Thanks to the continuation of sequestration, defense companies such as Northrop Grumman (NOC 3.03%), are feeling the impact of defense budget cuts. Moreover, it doesn't appear that reduced defense spending will end anytime soon. Consequently, commercial lines of revenue are that much more important for defense company's bottom lines. As such, Northrop came up with a possible new revenue-raising idea: It wants to sell unmanned drones to farmers.
Drones for crop-dusting?
Recently, U-T San Diego sat down with George Vardoulakis, Northrop's vice president for medium-range tactical systems, and asked him about the possible applications for Northrop's two smaller drones: the Bat and R-Bat. His reply:
Ideally, the R-Bat in the commercial world is used for agriculture. Farmers will do crop dusting in their fields. Today they do that with a remotely piloted joystick. In the future, at some point when the Federal Aviation Administration clears it, they could do something like that autonomously.
I laughed when I first read that. The idea of using a drone in agriculture sounds bizarre. But when I thought about it, it actually makes a lot of sense. Nor is using drones for crop-dusting a novel idea -- Japan's been doing it for decades.
Thanks to Japan's aging population, and mountainous and heavily treed terrain, using young workers, or planes, for crop-dusting isn't as feasible as it is in America. In fact, Japan's Ministry of Agriculture started promoting drones for crop-dusting in the 1980s, and today, unmanned aerial vehicles, or UAVs, spray 40% of the nation's rice crops. Further, there are more than 2,500 Yamaha RMax UAV helicopters currently being used for seeding, spraying, frost mitigation, and precision agriculture in Japan.
Bringing agricultural drones to American fields
Japan's use of drones for agricultural purposes has been so successful, researchers at the University of California, Davis, have been working with Yamaha Motor to test UAV crop-dusting at the Oakville Experimental Vineyard. The team's goal is to show how UAV spraying is superior to traditional methods, and how it's safe -- and so far, results have been promising.
Which brings us back to Northrop's drones. Right now, Northrop is one of the top manufacturers when it comes to UAVs, and the use of drones in crop-dusting seems like a logical, and lucrative, next step. But there are hurdles to overcome, the most notable being that civilian drone use isn't exactly legal -- yet.
At present, the Federal Aviation Administration doesn't allow civilians to use UAVs, with notable exceptions being Boeing's (BA 2.79%) Insitu ScanEagle, and AeroVironment's (AVAV 0.66%) Puma, both of which are used for surveillance, with the ScanEagle also being used to study whale migration. However, starting in 2015, Congress has directed the FAA to integrate drones into U.S. airspace, which means civilians will be able to use certain drones. More importantly, Phil Finnegan, Teal Group's director of corporate analysis, estimates that civilian UAV sales could reach $8.2 billion within the decade.
What this means for Northrop
According to its third-quarter results, Northrop's Aerospace Systems division -- under which UAVs fall -- saw a sales decrease of 4%, in part because of lower volume for the Global Hawk. While that's clearly not great, it's in line with reduced government spending.
If the FAA clears Northrop's smaller drones for agricultural use, Northrop's drone sales wouldn't have to rely on government spending. Consequently, that could give Northrop's Aerospace division a welcome boost -- and considering Northrop's Aerospace division is also its most lucrative division, this would be great for Northrop and investors. Consequently, this is something investors should watch.