In contrast with some of its US defence industry peers, Boeing is expanding the presence of its Defense, Space and Security (BDS) division at Farnborough this year as the unit casts a broader net for growth opportunities outside its home market.
A glance at Boeing’s balance sheet offers a few clues behind the new emphasis on international marketing. Only six years ago, the US military accounted for 93% of the division’s revenues. International customers now claim 28-29% of BDS revenues. Foreign orders also comprise about 35% of the $71 billion BDS backlog, or about $24.9 billion.
That trend has to remain at least stable or grow still further. As the international share of the BDS sales backlog has increased, the division’s revenues remain slightly down from peaking at $33.6 billion in 2009. If Congress does not repeal sequestration in fiscal year 2016, US defence spending will contract even further over the next four years.
So, for the foreseeable future, the path to revenue growth for US defence contractors is in the international market.
“I think there continues to be a rebalancing of social needs and defence, space and security needs worldwide. You’re really seeing it in the marketplace. If you look at the opportunities over the last five years, they have been extensive and we have benefited tremendously from them,” says Christopher Chadwick, Boeing executive vice-president and chief executive of BDS.
Boeing’s benefits have come from opening the Indian market, winning a blockbuster F-15 contract in Saudi Arabia and cultivating a global customer base for the C-17, among other landmark deals.
Those international orders have helped steady the company despite declining demand back home. As US defence budgets have contracted, BDS has shuttered facilities and purged unnecessary costs. The divison’s cost base shrank by $4 billion as of last year, and another $2 billion is targeted for removal in the future. The reductions have not been enough to keep certain businesses going. BDS plans to close the C-17 factory in Long Beach, California, within 12 months.
The cuts have been painful, but they are critical to Boeing’s strategy of competing not only in the USA but also abroad.
“I think market pressures will dictate the company who can provide more capability at a [lower] cost and adapt from an innovative perspective in a very seamless way at the right price will end up on top at the end of the day,” Chadwick says.
In this new era for the defence sector, market pressures do not only involve a desire for more affordable products. Companies also feel pressure by the sheer absence of new requirements. In the past decade, Boeing may have lost the prize of the Joint Strike Fighter programme to Lockheed Martin, but the company restocked its defence orderbook in several other ways. It branched into the unmanned sector with the acquisition of Insitu, revived a pipeline for derivatives of its commercial aircraft with the P-8A and KC-46A contracts and extended production of long-term airlift, fighter and helicopter programmes.
As BDS looks forward, it is no longer attempting to win the most ambitious projects by itself. That is why Boeing is teaming up with Lockheed Martin to bid for the US Air Force’s classified long-range strike (LRS-B) contract. BDS is also partnering with Sikorsky to develop a future military rotorcraft – the SB-1 Defiant – to demonstrate to the US Army. With little appetite for further consolidation at the airframe level, the major prime contractors will use partnerships to spread the risk of major development projects.
“As you move forward you’re going to see these partnerships,” Chadwick says. “You’re going to see the right joint ventures. In certain markets you’ll see a company go it alone. The normal will be the right partnerships.”
For production programmes, BDS faces some stark challenges. The forthcoming demise of the C-17 line – and the last remnant of legacy Douglas manufacturing – is like an omen. In St Louis, the legacy of McDonnell also faces extinction. A flicker of hope to extend the F-15 line was brutally extinguished last year, as South Korea awarded – then cancelled – a contract for the “Silent Eagle”. It is now at the mercy of the ongoing production for the Royal Saudi Air Force.
The outlook for the F/A-18 line of Super Hornets and EA-18G Growlers is more hopeful, but still murky. Last year, the US Navy flirted with a proposal to acquire up to 36 EA-18Gs in Fiscal 2015, but in the end requested funding for none. The House of Representatives has since added funding to buy 12, complying with the navy’s unfunded priorities list. The proposal still needs to be adopted by the Senate. The extra 12, if approved, still only extends F/A-18 production until FY2016.
The Super Hornet, meanwhile, has lost two recent deals on the international market in India and Brazil to competitors. It needs to add more customers soon to keep the production line stocked beyond FY2016. Chadwick cites opportunities for contracts among current F-35 partners in Canada and Denmark, as well AS potential new interest in the Middle East.
Commercial derivatives, by contrast, are a rock of certainty for BDS. The USN faces funding challenges, but plans to buy up 117 P-8As to replace the Lockheed P-3C Orion fleet. The fixed-price development contract on the KC-46A risks pushing BDS into the red, but the US Air Force intends to acquire 179 tankers up to 2027.
Boeing already has secured a firm order from India for the P-8I and a commitment from Australia for the maritime patrol and anti-submarine warfare aircraft. The KC-46A is now entering a stage where it, too, can compete for international deals. The Airbus A330 multirole tanker transport has monopolized the tanker market – with the notable exception of the USAF’s KC-X contract – since it first appeared. But the KC-46A is now challenging in strong Boeing markets in South Korea and Japan.
“They are both going to materialise this year or early next year,” Chadwick says. “They’re both in the $1.5 billion, give-or-take competitive range.”
Source: Flight Daily News
