That's the question facing investors today, as GE gears up to compete head to head with archrival United Technologies and its UTC ally Honeywell on a contract potentially worth $4.5 billion -- or more. The contest, dubbed "VAATE" by the military, aims to pick one contractor to build a new generation of Versatile Affordable Advanced Turbine Engines to power the Pentagon's helicopter fleet into the 21st century -- and GE aims to win it.
In fact, GE made a good first step toward winning the contract when, on Tuesday, the Pentagon awarded GE a $325 million indefinite-delivery/indefinite-quantity contract (IDIQ) contract for stage III of VAATE. Under this contract, GE is instructed to continue work on developing technologies that "will permit an order of magnitude increase in turbo-propulsion affordability over the year 2000 state-of-the-art technology."
"An order of magnitude"
What goes into an order-of-magnitude improvement? According to the Army, it's looking for a new "drop-in" engine that it can use to replace and improve the performance of its existing fleet of Sikorsky Black Hawk and AH-64 Apache helicopters. The new engine, which would replace the fleet's current generation of GE T700 engines, should offer:
- 20% longer service life
- 25% better fuel efficiency
- 35% cheaper acquisition and maintenance costs
- A 65% improvement in power output relative to weight
So, that's what they want. But what is the Pentagon willing to pay for it?
What it means to investors
You see, here at The Motley Fool, we're as interested as anyone in keeping up with developments within the military-industrial complex. But what we really enjoy is figuring out how this kind of news affects investors' portfolios. In that regard, it's worth taking a couple of minutes to consider what a win on VAATE might mean for GE. So, what is that potential?
According to market research site bga-aeroweb.com, GE's T700 engine is just about ubiquitous throughout the military. It's the engine that powers the AH-64 Apache attack helicopter, the UH-60 Black Hawk transport, and the several Black Hawk variants in service as well, including the Navy's MH-60 Seahawk, and the Air Force's HH-60 Pave Hawk. Across the military, Flightglobal's 2014 report on World Air Forces counts a total of about 2,500 Black Hawk-type helicopters and 700 Apaches in service in the U.S. Army, Air Force, Navy, Marines, and Coast Guard. (And that's just the U.S. Around the world, hundreds more Black Hawks and Apaches see service in foreign militaries.)
But focusing on the U.S. military alone, bga-aeroweb estimates the unit cost of a GE T700 turboshaft engine at upward of $700,000 per unit. Multiply that by 6,400 units in service (each Apache and every Black Hawk needs two engines), that's easily a $4.5 billion opportunity for GE to upgrade the Pentagon's helicopter fleet. Now add in opportunities to re-engine helicopters in foreign service, to build new engines for new helos, to sell spare parts and entire spare engines, and to maintain and service all of these engines over the years -- and the size of the opportunity could easily double or triple.
Even at the low end of estimates, though, $4.5 billion represents a revenue opportunity equal to 20% of what GE's Aviation division (the company's third largest by both revenues and profits, according to S&P Capital IQ) makes in a year. That makes this a very big deal for GE, and for its shareholders, too.