Lockheed Martin's (LMT -0.27%) F-35 fighter has beaten out rivals from Boeing (BA -0.76%) and Airbus (EADSY 1.32%), among others, to capture a $6.5 billion order from Switzerland. The deal is a much-needed boost for the F-35, and a setback in Boeing's effort to drum up sales for an alternative it says is more cost effective.
The Swiss Air Force will purchase 36 F-35As to replace its aging fleet of Boeing F/A-18 Hornets and Northrop Grumman F-5 Tigers. Switzerland is the fifteenth nation to sign onto the F-35 program, a plane that already has more than 655 airframes in service globally.
The deal is a small drop in the bucket for a program that is expected to generate more than $1 trillion in total sales for Lockheed and its partners. But the Swiss government's justification for picking the F-35 will bring smiles to Lockheed Martin investors, and demonstrate what an uphill battle challengers have in trying to unseat the aircraft.
Lockheed is winning the cost battle
The Swiss Federal Council, in announcing the deal to buy both the F-35s and five Patriot missile batteries from Raytheon Technologies, said its choices provided the most bang for the buck.
"An evaluation has revealed that these two systems offer the highest overall benefit at the lowest overall cost," the council said in its statement. "The Federal Council is confident that these two systems are the most suitable for protecting the Swiss population from air threats in the future."
The F-35A in flight. Image source: Lockheed Martin.
The F-35 was competing against an updated version of Boeing's F/A-18, as well as the Eurofighter and the Rafale from France's Dassault. Though the F/A-18 program is more than 25 years old, Boeing has been marketing a modernized version as a lower-cost alternative to the F-35 both to the Pentagon and in competitions in Canada and elsewhere.
Acquisition and operating costs have been an ongoing criticism of the F-35, and appeared to be a vulnerability competitors could exploit. But the Swiss concluded otherwise, determining the F-35 offered the "highest overall benefit at lowest cost by far."
The Swiss estimate that the F-35 will cost about $16.8 billion to acquire and operate over 30 years. That's about $2 billion less than the second-lowest bidder, by its analysis.
Conquering Europe
It's worth noting that Switzerland is only buying the F-35 "A" variant, the most affordable option and the one Lockheed has spent the most time with ironing out the costs. It would be dangerous to read too much into the decision or try to predict how other competitions might go.
Still, the win is a massive one for Lockheed Martin on a number of fronts. In addition to the cost comparison with Boeing, the deal is a significant step toward the F-35 making inroads in Europe against the Eurofighter.
The Eurofighter Typhoon, which is manufactured by a consortium including Airbus, BAE Systems, and Leonardo, counts Germany, United Kingdom, Italy, Spain, and Austria as well as a handful of Middle Eastern countries as buyers, but the Swiss would have given it a major win from a country not a part of the ownership consortium.
The F-35 was the most modern fighter in the competition, with more advanced tech and stealth capabilities, and scored highest among the entries in terms of effectiveness, product support, and cooperation. The council praised the jet for being "entirely new, extremely powerful and comprehensively networked systems for protecting and monitoring airspace," as well as its stealth coating, saying the "resulting high survivability is a great advantage for the Swiss Air Force."
In the months to come these same contenders will slug it out for an $11 billion award from Finland. Investors will be watching closely to see if the Finns come to a similar conclusion.
Winners win
All is not lost for Boeing or any of the other entries, and decisions by Finland or Canada could shift momentum in the months to come. But after a few years where the F-35 was seemingly the recipient of more criticism than wins, the Swiss decision is a reminder of what a juggernaut franchise the plane is.
Given the F-35's apparent stall, the bull case for Lockheed Martin of late has centered more on the company's exposure to areas including space, missile technology, and its helicopter franchises. There is potential growth in all those areas, but a stable and building F-35 program is essential to the company's ability to generate cash to fund that growth while still paying a dividend yield north of 2%.
In winning the Switzerland deal, the world's largest defense contractor has proven once again it is the company to beat when it comes to fighter planes.
