics could make the drones, AV and Northrop were tapped to make these drones more useful.

It won't be easy. But with DARPA's TERN program advancing from phase 1 (preliminary design) to phase 2 (risk reduction), it appears Northrop Grumman and AeroVironment are making progress -- even if we don't know all the details about what they've worked up. And with both companies having been paid thus far just $22 million each, they're doing it on a shoestring budget.

Ultimately, whichever company figures out how to make TERN work will proceed to phase 3 and build a prototype system for DARPA. After that, the money should flow in greater quantity -- outfitting as many as 52 U.S. Navy frigates and littoral combat ships, along with upward of 77 destroyers, with TERN systems to convert each small surface combatant into an ad hoc mini-aircraft carrier. (That's not even considering the possibility of rolling out TERN to midsized ships such as the new class of joint high-speed vessel.) Ultimately, hundreds of U.S. Navy warships could become ad hoc drone "aircraft carriers." At a cost of, say, $22 million per unit, that would mean billions of dollars of revenue -- and hundreds of millions of dollars in profit -- for the winner.

That, in an nutshell, is why TERN is a contract worth watching.


Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 352 out of more than 75,000 rated members.

The Motley Fool recommends AeroVironment. The Motley Fool owns shares of AeroVironment. 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.