Two years ago, in a landmark deal, the United States announced it would sell 105 F-35 Lightning II Joint Strike Fighters to Japan. The purchase -- worth $23 billion to F-35 manufacturer Lockheed Martin (LMT +0.07%) -- would more than triple Japan's F-35 force to a total of 147 jets. Once completed, it would make Japan the world's No. 2 user of the F-35, second only to the United States. Incidentally, the United Kingdom would be the F-35's No. 3 fan, with 138 jets.
But maybe not for long.
NYSE: LMT
Key Data Points
Japan and the U.K., together at last
As keen as both Japan and the U.K. are to acquire America's most advanced (and in-production) fighter jet today, it turns out they're even more interested in acquiring something better later on. And they want to build that something better themselves.
As Reuters reported last week, multiple sources are now confirming that Japan and the U.K. have decided to team up and merge their own national next-generation fighter jet programs, and build a new fighter jet together. Mitsubishi Heavy Industries (MHVYF +4.75%) -- maker of the famed WWII "Mitsubishi Zero" fighter plane -- had previously been developing a new "F3" fighter jet, also known as the F-X, for Japan's Self-Defense Forces. And Britain's BAE Systems (BAES.Y +0.33%), one of four companies that builds Britain's Typhoon fighters currently, was developing a Tempest jet for the U.K. But now those two companies will team up to build a different jet instead, and do it together.
OTC: BAES.Y
Key Data Points
OTC: MHVYF
Key Data Points
In a 50-50 partnership, the two companies plan to merge their programs, skip right past the "fifth generation" fighters that everyone else is still working on, and instead develop a new "sixth generation" fighter jet usable by both countries -- and spend "tens of billions of dollars" to do it, reported Reuters.
Bad news for Lockheed Martin
This is bad news for Lockheed Martin, for a couple of different reasons.
First and foremost, Lockheed Martin had hoped that Mitsubishi would choose it to help develop the F3 -- a logical hope given that Mitsubishi partnered with Lockheed in building Japan's previous fighter jet, the F2. In this scenario, Mitsubishi would incorporate elements of Lockheed's F-35 and F-22 fighters into its new jet, and Lockheed would be paid for use of that technology. Now it seems Mitsubishi will instead partner with BAE -- which, as a partner on the Typhoon project, is a rival to Lockheed in international markets where it markets F-35 and F-16 fighters.
Thus, not only is Lockheed losing the chance to profit from part ownership of the F3, and a piece of the sales -- it will now also face potential competition in international markets, from whatever plane Mitsubishi and BAE end up building. And that's the second part of the problem for Lockheed.
40% of Lockheed's revenue comes from its flagship "Aeronautics" business, according to data from S&P Global Market Intelligence. And within Aeronautics, F-35 sales make up the bulk of the revenue stream: "The F-35 program is our largest program, generating 27% of our total consolidated net sales," the company explained in its most recent 10-K filing with the SEC.
What's more, as Lockheed continues to ramp up the size of its F-35 program, F-35 sales will be increasingly important to the company's overall revenue over time. The more competition Lockheed faces from rival products, however, the more limited its potential market for the F-35 -- especially if a rival sixth generation jet appears to challenge sales of the fifth-generation F-35.
Hope for Lockheed
Unless, that is, Lockheed Martin develops a sixth generation fighter jet of its own -- and potentially beats the U.K.-Japan offering to market.
By all accounts, both Mitsubishi and BAE had been planning to field their respective new fighter jets in the 2035 timeframe. But as BreakingDefense.com reported last month, Lockheed Martin is a leading contender to build a new sixth generation fighter jet (the so-called "Next Generation Air Dominance" fighter, or NGAD) for the United States -- and expects to be able to field its offering before 2030. Indeed, while it's not certain that Lockheed is the winner of this U.S. contract, BreakingDefense notes that someone built an experimental prototype of the NGAD plane and flew it as early as 2020, that the Air Force has already decided to proceed with development of this NGAD -- and that the likely builder will be Lockheed.
While much remains uncertain about all of the above, it sounds at least possible that Lockheed Martin may have a new plane ready to compete with any future Mitsubishi-BAE offering -- and potentially beat its rivals' bird to market by as much as five years.
