Since 1959, American jet pilots have trained for war aboard T-38 Talon fighter jets built by Northrop Grumman (NYSE:NOC). In just a couple of weeks, though, the U.S. Air Force is going to put its training jet contract up for new bids -- and Boeing (NYSE:BA) and other peers will attempt to steal away one of Northrop's last military aircraft franchises.
Whether they succeed -- or whether Northrop Grumman deflects the attack -- will determine who wins up to $50 billion worth of contracts to build as many as 1,000 new "T-X" training jets over the next 50 years. Here's what you need to know.
For nearly six decades, Northrop Grumman has owned the market for fighter-jet trainers, selling upward of 1,110 units of its supersonic T-38 worldwide. New technologies in fighter jets, however, dictate that a new trainer be built that more closely approximates the flying characteristics of so-called "fifth-generation" stealth fighter jets.
Enter the T-X.
Sometime in the next month, the Air Force will publish requirements for what equipment T-X must carry, what speed it must fly at, its maneuverability, and other specifications. The Defense Department will then issue an official request for proposals from the defense industry sometime prior to October 2016. After reviewing the proposals, the Pentagon should announce a winner in fall 2017.
Nearly everyone who is anyone in military aerospace is expected to bid on this contract -- at least five industry "teams" in total. First up:
Northrop Grumman: The incumbent had been expected to offer a version of BAE Systems' Hawk training jet to the Air Force. Earlier this month, though, Northrop announced it would instead develop a "clean sheet" aircraft, built from the ground up to Pentagon specifications, and using the rapid prototyping abilities of Northrop's Scaled Composites subsidiary to speed the process along. Scaled Composites demonstrated proficiency at rapidly prototyping groundbreaking designs on a tight schedule when it won the "Ansari X" prize for its experimental SpaceShipOne spaceplane -- now the basis for Richard Branson's Virgin Galactic project -- in 2004.
Northrop is still expected to team with BAE in part, and with L-3 Communications as well, to supply T-X's onboard and ground-based training systems, respectively.
Competing against Northrop for T-X will be:
- Boeing, teamed with Saab and probably offering a variant of the latter's JAS 39 Gripen as their submission to T-X. (A perverse but logical choice, seeing as Saab's cheaper fighter jet has been stealing contracts away from Boeing's F/A-18 all around the world).
- Lockheed Martin (NYSE:LMT) and allied Korea Aerospace Industries, offering their jointly developed T-50 Golden Eagle training jet.
- Textron (NYSE:TXT), offering its Scorpion light attack fighter jet.
- General Dynamics (NYSE:GD) and Italy's Alenia Aermacchi, teaming up with a "T-100" variant of the latter's proven M-346 Master.
What all this means for investors
For investors, the math on this contract couldn't be simpler: $50 billion, 50 years' lifetime for the T-X program -- this is a $1 billion-a-year program, easy. This being the case, a win on T-X would be more significant for a smallish defense contractor such as Textron or Northrop ($14 billion and $24 billion in annual revenue, respectively, according to S&P Capital IQ), than for Lockheed or Boeing ($46 billion and $91 billion). But this is a deal big enough to bring out the best offerings from all comers.
For example, Lockheed Martin owns the market for fifth-generation fighter jets. Adding a franchise in training jets for the fighters it already builds would be a logical "brand extension" for the nation's biggest pure-play defense contractor. Boeing, by contrast, would like to claim the T-X just to maintain its present position as a player in military aircraft -- a position that has been increasingly threatened in recent years.
General Dynamics would dearly love to regain entry into the global market for fighter jets -- a position it lost when it sold the F-16 franchise to Lockheed in 1993. And with its expertise in building business jets at Gulfstream, General D has the chops for this.
Textron's reasoning will be similar, but more so: Textron sank tens of millions of dollars into building its Scorpion fighter jet on spec, but has yet to find a buyer for the plane. Winning T-X would finally give the company a return on that investment.
And Northrop Grumman? Clearly, it's the company with the single greatest stakes at risk. While all the other contenders vie to add to their existing revenue streams, Northrop will be striving to secure the trainer jet franchise it already possesses. A loss on T-X will mean the equivalent of two full years' revenue lost out of the next 50. A win, though, could secure decades of dominance for Northrop Grumman.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 293 out of more than 75,000 rated members.
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