Raytheon: Defense on the Cheap

It's been a hot topic among defense analysts ever since 2002, when terrorists fired two shoulder-launched antiaircraft missiles at an Israeli airliner in Mombasa, Kenya: How do we protect U.S.airplanes from similar attacks? And how do we protect them at a price that won't bankrupt the airlines once and for all?

Since the Mombasa attack, various figures have been bandied about regarding how much an adequate defense system might cost. Some say as "little" as $10 billion to equip every U.S. commercial aircraft with anti-missile technology (electronic jammers, flares, and the like). Some say $40 billion. Some break it down to the per-aircraft price of $1.6 million. And the Department of Homeland Security has Britain's BAE Systems and America's Northrop Grumman (NYSE: NOC  ) working on bringing the cost per plane down below the psychological barrier of $1 million.

Enter Raytheon (NYSE: RTN  ) with an affordable solution -- and a glove thrown at the feet of its defense contracting peers, challenging them to beat its price. Yesterday, Raytheon posited that, if at least 25 airports sign on to buy its product, the company can provide an adequate, airport-wide (rather than airplane-based) defense system for$25 million per location.

The system, which Raytheon has named "Vigilant Eagle," circles a defended airport with infrared sensors designed to detect a missile launch. Once a launch is detected, the sensors relay that information to a microwave transmitter that blasts the offending missile with electromagnetic energy and jams the missile's guidance system to throw it off course.

It sounds good in theory, but is area defense really more economical than protecting planes individually? Raytheon thinks so. It claims that Vigilant Eagle is "at least 10 times less costly than the current aircraft-based countermeasure programs." Now, at $25 million per site, covering all 429 commercial airports in the U.S. would cost $10.7 billion. If you're confused as to how $10.7 billion is one-tenth the cost of $10 billion to $40 billion (as I was), here's the secret: Raytheon aims to protect the vast majority -- but not all -- of air traffic in the U.S. by protecting just the 53 largest airports.

Over the course of 20 years, Raytheon argues that Vigilant Eagle can protect 84% of America's air traffic at a cost of $2.6 billion for installation, maintenance -- the whole shebang. In contrast, Raytheon says that equipping 84% of aircraft flying in the U.S. (4,800 planes) would cost $41 billion. Taking those numbers at face value, Raytheon's argument does indeed seem defensible, and its system, economical.

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Fool contributor Rich Smith owns no shares in any company mentioned in this article.

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10/27/2016 4:01 PM
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