Lockheed Martin, Boeing And Leonardo In Massive Contract Showdown

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Includes: BA, CAE, FINMF, GD, LMT, RTN
by: Deltabot Capital
Summary

Boeing, Lockheed Martin, and Leonardo are in a bidding war for the contract to produce the Air Forces new trainer jet fleet.

The contract has a maximum value of $16 billion and requires the production of 350 aircrafts.

Contract breakdown by objectives and how each of the firms bidding meet the requirements.

Overview

The U.S. Air Force has been the center of the rebuilding of our military that President Trump promised the people of the United States during the election in 2016. The new military spending budget signed by President Trump features a generous budget for aircraft and the new military branch: Space Corps which is set to branch off of the Air Force. Although many disagree with the declaration of a sixth military branch, many Aerospace and Defense companies stand to benefit from the expansion of the Aircraft budget. The spending budget included expanded budgets for the purchase of a multitude of aircraft. This article focuses on a contract available to defense contractors for the ability to produce the new trainer planes for the Air Force. This contract is the first replacement for the T-38, trainer planes in decades which were produced by Northrup Grumman in the 1960s.

Three companies are up for the contract, each taking their own approach to winning the proposal which has a value of $16 billion for the production of 350 jets. The three companies in contention for the contract are Lockheed Martin (LMT), Boeing (BA), and Leonardo (OTCPK:FINMF), an Italian defense contractor. With each contractor's unique approach comes different advantages and disadvantages for the US Air Force and bidders, which could have financial implications when the contract is awarded, currently planned for later this year.

Contract Details

The contract is broken into two large deliverables. The first is the delivery of 350 training jets for the United States Air Force. The second deliverable is a new simulation program for the training of pilots. The contract is broken down into four different categories for judging the proposals of the defense contractors:

  • Performance
  • Risk
  • Cost
  • Capabilities Above Requirements

The contract also mentions that the planes and software be built around the fifth generation of combat aircraft currently in use by the Air Force. The two fifth-generation planes are the F-22 and the F-35 produced by Lockheed Martin.

Performance

The plane that Boeing is proposing is named the Boeing TX, and it is a joint venture between Boeing and Saab. The plane was built to meet each of the requirements the contract obligates as well as other forward-thinking requirements such as a fit all cockpit that can fit any person no matter the size. Although, Boeing seems to have the advantage because they built their proposal plane to the standards of the contract, we know very little about the simulator that they are going to propose. On the other hand, Lockheed Martin has produced a variation on the Korean Air Forces fighter jet called the T-50A. Lockheed has an assortment of advantages in the performance category that should worry Boeing investors. The first advantage, as previously mentioned, is that Lockheed recently won the contract to be the production company for both the F-22 and F-35 jets, the Air Forces fifth generation aircrafts. Due to their contract to produce the fighter jets used in combat, they inherently have an advantage in building high performance trainer jets for those fifth generation combat planes. Finally, the Leonardo Jet that is being proposed is set to be in last place in the category of performance. The base plane for the model being proposed by Leonardo has been quoted by its creator to be "second only to afterburner-equipped aircraft". Unfortunately for Leonardo both the Boeing and Lockheed Martin proposed planes are afterburner models, giving them the advantage in the performance category. Moreover, when taking a look at the simulator that Leonardo will present there have been some apparent hiccups. General Dynamics (GD) and CAE Inc. (CAE) were originally slated to be the lead engineers for the simulator, but General Dynamics dropped out and disassociated from the project in 2015. They were replaced by Raytheon (RTN) who also withdrew after announcing they would replace General Dynamics as the lead integrator of the simulation project.

Risks

Lockheed Martin and Leonardo lead this category as they both have based their planes on off the shelf models that have had years of flights to prove the viability and safety of the planes. For example, Lockheed Martin's base model plane has amassed 150,000 hours of flight time. On the other hand, Boeing has created a new plane which has only been flying since 2016, opening them up to many concerns about the longevity and ability of the planes as well as the planes maintenance needs. Moreover, Boeing has had delays on the production of other aircrafts this year, whereas Lockheed Martin has announced they have already produced 179 of the aircraft for the contract. Lockheed Martin explains that this pre-production will allow them to meet the deadlines for the planes 2-years earlier than the schedule. This puts Lockheed Martin at a massive advantage but also concerns us that their capital expenditure may have been for nothing if they do not win the contract and cannot sell the planes elsewhere. The capital expenditure concern is also present for Boeing as they have spent between 1-3 billion dollars to design their plane. This comes after losing the bid to build the fifth generation planes for the Air Force, a massive revenue opportunity missed for the firm.

Costs

As have already been mentioned Boeing has spent a relatively large sum in the development of their new aircraft. The comparative costs of the competing aircraft and simulators are not as clear though. Each company does not have a specific price that they will provide the planes for, but there are two assumptions that can be made. The first is that all three will attempt to have the most competitive pricing for their model. The second is that Leonardo does have an advantage in this category. Due to the fact that they do not use an afterburner and they were made to be low cost, the planes base model has low acquisition cost and very per flying hour costs (1/10th of the cost to fly a Eurofighter Typhoon).

Capabilities Above Requirements

Boeing and Lockheed Martin lead this category as they each bring a significant advantage to the table for the U.S. Air Force. Boeing has created a jet that fits the exact specs of the contract that also has the ability to fit a wider range of pilots making them great training planes in the event of a pilot supply shortage that requires an adjustment of the standards for pilots. Lockheed Martin provides a simulation and plane combination that they claim can train pilots faster than the current system reducing the time to train a pilot from 6 to 8 months to 4 to 6 weeks according to Mark Ward, Lockheed Martin's Chief Test Pilot. Moreover, with the ability to begin delivering those planes now may be a massive upside for the Lockheed Proposal as the T-38 continues to age and become outdated for training our pilots efficiently, safely, and effectively. The final advantage that we have identified in support of Lockheed Martin is the 97% mission capable rate of their T-50As which have already been produced.

Investment Recommendation and Conclusion

We believe that although Leonardo is the cost leader, Lockheed Martin provides the best value proposition for the contract. The pre-produced T-50A models, hyper-efficient training simulation software, advantage from producing the fifth generation planes for combat and the reliability of flight hours gives them the most transparent advantage in the race for this massive Air Force contract. While we do not know the specifics on the profitability of the deal, we do know that the contract is set to have a lifespan of 16 years providing Lockheed with significant recurring revenue. Moreover, the contract is also for indefinite quantity, meaning for the next 16 years if any other trainer jets are needed, the winner will be the company tapped to produce them. Overall, we believe that this contract offers stable recurring revenue to the winner, as well as the opportunity to benefit greatly if there is an expansion of the Air Force trainer jet fleet beyond this initial order.

Disclosure: I/we 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.

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