India wants to buy U.S. drone aircraft. Really, really wants to. And American defense contractors AeroVironment (NASDAQ:AVAV), Northrop Grumman (NYSE:NOC), Textron (NYSE:TXT), and General Atomics all want to sell their drones to India.
That sounds like a match made in heaven, and a recipe for generating hundreds of millions of dollars in revenue for the United States' sequester-starved defense industry. There is just one problem: President Barack Obama won't let the sales happen.
The upside of selling unmanned drones internationally
Selling advanced weapons systems to allies such as India is good for the U.S. in several ways:
- First, and most obviously, each sale generates revenue and profits for the U.S. defense contractors that make the weapons.
- Second, every sales contract won by a U.S. company deprives a foreign competitor (many of which reside in countries hostile to the U.S.) of a sale.
- Third, these sales contribute to U.S. exports, to the economy's balance of payments, and to domestic job growth.
- Fourth, finally, and perhaps most important: When the United States sells a weapons system to an ally, to use for missions in our common interest, we don't have to pay for it, but it can still be used to "get the job done." And then we don't have to do the job ourselves.
A legislative Catch-22
These are all good arguments for selling drones and other weapons systems to our allies. But under the terms of the U.S. Arms Export Control Act of 1976, not all such sales are legal. In particular, the law generally prohibits foreign sales of weapons that might later fall into the hands of terrorists, to be used in offensive wars, or that contain sensitive technology.
Under the law, the U.S. president has the authority to issue licenses for arms sales that might otherwise be banned. Indeed, drone sales have already been authorized for sale to certain U.S. allies. The United Kingdom, for example, now flies Global Hawks built by Northrop Grumman. Australia hopes to buy Northrop's new Triton maritime surveillance drone, once it's ready for market. France just bought $1.5 billion worth of weaponizable Reaper drones from privately held General Atomics. But to date, Obama has not approved sales of drones to India.
What's more, the president cut short his recent trip to India to make an appearance at the funeral of Saudi Arabian King Abdullah -- apparently without first signing an agreement that would have permitted joint production of AeroVironment Raven drones (and perhaps others).
What it means for investors
For investors in the American drone producers -- Northrop, Textron, and AeroVironment in this case, but there are others -- this has to come as a disappointment. France's purchase of 16 GA Reapers for $1.5 billion alone shows how much money can be made from this industry. That's nearly $100 million per drone, close to the price tag on Lockheed Martin's F-35 piloted fighter jet.
Even sales of smaller drones, such as the Ravens that India wants to co-produce, have the potential to move the needle at smaller companies with smaller revenue streams. AeroVironment, for example, only charges $200,000 or so for a Raven unmanned aircraft system. Its smaller Wasp systems (two UAVs per system) -- well, AeroVironment doesn't disclose the price on those, but my back-of-the-napkin calculation suggests a complete Wasp system sells for about $250,000 . Assuming these figures are close to the mark, with AeroVironment doing less than $250 million in annual sales (according to S&P Capital IQ data), every system sold adds another 0.1% to its annual revenue.
Of course, for that to happen, Obama must first OK the sale. Until that happens, the drones will remain in America -- and the revenue will remain out of reach.