After 44 years of honorable service, the U.S. Army may soon scrap its entire fleet of OH-58 Kiowa Warrior scout helicopters.
That's the upshot of a story on DefenseNews website this week, which reports that the Army is mulling plans to retire all 338 Kiowas in active service -- and 30 more serving in the National Guard, as well. According to Defense News, the aim is to streamline the number of different kinds of aircraft that the Army is flying... and that it must buy parts for... and must train its mechanics to keep flying, as well. All of this costs money, and in a still-constrained defense spending environment, every nickel counts.
Which is not to say that scrapping the Kiowa would save money.
Col. Frank Tate, the Army's chief of aviation force development, says that killing the Kiowa would save the Army "approximately $1 billion a year in direct operating and sustainment cost," plus unspecified savings farther down the line.
There is, however, a catch.
Upon taking Kiowas out of its inventory, the Army would find itself without a light helicopter suited to the Kiowa's traditional fire support and reconnaissance roles. The Army says it can press Apache attack helicopters into these missions temporarily, pulling these helos from the Guard, and replacing them with Black Hawks.
According to the Logistics Management Institute, however, the cost of fueling and maintaining Apaches, rather than Kiowas, can run as high as an extra $400 million a year. Other estimates put the cost of fielding Apaches at 50% greater than the cost of keeping Kiowas in place -- and that's not counting the cost of switching the Guard's helo force over to Black Hawks. Roughly seven times as heavy as a Kiowa, you have to figure the Black Hawks would be commensurately more expensive to fuel.
Granted, an Apache-Black Hawk solution would be only temporary -- in theory. The Army is currently developing an "Armed Aerial Scout," also known as an "Armed Reconnaissance Helicopter", or ARH, to replace the Kiowa. Most major defense contractors are bidding on the work -- Textron (NYSE:TXT), which builds the Kiowa, and also Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), United Technologies (NYSE:RTX), AgustaWestland, and even Airbus parent EADS.
But there's no guarantee ARH will ever get built. A previous attempt by Boeing and UTC's Sikorsky unit to build a replacement scout, the "Comanche," was canceled over cost-overruns in 2004... after burning through $7 billion in taxpayer dollars. The current ARH effort, meanwhile, is at risk of cancellation due to the same budget cuts that now have the Army talking about killing the Kiowa!
What it means to you
All of this seems to argue against retiring the Kiowa -- or in any event suggests savings from such a move may be much less than the Army is counting on. A further argument against killing the Kiowa is that the Army just finished upgrading every last one of the birds in 2011. One would think that the best time to retire the Kiowas -- if that's the way to go -- was before investing tens of millions of dollars to upgrade them.
So how should stock investors be looking at the situation?
First, understand that the decision to kill the Kiowa is not set in stone. Defense News reported that the decision is "all but done," but that was before Congress announced its deal Wednesday to roll back part of the sequester. If Kiowa survives the Army's attempts to kill it, this whole discussion could become moot.
But if the Kiowa does get dumped, that's probably bad news for Textron, which will lose a big part of its services business. It will be better news for Boeing and United Technologies, who will see their Apaches and Black Hawks (respectively) get more flight time, and consequently require more maintenance work and spare parts.
And farther down the road... the gap created in the Army's aerial capability by lacking a dedicated scout helicopter must be filled. A return of funds previously thought lost to sequester, combined with a clear need for a new aircraft, could breathe new life into the ARH program. It would also mean billions of dollars for whichever company is eventually tapped to build it.