India's AEW Tender: Boeing's Next Battleground

Apr.15.14 | About: The Boeing (BA)

Summary

India wants to buy 6 AEW&C aircraft for its Air Force.

Boeing currently dominates this market segment.

Airbus Group wants to enter this market segment too.

AEW aircraft have a 30+ year life span, generate a lot of revenue and are cash cows.

India wants to buy 6 Airborne Early Warning & Control aircraft and the tender will be closed in July. Boeing (NYSE:BA) is the only manufacturer that has a suitable aircraft 'on the shelve', but Airbus (OTCPK:EADSF) is lurking in the background again. Airbus might enter another market niche where Boeing traditionally is the leader.

India's Modernization Program

India has a yearly defense budget of $46B and holds the 8th position of largest defense budgets in the world. Since a lot of aircraft and helicopters in their inventory are older, a modernization program has started to upgrade existing air assets and acquire new types.

This program will probably offer the largest foreign military export opportunities for U.S. and European aerospace companies in this decade.

As part of this program India is working on developing its own aerospace industry. India's Defence Procurement Procedure has the following 'preferred categorization':

  • Buy (Indian)
  • Buy & Make (Indian)
  • Make (Indian)
  • Buy & Make
  • Buy (Global)

India recently chose the Dassault Aviation (OTC:DUAVF) Rafale as its new Multi Role Combat Aircraft. Most of these will be assembled in India as detailed in Dassault Aviation: Purveyor Of France.

Dassault Aviation also acts as a consultant for an Indian designed combat aircraft (HAL Tejas) which is powered by General Electric (NYSE:GE) engines.

Another recent tender is the $8B Indian Navy Helicopter Tender where Lockheed Martin (NYSE:LMT) and United Technologies Corporation (NYSE:UTX) are candidates.

These tenders only provide a part of the required aircraft and there will be more in the near future. India has permanent tensions with neighbouring countries Pakistan and China and will not delay modernization.

India's Airborne Early Warning And Control Tender

In April 2014 India issued a tender for 6 AEW&C aircraft and the offers have to be submitted by July 15 at the latest. Relevant conditions are:

  • Antenna dome of 10 meters in diameter;
  • Aircraft with necessary structural modifications, power and endurance adaptations;
  • Only original aircraft manufacturers are qualified;
  • Manufacturers are required to support the aircraft for at least 30 years.

India already allocated $1.2B for the new AEW&C aircraft. In total the 6 required aircraft will be worth at least $5B excluding MRO (maintenance, repair, overhaul) of the aircraft during its life span.

At the moment India already has 2 AEW&C aircraft types in use. These are:

Ilyushin 76 / A50IE: Uses an Ilyushin 76 airframe with an ELTA Electronic Industries (which is a daughter of Israel Aircraft Industries) EL/W-2090 Phalcon radar. 3 aircraft were delivered and there are (or were) negotiations for an extra 2 aircraft.

Considering the requirement for 6 aircraft it is likely that the 2 additional aircraft will not be ordered. The airframes used were not acquired from the original manufacturer but were part of the contract with ELTA.

The much smaller Embraer ERJ145SM is the second type with an Indian developed radar array. 3 aircraft have been delivered and although 4 more Embraer's (NYSE:ERJ) were ordered, these will have a VIP configuration.

In 2012 the Indian Air Force also bought 2 Bombardier (OTCQX:BDRBF) Global 5000 aircraft that have a much longer range than the ERJ145. The Bombardier's are still in Israel being outfitted by ELTA Electronic Industries.

There is no further information on the role of these special mission aircraft, but considering the VIP-configuration of the optional Embraers the AEW&C role seems likely.

Bombardier's open architecture uses, enables third parties to build custom equipment in the airframes. As described Bombardier is a popular choice for aerospace manufacturers to use as special mission aircraft.

CANDIDATES

Since India wants original aircraft manufacturers only Boeing, Airbus Group and United Aircraft Corporation (which owns Ilyushin) apply.

Other aerospace manufacturers do not produce aircraft large enough to facilitate a rotodome (rotating disc-shaped antenna) with a 10 meter diameter.

Boeing

Boeing is market leader in the AEW&C market segment that uses large airframes. Electronic equipment is usually provided by Northrop-Grumman (NYSE:NOC).

The majority of Boeing's AEW aircraft are E-3 AWACS which are used by the USAF (since 1977) , NATO [NAEWF since 1982], England (since 1991), France (since 1990) and Saudi Arabia (since 1986)

Boeing also has the Boeing 737 AEW&C, but these have a fixed radar antenna. The airframe probably also doesn't have the required payload and range. However, India does operate the P-8 maritime surveillance aircraft, which is also based on the Boeing 737 airframe.

The E-767 (based on the Boeing 767) is the most likely candidate to offer. The E-767 has only been sold to Japan and in use since 1998.

Airbus Group

Airbus hasn't sold any AEW&C aircraft yet, but has a prototype based on the C-295 turboprop aircraft. The design is a joint development with ELTA Electronic Industries, which supplied the AEW&C systems.

The Il 76 / A50IE India currently operates is also from ELTA and uses the EL/W-2090 Phalcon radar. The proposal of a Airbus A330 AEW&C aircraft with ELTA Electronic Industries would be a logical choice since India is also in the final stages of buying 6 Airbus A330MRTT tanker aircraft.

The Indian Air Force wants the aircraft manufacturer to design the airframe and rotodome as stated in the tender. The rotodome changes the aircraft characteristics and aerodynamics. In 1999 India's first home-grown AEW aircraft crashed, killing some key people involved in the program.

Another plus for Airbus are the existing connections with India and the Indian aerospace industry. MBB (now part of Airbus Helicopters) helped India develop the HAL Dhruv helicopter. Airbus also has an engineering centre in India which;

is our flagship site in India. With 200 employees - growing to 400 over the next few years - the focus is on high-end engineering and design activities that include flight physics, structures, systems and testing

Considering India's ambitions and the Indian Defence Procurement Procedure selecting Airbus makes sense, especially when the A330AEW is partly designed by Airbus India.

The A330AEW isn't developed yet and this is an opportunity for Boeing. Developing and testing a modified airframe costs time and this offers a window of opportunity for Boeing. Boeing's E-767 is already in use.

United Aircraft Corporation

The Indian Air Force already operates Ilyushin 76/78 transport and tanker aircraft since 1985. The A50IE also uses a Il 76 airframe. United Aircraft Corporation is the owner of Ilyushin.

Since negotiations for additional A50IE have not resulted in additional aircraft, selection of the Ilyushin 76 seems unlikely. However, the possibility of choosing the Il 76 cannot be neglected.

IMPORTANCE FOR BOEING

Apart from Russia, China and the 3 Indian AEW&C systems Boeing has a 100% market share for large AEW&C systems.

The market for smaller AEW&C aircraft is much more fragmented. The Northrop Grumman E-2 Hawkeye has a large market share, but other manufacturers such as Saab AB (OTC:SAABF), Embraer and Airbus offer smaller AEW aircraft.

AEW&C aircraft have a long life-time as the specification of "at least 30 years" indicates. If India chooses Airbus, Airbus gets a foothold in the profitable AEW&C market.

MRO (maintenance, repair, overhaul) has good margins and provides revenue for a long time. Dominance in a market segment with long contracts and good MRO margins is an important cash cow.

From a strategic point of view Boeing should prevent Airbus gaining access to the AEW market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.