Call it a case of the eyes being bigger than the stomach, or "you can't always get what you want." Either way, the upshot of yesterday's news is the same: Embraer (NYSE:ERJ) and Lockheed Martin (NYSE:LMT) are out (temporarily). Northrop Grumman (NYSE:NOC) is back in (potentially).
On Thursday, the U.S. Army made its long-expected, and long-feared, decision to cancel the development contract for its Aerial Common Sensor spy plane, previously awarded to Lockheed and Embraer in 2004. The Lockheed team had won the contract, initially valued at $879 million, by offering to pack a single Embraer ERJ-145 plane with enough electronics to do everything the Army and the Navy desired. It would be smaller than the plane suggested by Northrop. Cheaper. It would have the ability to monitor ground battles for the Army and spy on overseas communications for the Air Force. And it would fly.
Turns out, though, that the small Embraer plane on which Lockheed based these promises couldn't juggle them all. To get the job done, a larger Embraer model would be needed. If the team stuck with the smaller plane, all the electronics gear desired by the two branches of the military simply couldn't fit on board. Even if it could, the plane would be too heavy to get off the ground.
After reviewing several revised proposals from Lockheed, the Army decided to cancel the contract. One small upside: Because this was an optional, or "convenience" cancellation, Lockheed will get a termination fee for its trouble. The downside of the news, of course, is that $879 million worth of initial development fees just went "poof," along with the potential for another $7 billion or so in follow-on sales, had the military bought 38 planes for the Army and another 19 for the Navy.
And there's one other aspect that investors need to consider: When the Army restarts the competition for this plane three years from now, there's a good chance that Lockheed (or Embraer) won't benefit from it. After all, Northrop told the Army that it needed a bigger plane in the first place.
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Fool contributor Rich Smith owns no shares in any company mentioned in this article.
