The U.S. fleet of nuclear-powered attack submarines is dying. The good news is the U.S. Navy has a plan to address this problem, and it would directly benefit sub makers General Dynamics (NYSE:GD) and Huntington Ingalls Industries (NYSE:HII). Here's what you need to know.
Los Angeles-class submarines
There are three types of Navy subs: nuclear-powered cruise missile and special operations forces subs (SSGNs), nuclear-powered ballistic missile subs (SSBNs), and nuclear-powered attack subs (SSNs). Of these three types of vessels, it's the SSNs that make up the backbone of the Navy's submarine force, conducting a range of missions, including reconnaissance, surveillance, covert insertion, and covert strikes.
More importantly, at the end of fiscal 2013, there were 54 SSNs in service: 10 Virginia-class subs, three Seawolf-class subs, and 41 Los Angeles-class subs. The problem is the Los Angeles-class subs entered service between 1976 and 1996, which means they are getting old. In fact, the Navy originally had 62 Los Angeles-class subs, but 22 have been retired, the latest being the USS Miami (SSN 755), which was retired earlier this year due to extensive damage caused by a shipyard fire. Moreover, this retirement brings the total of Los Angles-class subs down to 40.
Because it has to phase out the Los Angeles due to age, the Navy has been acquiring between one and two new and improved Virginia-class attack subs each year, with the total planned procurement being 30 Virginia-class subs by fiscal 2019. The reason? In order to meet its mission goals, the Navy says it needs a force of 48 SSNs.
Unfortunately for the Navy, a Congressional Research Service, or CRS, report issued in June points out one big problem with the above plan. While the existing Virginia-class submarine procurement plan allows the Navy to maintain its goal of 48 SSNs through fiscal 2024, starting in fiscal 2025 the service would see its force fall below 48 SSNs due to older subs being taken out of commission. In fact, by fiscal 2030 the Navy would only have 41 SSNs, and it wouldn't return to its stated goal of 48 vessels until fiscal 2035. Furthermore, the CRS report doesn't take into account the retirement of the USS Miami.
The above is an issue because the Navy states that, on average, day-to-day operations require the deployment of 10 SSNs, and during a peak time of war, an estimated 35 SSNs could be required for deployment within a certain amount of time. While that requirement might appear to be below the anticipated available SSNs in fiscal 2030, each sub can only be deployed for a certain period of time before it must be relieved. That necessitates having a larger force of available submarines.
The Navy weights its options
According to the CRS report, the options the Navy considered for mitigating the projected SSN shortfall include: lengthening the service lives of 16 existing SSNs, lengthening sub deployments from six months to seven months, reducing Virginia-class construction time from 72 to 60 months (something the Navy is already trying to do), and procuring an additional four SSNs beyond what is planned.
However, of all the options considered (or combinations of options), the only one that allows the Navy to meet its 35-boat figure during a war is the additional procurement of SSNs. That's possibly great news for General Dynamics and Huntington Ingalls Industries, as the CRS report states that each Virginia-class sub has a current estimated procurement cost of $2.8 billion. Considering that each company is responsible for building different components of these vessels, the result is a roughly even split of Virginia-class-sub profits.
What to watch
So far, the Navy hasn't increased its procurement of Virginia-class subs. However, considering the Congressional Research Service's report was only released on June 25, that's understandable. Of course, what the Navy ultimately decides to do will have to be approved through Congress, and taking into account that defense spending is still constrained, increasing Virginia-class procurement by four subs might be an uphill battle. Still, stranger things have happened. Consequently, this is something to watch.
Katie Spence has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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