Once upon a time, Lockheed Martin (LMT +1.74%) built the most expensive fighter jet in the world, the F-22 Raptor. Stealthy, fast, ultra-maneuverable, and equipped with advanced sensor systems, the fifth-generation F-22 was considered the world's best fighter jet when introduced in 2005. Unfortunately, the F-22 was so expensive (exceeding $400 million per unit) that the Pentagon ultimately cut short the plane's production at just 187 units -- well under the 648 planes originally envisioned.
And now, it looks like the Air Force is planning to make the exact same mistake again.
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Round up the usual suspects
After years of hemming and hawing, the U.S. Air Force has decided to proceed with the development of a new best-in-the-world fighter jet -- the Next Generation Air Dominance fighter (NGAD) -- to replace the F-22. On Thursday last week, the Air Force released a classified solicitation inviting America's jet-makers to submit proposals to develop this sixth-generation fighter.
All the usual defense contracting suspects are expected to bid on the project -- Boeing, Lockheed Martin, and Northrop Grumman to build the plane and Raytheon Technologies and General Electric to build the engines for NGAD. These companies are expected to spend the next six months getting and responding to clarifications from the Air Force on exactly what it wants. A contract award probably won't emerge before late 2024.
Even if that contract arrives on schedule, though, it will not come cheap.
The Air Force is said to be budgeting $1.9 billion to pay for research and development (R&D) work, testing, and evaluation of proposals for NGAD in 2024 alone -- and more than $16 billion total over the next five years. Then, once production begins, the cost could be in the "several hundreds of millions" of dollars per plane -- even more than the F-22 cost.
If all goes as planned, NGAD will eventually enter service sometime in the 2030s.
The best-laid plans of defense contractors and men
But here's the thing: What if things do not go as planned? On the one hand, yes, the U.S. Air Force would probably love to get a 2030s-era NGAD. I have little doubt that the combined efforts of Boeing, Lockheed, and Northrop can come up with a technological marvel to outclass anything else with wings all around the world.
It's noteworthy that according to U.S. Air Force Secretary Frank Kendall, NGAD will actually be not just one plane but the cornerstone of a system of planes operating in tandem. Although details are sketchy at this time, it appears that each NGAD system will comprise the NGAD itself -- a piloted fighter jet -- surrounded and assisted by one or more unpiloted drone aircraft, each of which might cost as much as half the cost of the piloted NGAD jet itself.
Consider, though, what that means for the cost of NGAD: One piloted fighter jet costing "several" (which I mentally translate with the soundalike "seven") hundred million dollars, plus at least one drone costing half of "several" hundred million dollars (so perhaps $350 million?), and...potentially two or three such $350 million drones.
It doesn't take a math whiz to see how each of the 200 NGAD systems the Air Force wants to buy could end up costing taxpayers $1 billion, $1.35 billion (for two drone wingmen), or even $1.7 billion (with three drones attached to each piloted NGAD).
NGAD? When the Air Force gets around to confirming these numbers, it's going to be more like "Egads!"
What it means for investors
Suffice it to say that if legislators and Pentagon accountants balked at the $400 million price of F-22 a few years ago, the price of NGAD -- once it becomes fully apparent -- will raise a lot of eyebrows in Washington, D.C. In fact, I expect the cost to be so high that it dooms the project. Granted, the Air Force will probably still get to spend its first $16 billion on R&D as it works its way toward this conclusion -- so that's money investors can probably still count on flowing to the defense contractors.
But once all the R&D has been done, I have serious doubts that NGAD will ever be built at the prices being bandied about today. Just like Admiral Mike Mullen predicted back in 2009, "there are those that see [the F-35, the stealth fighter designed to supplement the F-22] as the last manned fighter [that the U.S. would ever build]. I'm one that's inclined to believe that."
I'm inclined to believe that, too. And if I were a betting man, I'd bet heavily that, in the end, no one will build America's next great fighter jet, the NGAD. If you're considering investing in any defense contractors in hopes they'll win the NGAD contract, you'd be well advised to factor this risk into your estimates of future defense contractor earnings and invest -- or not invest -- accordingly.
