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Boeing, Lockheed Poised to Rejoice Or Mourn Over Jsf Decision

CHICAGO - In the high-stakes corporate shootout over the richest defense contract in history, it's almost high noon.

For the past five years, Chicago-based Boeing Co. and aerospace archrival Lockheed Martin have been locked in a bitter dogfight, each hoping their design for the planned Joint Strike Fighter will get the nod from the Defense Department.

Now, the companies are about to find out the result of their political jockeying and hard-sell campaigns: On Friday afternoon, the Pentagon is expected to announce which company's design has been selected as the nation's next-generation fighter aircraft.

The prize is rich indeed: About 3,000 JSF orders from the U.S. military and Britain alone are expected to yield $200 billion in revenues over the life of the contract, and orders from other countries could easily bring the total to more than $300 billion.

The government has billed the design contest as a winner-take-all competition. If the Pentagon sticks with that format in awarding the huge contract, "for the winner it's going to be like going to heaven, and for the loser it's like going to purgatory or maybe worse," said Loren Thompson, an analyst with the Lexington Institute, a Washington defense research group.

After existing aircraft contracts wind down, he said, "if you're not on this program, you're not making fighters."

But Thompson and many observers think that - because of powerful political and defense-industry factors - the all-or-nothing format that gives taxpayers the best bang for their bucks won't be retained. Thompson said the debate now underway "is really over how much the loser gets."

For one thing, observers say, the process for doling out megacontracts like the JSF is so politicized that the decision-making process can be skewed by the legislative clout that various constituencies can exert.

Lockheed has made it clear that an 11,000-employee plant in President Bush's home state of Texas may be shuttered if the company doesn't get the JSF contract. And Boeing, which recently disclosed plans to cut 30,000 workers from the payroll of its slumping commercial-jet business, figures the fighter contract would provide 5,000 jobs at its St. Louis facility, and an additional 3,000 in the Seattle region, in the near term.

There's another reason why industry-watchers think the spoils in this contract competition are unlikely to go entirely to the victor: the Pentagon's desire to maintain competition in the fighter business. Like any customer, the Defense Department likes competition between providers because it helps hold costs down and promotes innovation. But after a decade of consolidation sharply reduced the number of companies in the defense sector, Boeing and Lockheed are now the only U.S. fighter-jet makers still standing.

Should either company finds itself an outright loser in the bid for what's been called "the last new fighter contract for the next 30 years," experts think it would likely exit the fighter business - leaving the Pentagon in the unhappy position of having only one fighter provider.

Earlier this week, the Defense Department underscored its desire to maintain competition among a downsized cadre of defense contractors, when it opposed General Dynamics Corp.'s $2.1 billion plan to buy Newport News Shipbuilding. Defense officials want the bid blocked because those two would-be merger partners are the only remaining makers of nuclear submarines.

Given such dynamics, said Rick Turgeon, head of research at KeyCorp's Victory Capital Management investment arm, the JSF contract "will be announced as a winner-take-all deal," but "they'll probably bring the two companies in and find a way to divvy up the work, maybe 60-40" with the winner getting the bigger share.

Including components made by the teams of subcontractors Boeing and Lockheed have lined up, "this aircraft will probably be made in 40 states," Turgeon said. "Given the size of the contract and what it means to the job base, I just don't see (the Pentagon) eliminating either team. I see them splitting the business."

The Pentagon is sticking to its guns. It wants to avoid splitting the JSF contract, explains spokeswoman Kathy Crawford, because the cost of the multipurpose aircraft would be sharply higher if both companies were to operate production lines; such a division would not only sacrifice efficiencies of scale, but also would make it more expensive for the government to monitor production.

The JSF concept aims to use a common platform to keep production costs down. At present the Air Force, Navy and Marine Corps each rely on planes designed to their specifications, but the multipurpose JSF - designed to cost roughly $30 million to $40 million per plane - is to serve all three branches.

The aircraft lines the JSF is to replace when it begins coming on line in about 2008 include the Navy's workhorse Tomcat F-14, the Air Force's F-16 and the Marines' AV-8B II Harrier jet. The Pentagon contract calls for three different versions, with a carrier-ready JSF model for the Navy, a short-takeoff and vertical-landing version for the Marines and a conventional fighter for the Air Force.

"The basic concept behind the aircraft is sensible," said Lexington's Thompson. "It's supposed to satisfy a variety of (military) needs at the lowest possible cost." And the one-supplier strategy "is critical to achieving that cost goal," he added.

Although many people are suggesting that the only alternatives are either a single winner or a split with two production lines, said the analyst, "I would say the most likely possibility is for one company to take the lead, with the loser brought in as a subcontractor."

Because of the way its subcontracting team is structured, anchored by defense heavyweight Northrop, Lockheed would face more difficulties under such a resolution than Boeing would, he noted.

A Boeing spokesman said, "We have every confidence we will win," but when pressed said, "if it goes the other way, we'll continue to be a major player" in the military aviation sector, including its current role as the maker of the F-18 fighter.

At Lockheed, a spokesman took a more guarded tack, saying that while the company's JSF prototype is a "fabulous airplane," officials "really don't know" which way the decision will go. While Lockheed's current projects will provide work through about 2015, he said, "you can't overstate the importance of this contract. You might even call this critical for us."

In recent weeks, widespread rumors have suggested Lockheed's design is likely to win out. But Christopher Hellman, senior analyst at the nonpartisan Center for Defense Information in Washington, said the final decision remains "anybody's bet."

While Boeing has made it clear that it's counting on increased military revenue to help offset weakness in its passenger-jet business, the spokesman said it's almost impossible at this point to spell out the financial impact that winning or losing the JSF contract would represent to the company.

Wall Street's reaction to what the Pentagon calls its "downselect" of a contract winner is likely to be mild, suggests Ragen MacKenzie analyst Peter Jacobs. "Winning would be a very nice positive for Boeing," he said, but from a financial perspective, "the near term and intermediate term impact is rather modest."

Because the production revenues lie so far in the future, Jacobs said, he expects Boeing's stock would trade either up or down only a modest $2 or $3 a share, "depending on whether they win or lose" Friday.

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(c) 2001, Chicago Tribune.

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