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Northrop Grumman Corporation's Worst Defense Contract in 2015

By Rich Smith - Dec 23, 2015 at 4:13PM

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When is winning a contract not a good thing? When it sets you up to lose the follow-on contract.

A few days ago, I wrote a short column here about Northrop Grumman Corporation's (NOC -0.09%) best contract win of 2015. It wasn't a hard choice to make -- but picking Northrop's worst contract?

That's something of a stumper.

Northrop Grumman's concept for the DARPA XS-1 spaceplane. Image source: Northrop Grumman.

When asked what I thought was Northrop's worst contract so far this year, I admit to being a bit perplexed. I mean, when the U.S. government offers to pay you money for goods and services, and not only that, but picks your product and services to buy, out of a field of multiple rival defense contractors offering similar wares -- that's usually pretty good news. Viewed from that perspective, all contracts are good contracts. None are "bad" or "worse" -- much less "worst."

But one contract comes close.

Introducing XS-1 -- or Space Shuttle, part 2
If there was one truly bad call that Northrop Grumman made this year contract-wise, I'd have to say it was the August 2015 deal in which Northrop agreed to continue developing a new space plane for DARPA, the U.S. Defense Advanced Research Projects Agency.

According to DARPA's instructions, the new Experimental Spaceplane-1, or XS-1, must:

  • Fly as regularly as 10 times in 10 days before needing maintenance.
  • Cost less than $5 million per flight.
  • Reach speeds of Mach 10 or greater.
  • Launch a 3,000-to-5,000-pound payload into orbit.

That last requirement is sine qua non, because XS-1 will not itself ever reach Earth orbit. According to geek-chic website, the speed needed to maintain Earth orbit is much faster than the Mach 10 speed required of XS-1. XS-1 will boost its payload to the required orbital velocity of 8 kilometers per second, or about Mach 23.4, with help of a second-stage booster.

Now clearly, these are all very difficult tasks Northrop Grumman is trying to accomplish. Succeeding in them is probably worth a lot more than the $3.9 million it was paid to do preliminary design work in phase 1 of XS-1 last year. It's probably worth more than the $6.5 million DARPA will pay Northrop to continue development of XS-1 through phase 2.

The reason this contract is a bad deal for Northrop, though, goes beyond the pittance Northrop's being paid. The real reason it's a bad deal is because Northrop doesn't have much chance of winning, because it's teamed up with Virgin Galactic.

The company you keep
DARPA picked three industry teams to do phase 2 design work on XS-1, you see. Boeing (BA -0.88%) and Jeff Bezos' Blue Origin formed the first team. A partnership between privately held Masten Space Systems and XCOR Aerospace formed the second. On Team 3, however, Northrop got paired up with Virgin Galactic.

That probably seemed a good choice when Northrop first set out to compete for this contract in 2014. Virgin Galactic had been successfully test-flying its SpaceShipTwo suborbital spacecraft for years. Also, Northrop subsidiary Scaled Composites built both Virgin's SpaceShipTwo and the WhiteKnightTwo carrier aircraft designed to launch SpaceShipTwo into suborbit. That made the two firms a natural match.

Three months after Northrop won its bid to do phase 2 design work for DARPA, however, Virgin Galactic suffered the catastrophic loss of SpaceShipTwo in a crash that claimed its co-pilot's life. Virgin is currently building a replacement spaceship to resume testing its commercial venture, and also developing a new vehicle for launching small satellites from WhiteKnight2 (shares of the XS-1 contract).

Even so, Virgin suffered a major setback last year. And set against the backdrop of a Boeing-and-Blue Origin team that have nothing but good news to report on their safety records -- the Northrop-Virgin team's chances of winning this contract don't look good.

What's next for XS-1 and Northrop
All that said, and my own estimation of Northrop's chances notwithstanding, DARPA still wants the three teams to submit final designs for their craft by August of next year. Whoever submits the best design will then be given a contract to build a prototype craft with an anticipated first flight date as early as 2018.

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. 321 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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