Boeing And The Battle For T-X: Well, This Is Awkward

| About: The Boeing (BA)
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Summary

Northrop Grumman has dropped out to protect shareholders' value.

Stavatti Aerospace bid carries no credibility.

Boeing still most likely to win contract.

The competition for the T-X trainer jet that will be used by the Air Force to train fighter jet pilots is an interesting one. Not in the first place because of the many contenders for the bid, but also because the importance of such contract for Boeing (NYSE:BA). Boeing's ability to keep knowledge and production facilities for military aircraft aboard more or less hinges on a boost from a T-X contract, approved orders from international customers and the US Air Force.

Things are changing fast for the competitive landscape for the contract, with Raytheon (NYSE:RTN) dropping out while I was writing the first Battle for T-X article. Since then, one contender dropped while another contender stated it would enter.

In this article, I want to look at what changes there were to the competitive landscape for the contract.

Source: Nationalinterst.org

For those unfamiliar with the T-X contract, a quick recap has been provided below.

T-38 Talon

Source: tallyone.com

The T-X RFP (Request For Proposal) calls contenders to propose a replacement for the aging T-38 fleet. The T-38 is an aircraft used to train fighter jet pilots, but the aircraft itself is quite old which impacts the availability of the airframe.

The T-38 was produced by Northrop Grumman (NYSE: NOC) between 1961 and 1972. In total 1,146 units were built of which 456 are in operation with the US Air Force, 33 with the Turkish Air Force and 35 with the German Air Force. So out of the total number that has been built roughly half are still in service with air forces around the world. To increase reliability and validity of the trainer jets, the jets have been upgraded to maintain an availability of at least 75% and keep the aircraft serviceable beyond 2020. In recent years, that availability has slipped to a level below the target of 75%, which is not weird for an airframe of this age.

It also shows that a replacement is required and that is why the US Air Force will award a contract for 350 replacement aircraft valued at $16.3B including but not limited to support, spares and training systems. The number of 350 jets coincides with the number of current trainers multiplied by the desired availability.

The total market potential for a trainer aircraft could be up to $50B.

Contenders

Source: breakingdefense.com

One of the contenders for which the situation remained unchanged and unknown is the Sierra Nevada Corporation/TAI Aerospace collaboration. The parties want to produce the Freedom Trainer with the core strength of the aircraft being low maintenance and fuel costs.

Two other contenders, which I regard as most likely to be suitable candidates for a contract award, Boeing and Lockheed Martin, have not changed their view on the project either.

Leonardo S.p.A (OTCPK:FINMF) has not found a partner yet since Raytheon ended the partnership in January 2016 as the parties were not able to reach a business agreement.

In a press release, Leonardo said the following:

In February 2016, Raytheon and Leonardo announced their intent to team on the T-X pursuit. While they remain confident that the T-100 is a strong solution, the companies were unable to reach a business agreement" said Filippo Bagnato, Leonardo Head of Aircraft Division. "Consequently, Raytheon and Leonardo will not jointly pursue the T-X competition."

Leonardo is evaluating how to leverage on the strong capabilities and potential of the T-100 in the best interest of the U.S. Air Force.

The press release does not tell us whether Leonardo will still bid, but in the absence of a partner and especially a US partner, I think we will see Leonardo withdrawing their bid in the months to come.

In the previous "Battle for T-X" article, I stated that only the big three, namely Northrop Grumman, Lockheed Martin and The Boeing Company, were left. That also changed.

Northrop Grumman dropped its plans to bid as well and said the following in a statement:

Northrop Grumman and its principal teammate BAE Systems have carefully examined the U.S. Air Force's T-X Trainer requirements and acquisition strategy as stated in the final request for proposals issued on Dec. 30, 2016.

The companies have decided not to submit a proposal for the T-X Trainer program as it would not be in the best interest of the companies and their shareholders.

Northrop Grumman and BAE Systems remain fully committed to performing on current and future U.S. Air Force programs to deliver critical capabilities to America's airmen.

Northrop Grumman was one of the bidding parties that had a flying model, making a bid more likely. The company, however, believes that the program would eat away on the bottom line and cash flow. From this we can conclude that Northrop Grumman believes that it would have to land money in the program without a big chance of winning the contract or an inability to produce the trainer with profits in case a contract was awarded. I think that the company has acknowledged that its chances to win the contract are slim since it already has won the $80B stealth bomber contract.

While Northrop Grumman dropped out, the number of contenders remains the same. Stavatti Aerospace has said it will enter the Javelin into the competition. Being unfamiliar with this name, I did some research on the company with unsatisfying results.

Stavatti Aerospace obtained an exclusive license from Rud Aero to enter with a derivative of the Javelin. The company was founded in 1994, but in its 20 years of existence has never produced an aircraft or single piece of equipment. Visiting the company's website shows that the company seems to be a one-man operation with no products. The company states in its FAQ section that it will start low-rate initial production between 2017 and 2019. Separately, the company states that primary structures would be built by partners. In absence of any contract announcement by Stavatti or one of its partners, I feel it is safe to say that chances of aircraft production are close to zero.

The website sports a few renders of their "products" as an aerospace engineering undergraduate and a project manager for a company active in the (home) flight simulator scene. I can say that the product renders are far from what is required to manufacture a product or carry enough detail to perform simulations. In fact, the models are lacking detail to the extent that they are not even usable in the home flight simulator scene.

I can be short about Stavatti Aerospace and a possible bid: In the absence of production facilities, lack of basic engineering design skills and no proven products over the past 20 years even considering about entering with an aircraft is a waste of time for the people that go through the bids and I see absolutely no chance that this company will ever be producing the next trainer.

Conclusion

With Northrop dropping out, Leonardo still being without partner and a company with unrealistic targets bidding for the contract, the battle for T-X is still between Lockheed Martin and Boeing.

Despite the changes in the competitive landscape, I still view Boeing as the primary candidate to be awarded the contract.

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Disclosure: I am/we are long BA.

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