Nearly an hour after close of trading Tuesday, the U.S. Department of Defense dropped a bombshell on the market:
The U.S. Air Force initially targeted a price of $550 million per aircraft on average, in 2010 dollars, across a fleet of 100 aircraft. After inflation, that works out to about $545 million in today's dollars. In announcing the contract award, the Pentagon says that its estimate is now just $511 million per aircraft (again in 2010 dollars) across the fleet. That's $558 million in today-dollars, or $55.8 billion total for the complete anticipated fleet.
(The Pentagon also revealed, in a press conference announcing the award, that it's counting on a unit cost of $564 million in projected 2016 dollars.)
Development costs for the LRSB -- the plane that many in the military community are now calling the "B-3" -- will be funded separately at $21.4 billion in 2010 dollars -- $23.4 billion in today-dollars.
So the total value of the two-part B-3 bomber contract announced Tuesday? That would be $79.2 billion -- if everything goes as planned. (But until these costs shake out, I'm still sticking with my prediction of $90 billion, give or take.)
What it means to the losers
Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT) formed a team to contest Northrop Grumman for the B-3 bomber contract. These two companies are now the losers -- although there is a very good chance they will appeal the Pentagon's decision to award LRSB to Northrop. Given the multiple setbacks that one member of this team -- Boeing -- has suffered in the fighter jets market of late, some analysts have argued that the company will be unable to maintain a separate defense division without LRSB. This makes a challenge to Tuesday's award virtually assured.
Indeed, the Pentagon addressed the possibility of a protest being filed, and appears to be resigned to the fact that despite having awarded Northrop Grumman the LRSB contract today, the company may not be able to begin work on getting the plane ready for 100 more days (the minimum time it will take for a Government Accountability Office protest to work its way through the system).
What it means to Northrop Grumman
Building the B-3 bomber fleet is expected to cost U.S. taxpayers a minimum of $79.2 billion for a force of 100 long-range stealth bombers. The bulk of these funds will now go to the contract's primary contractor, Northrop Grumman.
That's incredibly good news for Northrop -- and it may be even better news for Northrop shareholders. In addition to winning the contract, which should already do good things for the company's stock price, there's a very real possibility that Boeing might be tempted to acquire Northrop Grumman, paying a big premium for the privilege. Thus, Boeing could end up winning the LRSB contract... despite losing it.
Is it a far-fetched theory? Certainly. But it has the curious twist of giving Boeing a way to "win" LRSB, to keep all of the money for itself (via its new subsidiary) -- and of not having to share the loot with Lockheed Martin. Strange as it may sound, the decision to finally award the LRSB contract could be not the end of this story, but only the beginning.