Hey, did you hear the joke about the $500 million Army contract?
I don't remember the setup -- but the punchline was that it's actually going to cost 10 times more.
ITEP spells what?
Across the four main branches of the U.S. military, the Army, Navy, Air Force, and Marine Corps currently fly some 3,516 Apache and Black Hawk helicopters (according to data from Flightglobal). Last month, the U.S. Department of Defense officially published its request for proposals (RFP) to build a new generation of helicopter engine to power most, if not all, of these aircraft.
Production of the new engine, dubbed the Improved Turbine Engine Program (ITEP), is expected to begin in fiscal 2024. In the words of Honeywell (NYSE:HON) and United Technologies (NYSE:UTX) joint venture president Craig Madden, it will be "the largest engine program in the Department of Defense."
That Honeywell/UT joint venture, Advanced Turbine Engine Co., will be going head to head with incumbent military helicopter engine maker General Electric (NYSE:GE) to try to win ITEP. And with the money at stake here, it's no mystery why: According to press reports, ITEP is expected to cost taxpayers some $500 million over five years just to develop the engine.
But once developed, the engine also has to be produced -- and that's where the real money is.
Initial plans call for the Army to buy about 2,835 ITEP engines to upgrade the bulk of its fleet of Apache attack helicopters and Black Hawk transports. Eventually, the Army will double the program's size to an anticipated 6,125 ITEPs -- with 90% of the engines slated for installation, and the remaining 10% held in reserve as spares.
Now, 6,125 engines is obviously already a big deal. But it stands to reason that if ITEP delivers a truly better engine than the GE engines it replaces, the program will not end with the Army. Eventually, it will roll out to encompass all 3,516 helicopters deployed across all the U.S. military branches.
At two engines per helo, plus an additional 10% for spares, ITEP will probably -- eventually -- result in the production of well over 7,700 engines.
According to data from BGA-Aeroweb, the unit cost of a 2,000-horsepower T700-701D General Electric turboshaft engine -- the engine of choice to power America's Apache and Black Hawk fleets -- is $728,029. Multiply that by 7,700 such engines, and ITEP could therefore easily cost taxpayers $5.6 billion -- and that's just if ITEP, rated at 3,000 horsepower, costs no more than the 2,000-horsepower GE engines it replaces. If those extra horses come with a higher price tag per engine, on the other hand, ITEP could easily be worth more than $5.6 billion.
Who will win it?
The Army's ITEP RFP will consider all companies willing to make a bid for the work. But as already mentioned, the Honeywell/United Technologies joint venture and General Electric are the two leading candidates to build ITEP -- and initially, both competitors could win large pieces of the ITEP pie. Current Pentagon plans call for two-year development contracts to be awarded to two separate bidders. These will presumably split the $500 million in development money.
After these contracts run their course, the Pentagon will narrow the field, dropping one team and proceeding to production with the lone survivor in fiscal 2018. It's this victor that will have a shot at the big prize of $5.6 billion-plus in production contracts.
And which company will be the victor? In defense contracting, as in politics, odds favor the incumbent -- so the smart money is probably going to bet on GE to win this work. Be that as it may, we'll have a better feel for who has the best chances in pretty short order.
Proposals are due for ITEP on Monday, Nov. 9. Confirmation of which engine makers have made the initial cut should arrive sometime next summer. Stay tuned.
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. 299 out of more than 75,000 rated members.
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