Wednesday, September 25, 2013

Lockheed Fighter Jet Gains Momentum: South Korean Move Reflects a Shift in the Industry

Updated September 24, 2013, 7:15 p.m. ET


The Wall Street Journal

A U.S. Marine F-35B Joint Strike Fighter jet sits in a hangar after the rollout ceremony at Eglin Air Force Base in Florida in February 2012.

South Korea's decision Tuesday to delay a multibillion-dollar fighter-jet deal reflects a shift in the industry in favor of Lockheed Martin Corp.'s Joint Strike Fighter. Despite Lockheed's high-profile travails, its competitors now face an even steeper climb to achieve success.

The South Korean decision was a blow to Boeing Co., whose revamped F-15 fighter—known as the Super Eagle—had been expected to win the 60-plane deal valued at up to $7.7 billion. South Korea's air force already flies the F-15, and of the three bids submitted, only Boeing's fit under the country's budget cap.

But South Korea's defense ministry said it would reopen the fighter contest because Boeing's jet didn't meet Seoul's need to counter North Korea's nuclear threat with radar-evading jets.

The decision gives Lockheed and its partners in the F-35 Joint Strike Fighter project more time to cut their jet's cost and rebid for the contract, which has been contested for nine years and is one of the biggest fighter-jet contracts now open.

Analysts say that competing fighter programs face challenges that could eventually leave the F-35—which has Pentagon backing—as the only Western advanced fighter available.

Boeing is working through an order for 84 F-15s from Saudi Arabia signed in 2011 that is expected to keep its production line running through 2019, and earlier this year it sold 12 of its EA-18G Growlers—a version of the F-18—to Australia. Winning the South Korean order would have extended the F-15 line until 2021 or 2022. Boeing still sees opportunities in the Middle East and Asia to sustain the jet and the F-18, according to a senior industry executive.

Boeing is also looking at the potential for developing a sixth generation of jets that would come after the F-35, though any business wouldn't come until the late 2020s or beyond.

Richard Aboulafia, who tracks the market for Teal Group, a Fairfax, Va.-based consultant, said any move out of the market by Boeing "will mark the end of an era and the end of competition in the U.S. market."

Budget cuts in the U.K. and Germany, meanwhile, have limited sales of Europe's Eurofighter Typhoon. The consortium building the jets—led by BAE Systems PLC, units of European Aeronautic & Defence & Space Co. and Finmeccanica SpA and Rolls-Royce Holdings PLC—continues to pursue orders in the Middle East, but some analysts believe the plane won't survive.

"You could say all they're doing is delaying the inevitable," said Rob Stallard of RBC Capital Markets. Like other defense-industry analysts, he believes a similar fate awaits the only other large Western jet-fighter program—the Rafale from France's Dassault Aviation SA —after it fulfills a long-awaited order from India.

Eurofighter and Dassault both say they have no plans to end their fighter programs. They continue to battle for limited overseas business, including a long-delayed order from Brazil and opportunities in the United Arab Emirates and Qatar.

Fighter-jet makers in the U.S., Europe and Russia are expected to produce jets valued at $16.9 billion this year, having averaged $15.7 billion over the past five years, according to the Teal Group. With the increase in F-35 production, Teal expects that to rise above $20 billion a year toward the end of the decade.

Lockheed accounted for almost a quarter of the market this year. The F-35 is scheduled to officially enter service with the U.S. Marine Corps starting in 2015. Analysts forecast the plane that year will account for 15% of Lockheed revenue, which hit $47.2 billion last year. Teal Group projects the F-35's market share will be 68% by 2022.

Changing military priorities and the emergence of perceived new threats in both regions—notably China and Iran—have made air power a top priority for defense planners, even in an age of budget austerity.

The F-35 Lightning II is what's known as a fifth-generation fighter, with stealthy radar-evading abilities as well as the latest electronic hardware. That gives it a crucial advantage over less-advanced jets and enables it to coordinate with army and naval forces.

Boeing and Eurofighter contend their jets have elements of fifth-generation aircraft, but U.S. military planners apply the designation only to the F-35 and the F-22 Raptor, an advanced fighter developed by Lockheed and Boeing. The F-22 finished production in 2011 after the Pentagon cut its order to 187 from an original plan for 750.

"If we are to be a global power capable of deterring and defeating possible threats, then we need fifth-generation aircraft, " said Gen. Mike Hostage, head of the U.S. Air Combat Command, last week.

The F-35, led by Lockheed, Northrop Grumman Corp., and the Pratt & Whitney arm of United Technologies Corp., has become notorious for design problems and cost overruns since the consortium was picked over Boeing in 2001.

That hasn't deterred the Pentagon from lining up the jet as the sole replacement for an array of aging fighters. The U.S. services plan to order over 2,700 of the jets in the next 30 years, and nine other nations—including the U.K. and Japan—have committed to buy the planes.

Still, Lockheed and its partners face big challenges. The F-35 has to deliver its promised performance and become far cheaper to buy and run. The latest batch ordered by the Pentagon cost just under $100 million each—without engines.


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