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Lockheed’s F-35 ‘Program Killer’ May Double Sales (Update1)
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By Edmond Lococo and Gopal Ratnam

June 17 (Bloomberg) -- Lockheed Martin Corp., the world’s largest defense company, may double sales of its new F-35 fighter jet in a surge of contracts that could squeeze competitors including Boeing Co. and Saab AB out of the market.

The U.S. and eight partner nations already plan to buy more than 3,000 of the warplanes, and with potential exports to countries including Israel, South Korea, Japan, Singapore, Finland and Spain the total could “easily” reach 6,000, Brigadier General David Heinz, the top Pentagon official for the F-35, said today.

Boeing and Saab may come to view the Lockheed model as a “program killer,” said Douglas Royce, a market analyst at Forecast International in Newtown, Connecticut. The F-35 will control half the $17 billion warplane market by 2015, aviation consultants Teal Group estimate, bringing a level of dominance unmatched even by the company’s F-16 and threatening to eliminate other primary manufacturers from the industry.

“There may be fewer primes,” Dan Crowley, Lockheed’s F-35 program manager, said in an interview in Paris yesterday. “Just as we’ve seen fewer shipyards and fewer satellite facilities in the U.S. over time, that is a trend you cannot hold back.”

U.S. Defense Secretary Robert Gates’ pledge in April to speed domestic F-35 purchases will give confidence to foreign buyers, both among the eight current partners and beyond. Israel and Singapore, which had F-35 security cooperation pacts yet weren’t full partners in the program, have begun talks with the U.S. government that could lead them to join, Crowley said. Government talks have also begun on possible F-35 sales with Finland, Spain, South Korea and Japan, he said.

One Survivor

“It’s entirely possible that by 2020 there will be only one surviving western fighter plane,” Richard Aboulafia, an analyst with Fairfax, Virginia-based Teal. “The F-35 is designed to do what the F-16 almost did: drive competing manufacturers out of the market.”

Lockheed has held 31 percent of the global fighter jet market over two decades with the F-16 Fighting Falcon, exceeding Boeing’s 24 percent share, according to Teal. The Bethesda, Maryland-based company shipped more than 4,400 F-16s over 35 years, including 2,200 to international customers.

Lockheed aims to emulate that success with the F-35, which is also known as the Lightning II or Joint Strike Fighter, Chief Executive Officer Robert Stevens said in a June 2 interview.

“The F-16 is now in the inventory of 25 air forces,” Stevens, 57, said in Washington. “I wouldn’t be surprised to see that happen to the Joint Strike Fighter, even though we are only talking about eight partner countries today. We think it will expand over time.” The original international partners developing the jet are Australia, Turkey, the U.K., Italy, the Netherlands, Canada, Denmark and Norway.

‘Bright Future’

Boeing, based in Chicago, and Sweden’s Saab aren’t ready to concede the market. Boeing sees “a very bright future” for its F/A-18 Super Hornet, Tom Bell, the vice president for military aircraft business development, said in an interview. The company “can very easily see ourselves making Super Hornets for at least a decade or more,” he said.

Boeing is promoting the F/A-18 and an updated version of its F-15 called Silent Eagle to international customers in Paris, Bell said.

Saab’s Gripen would be an “ideal plane” to compete for orders with F-35, yet lacks a home market large enough to give it economies of scale because Sweden’s Air Force is only about 100 jets, Teal’s Aboulafia said.

Price, Performance

“From a price-performance perspective I think the Gripen can compete with the JSF,” Linkoping-based Saab’s CEO, Aake Svensson, said in an interview yesterday. “We can compete very tough from a price and cost perspective and then performance- wise also.”

Still, Norway dealt Saab a blow in November with a contract for 48 F-35s in a contest analysts predicted the Gripen would win. The Netherlands selected the U.S. plane as the best candidate to replace 85 older aircraft a month later, and Denmark may also opt for Lockheed later this year.

The U.S. and the eight partner nations plan to buy 3,173 F- 35s. A full-scale model is on display this week at the Paris Air Show, where Heinz and Tom Burbage, executive vice president for F-35 integration, gave a program update today.

“The partnership is strong, the program is stable and the value proposition on which this program was founded remains intact,” said Heinz, the U.S. military’s F-35 program executive officer. He declined to disclose the price of the first test aircraft sold to foreign customers, two to the U.K. and one to the Netherlands.

Biggest Program

At an estimated cost of about $298.9 billion for research, development and the purchase of more than 2,400 aircraft for the U.S., the plane is the Pentagon’s largest weapons program. The F-35, with common parts for Air Force, Navy and Marine Corps missions ranging from air combat and tactical bombing to close air support, is designed to replace legacy aircraft including the F-16 and A-10.

The F-35 comes in three variants including a conventional version, a short takeoff/vertical landing jet that can hover in place, and a plane optimized for landing on aircraft carriers.

Lockheed’s principal subcontractors on the F-35 are Los Angeles-based Northrop Grumman Corp. and London-based BAE Systems Plc. Two separate, interchangeable F-35 engines are under development: the F135 by United Technologies Corp.’s Pratt & Whitney unit, and the F136 by a team of General Electric Co. and Rolls-Royce Group Plc.

Raptor

The F-35 is one of two “5th Generation Fighters” designed by Lockheed, along with the F-22 Raptor, that incorporate stealth technology with the latest avionics and improved combat performance over older jets. Because the more advanced F-22, which is also capable of high-altitude supercruise flight, is banned by U.S. law from export, only the F-35 is available for sale to allies.

Competition in the fighter jet industry will be preserved at the level of suppliers, Crowley said. Rival warplanes already produced will also stay in service, providing their makers with maintenance work for decades, even if new jets aren’t ordered.

The biggest threat to the F-35’s global dominance is development risk, said Eric Hugel, a New York-based analyst with Stephens Inc. Lockheed must keep the jet on schedule and costs under control.

“A lot depends on what price-point Lockheed can hit,” Hugel said. “If you sign up for the F-35, you have to wait and see what you are actually going to get. The F/A-18 is flying today. It’s a lower risk solution, so there are positives and negatives either way.”

Price Equation

Lockheed in February estimated that the F-35’s average flyaway cost, excluding research and development, would be “upper-$40 million” for the conventional version when measured in 2002 dollars and “mid-$60 million” for the short takeoff and carrier versions.

The flyaway cost for the F-35 model mustn’t rise above $70 million or competition such as the Super Hornet “starts to look pretty good,” Aboulafia said. The base cost for the F/A-18 is about $53.8 million, according to Boeing.

Boeing plans to exploit its cost advantage to expand sales beyond the nine nations already flying legacy Hornet jets, Bell said. Another six countries “are seriously considering” Super Hornets, he said, without identifying them.

“We have never seen more robust demand for information about the F-15 Silent Eagle and the F/A-18 Super Hornet,” Bell said. “International customers are very interested in the cost and capability mix that those two products could offer them as they think about how to recapitalize their tactical aircraft inventory in these difficult economic times.”

Stock Performance

Lockheed shares rose 24 cents to $82.05 at 4:15 p.m. on the New York Stock Exchange and have fallen 19 percent in a year. Boeing declined 28 cents to $48.55 and has dropped 35 percent in 12 months.

Production volume will give Lockheed an advantage from economies of scale, Forecast International’s Royce said.

“The F-35 is the only fighter looking to be in production for thousands of aircraft over the next 20-30 years,” Royce said. “Other fighters have much more narrow prospects. These other manufacturers know they are fighting up hill.”

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