Defence giant Lockheed Martin has moved to limit the business risks posed by technically complex and competitive government contracts for new military hardware.
Speaking during a quarterly earnings all on 28 January, Lockheed chief executive James Taiclet said Lockheed has repositioned its portfolio of development programmes such that the company will not incur significant financial setbacks if it loses any of those bids.
“There are no longer any must-win competitions,” Taiclet said.
Lockheed’s executive team achieved that position of stability by rolling out a new bidding strategy across all four of the company’s business units, with particular focus on assessing the risk-adjusted potential for return on investment from each programme.
“This process is designed to compete aggressively for key opportunities, while also being very committed to achieving positive results in the short- and long-term,” Taiclet says.
Several of Lockheed’s main competitors in the US defence sector have also adopted a more-conservative approach, driven by a renewed focus on cost control at the Pentagon. Procurement officers now often pursue fixed-price contracts, which limit both the profit potential and ability to adjust to unforeseen expenses and delays.
Boeing very publicly pivoted to a more disciplined business strategy in 2023 after years of aggressive fixed-price contract bids had cost the company billions of dollars. That same year, the airframer withdrew from the competition to deliver the US Air Force’s new “Doomsday jet”, citing concerns about the programme’s cost structure.
Also in 2023, Northrop Grumman said it would not compete for the US Air Force’s Next Generation Air Dominance (NGAD) programme, citing concern about a lengthy research and development period. Those periods are often characterised by thin profit margins and occasionally losses.
The company is currently in low-rate initial production on the next-generation B-21 stealth bomber, early examples of which CEO Kathy Warden has previously said will likely be loss making.
Notably, part of Lockheed’s de-risking strategy involved moves to pre-emptively absorb penalty charges on older, riskier programmes already in the works that may experience future technical challenges or delays. That process has included accepting new charges on two classified development programmes, one in the company’s aeronautics division and another in the missiles and fire control (MFC) unit, during the fourth-quarter of 2024.
“Recording charges in Q4 on these two programmes enabled us to de-risk the financial profile of both these critical national security programmes going forward as we move into their next phases,” Taiclet notes.
Together, the two programmes generated nearly $2 billion in losses in 2024, with the classified MFC project responsible for roughly two-thirds of that figure.
Details on the two efforts are scant, given their classified nature.
Lockheed’s aeronautics unit includes fighter manufacturing and the secretive Skunk Works advanced development group, which designs and tests experimental aircraft and associated technologies.
The company describes the classified aeronautics programme as a fixed-price contract covering “highly complex design and systems integration” work. The deal includes a base contract for the initial phase of the programme, with multiple options for additional phases.
After performing what Lockheed describes as a “comprehensive review of the programme requirements, technical complexities, schedule and risks”, the company now expects higher costs associated with the engineering and integration work necessary to meet the initial contract milestones.
That led Lockheed to absorb $555 million in charges on the classified aircraft project for 2024, $410 million of which came in Q4.
While the company declines to provide further detail about the sensitive programme, both the US Air Force and US Navy are engaged in efforts to develop a sixth-generation fighter.
The air force’s NGAD initiative now faces an uncertain future, owing to budgetary challenges and the sky-high price estimates for each aircraft.
Two unnamed manufacturers are competing for the contract, widely believed, though not confirmed, to be Lockheed and Boeing.
Unlike Lockheed, Boeing very much needs to win a next-generation fighter contract. The airframer has invested some $1.8 billion to develop a factory in St Louis capable of producing a highly-classified combat aircraft.
Boeing officially does not acknowledge any connection between the planned factory and the NGAD programme. Company officials say the investment is meant to signal Boeing’s commitment to producing next-generation aircraft for the USA.
