"PM's floating fighter jet plan quietly sunk by Defence."
That's how Australia's Financial Review parsed the story last month, revealing that an ambitious plan to give the Royal Australian Navy a budget-priced aircraft carrier fleet has been scuttled.
Australia, you see, is one of nine nations that have committed to developing and fielding Lockheed Martin's (NYSE:LMT) revolutionary F-35 stealth fighter jet. At last report, Australia was still on track to buy 72 conventionally launched-and-landed F-35 "A" variant aircraft for its Air Force. But with two new 27,000-ton Canberra-class amphibious assault ships entering service in its navy, the Aussies thought it just might be possible to load F-35 "B" short takeoff and vertical landing jets on these vessels, giving the country an instant aircraft carrier capability.
Had this plan gone forward, Australia would have bought a total of 12 F-35B fighter jets for its new carriers. But here's the problem: Defense officials have now concluded that for F-35Bs to operate off the vessels, it would be necessary to upgrade the brand-new warships with heat-resistant decking (to absorb the shock and blast from the plane's engine) and make other expensive modifications. The total cost of these mods, according to Australia's Strategic Policy Institute think tank, would have stretched into the "multibillions of dollars." And with money tight, Australia's Department of Defence fears they just can't afford that.
That's bad news for Lockheed Martin, but it could be good news for other U.S. defense contractors.
Bad news for LockMart
At Lockheed Martin's advertised $104 million price, the loss of a dozen F-35B sales will cost LockMart a not inconsiderable sum: $1.25 billion in revenue. At what some sources say is the aircraft's actual cost -- $251 million per copy -- the damage to Lockheed Martin's revenue stream will be closer to $3 billion.
Good news for others
Flip that coin over, though, and that's $3 billion in revenues now freed up for spending on other military projects. According to news reports, Australia is aiming to spend as much as $275 billion upgrading its military with new equipment over the next 20 years.
Much of those funds will be heading to Lockheed Martin anyway. Australia's plan to buy 58 more F-35A conventional takeoff and landing aircraft (bringing the total to 72) for $12.4 billion remains intact. But that still leaves tens of billions of dollars up for grabs by everybody else.
What it means for everybody but Lockheed
Australia's defense spending plans for the next two decades are pretty ambitious. As we described last time we examined this subject, they include potential purchases of:
- A new Offshore Combatant Vessel to replace the country's fleets of the Armidale-class patrol boats, Huon-class minehunters, and assorted survey vessels. The missions assigned to the OCV suggest it might resemble an American Littoral Combat Ship (LCS) in function. And as luck would have it, the Australian company Austal is currently partnered with General Dynamics in building one variant of the LCS.
- 12 new EA-18G Growler electronic warfare aircraft from Boeing, a bargain at just $1.5 billion, and reportedly ordered precisely because Australia has concerns about the F-35 program.
- Eight new P-8 Poseidon maritime surveillance aircraft, costing $3.6 billion -- and also built by Boeing.
- Hundreds of millions of dollars' worth of new long-range MQ-4C Triton unmanned aerial vehicles, also designed for maritime surveillance, but this time built by Northrop Grumman.
What it means to investors
Freeing up funds that might otherwise have been spent on Lockheed Martin's F-35B fighters makes spending plans for all of these projects, and for new submarines and armored vehicles besides, a bit more secure. For defense contractors hoping to win business in Australia's rapidly growing defense sector, that's good news.
For investors in Lockheed Martin, however, the opposite is true. The loss of a dozen potential F-35B sales Down Under is just the start. All around the globe, second-tier navies are building mini-aircraft carriers that are designed to carry helicopters, but could potentially launch fighter jets as well. But now it seems that turning a helicopter carrier into a mini-aircraft carrier won't be as simple -- or as cheap -- as just dropping a few F-35Bs on board and sailing off into the sunset. As this realization spreads internationally, the "multibillions of dollars" expense of upgrading helicopter carriers to carry F-35Bs could become a real deterrent to F-35B fighter jet sales.
This is an issue Lockheed Martin must address, and soon.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 338 out of more than 75,000 rated members.
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