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Boeing, Lockheed Poised to
Rejoice Or Mourn Over Jsf Decision
Knight Ridder/Tribune
October 25, 2001
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.
- - -
(c) 2001, Chicago Tribune.
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