For more than 70 years, the Skunk Works has existed to create revolutionary aircraft and technologies that push the boundaries of what is possible [...] The Skunk Works of today is focused on the critical aircraft for tomorrow. Advanced technology solutions for manned and unmanned systems... -- Lockheed Martin
Lockheed Martin (LMT -0.40%) makes the world's best-selling fighter jet, the F-16 Falcon. With more than 4,500 F-16s built since the aircraft's introduction in 1976, and 2,242 of those planes still in active service around the world, the F-16 is the most popular fighter jet on the planet, making up 15% of the world's air forces today.
Now that market share is due to shrink. Pretty soon, the F-16 could lose its No. 1 status to another fighter jet, the F-35 Lightning II stealth fighter. But Lockheed is totally OK with that prospect, and here's why:
Lockheed also makes the F-35.
Warning: Here be cannibals
When you think about it, the fact that Lockheed Martin would risk cannibalizing sales of a popular product like the F-16 with an entirely new, unproven product -- and one that's getting quite a bit of negative press these days -- is kind of strange. Sure, optimism runs high for future F-35 sales. Plans call for the production of as many as one plane per day by next year, and by some estimates, Lockheed Martin could produce as many as 5,100 F-35s for the U.S. military, its international partners, and foreign client states over the next 60 years.
But the project could just as easily end in spectacular failure if Lockheed fails to address and fix the new warplane's deficiencies. So, why cannibalize a successful business in favor of selling an unknown?
Cannibalization, thy name is Skunk Works
The answer is that taking a risk on the F-35 is both essential for Lockheed Martin to remain at the top of the fighter jet game and built into the company's DNA.
As the company says right on its website, Lockheed's "Skunk Works" division has been upending paradigms and developing new products to cannibalize sales of old ones for more than seven decades. Over the years, Skunk Works has churned out such military marvels as the U-2 spyplane...
...the F-117 stealth fighter -- the world's first stealth fighter jet...
...the F-22 Raptor...
...and of course the F-35 itself.
In the process, Skunk Works has also outworked and outperformed its competitors around the globe, winning fighter jet contracts in countries like Korea and Japan, even when going up against cheaper planes such as Boeing's (BA -0.88%) F-15 and Eurofighter's Typhoon. Lockheed has succeeded in dominating the fighter jet business so completely, in fact, that very soon, Boeing could be driven out of it. Production of the Boeing F/A-18 Super Hornet, for example, could come to an end as early as 2017. F-15 Eagle Production lines could grind to a halt in 2019.
If and when that happens, Lockheed Martin will be left without a single major rival in the fighter jet business in America.
What's next for Skunk Works?
Lockheed Martin's victory over Boeing in winning the F-35 contract back in 2001 was perhaps the pinnacle of Skunk Works' achievements. With multiple Pentagon leaders now in agreement that the F-35 will be "the last manned fighter" the U.S. military ever buys, Lockheed's supremacy in fighter jets seems secure. But it does raise the question:
What's next for Skunk Works?
While by nature a secretive organization, Lockheed does provide a few clues as to where Skunk Works will head next, noting that it's currently involved in project to develop supersonic, quiet commercial passenger jets for the civilian market -- taking on Boeing on its home turf. In the military sphere, Lockheed is taking its cues from the Pentagon's emphasis on robotics and working to build more "persistent" unmanned aircraft (UAVs), including those that can be launch from aircraft carriers. Cooperative UAVs, that communicate among themselves and operate as a team, are another area of interest at Skunk Works.
And in an apparent (but not total) departure from its focus on aerospace, Skunk Works announced a potential paradigm-shifting breakthrough in the field of compact fusion last year: a compact fusion reactor that could conceivably power an aircraft -- no jet fuel required.
Which of these projects, if any, will result in sellable products remains to be seen. Perhaps none of them will. But according to some sources, Lockheed Martin's Skunk Works scientists are currently working on no fewer than 500 separate projects, each with the potential to drive sales in the future. If just one of them meets with the success Lockheed Martin has achieved in fighter jets, this company should have a bright future, continuing to reward investors for decades to come.