Friday, June 10, 2016

BAE Looks Beyond the Typhoon to F-35 Program, Drones: Sales from the Lockheed-led program are expected to jump in coming years

Kathryn's Report:

U.S. Marine Corps F-35B Lightning II Joint Strike Fighters are shown in 2013 during a training exercise over eastern California. 

The Wall Street Journal
By Robert Wall
June 9, 2016 7:01 p.m. ET

SAMLESBURY, U.K.—After more than a decade in which building Eurofighter Typhoon jet fighters has been the backbone of BAE Systems PLC’s combat aircraft production, the defense company is shifting its focus to the new F-35 Joint Strike Fighter and what may come next.

BAE Systems expects sales from the Lockheed Martin Corp. -led F-35 program to jump in coming years as its work on the program surpasses production of the Typhoon combat jet, Chris Boardman, managing director of the British arms maker’s military air and information systems unit, said.

With its role on the F-35 limited to being a key supplier, the British weapons maker also is trying to retain its ability to lead future combat aircraft developments to remain a top-tier military plane maker.

BAE is working with other U.K. and French firms to develop a stealthy combat drone that could surveil and strike ground targets. A small group of engineers also is exploring what a future air-superiority combat plane might look like, Mr. Boardman said, though fielding such a system may take another two decades. BAE also is supporting Turkey’s indigenous combat aircraft development program called TFX.

The Franco-British combat drone program, through which both countries hope to keep up with more advanced U.S. developments, received a boost in March when U.K. Prime Minister David Cameron and French President Fran├žois Hollande pledged €2 billion ($2.3 billion) to develop a drone to fly around 2025 and potentially enter production a few years later. “It is the most advanced program of its kind,” Martin Rowe-Willcocks, head of for future programs at the BAE Systems unit, told reporters.

BAE Systems is building on experience gained using a smaller combat drone test aircraft, the Taranis, which first flew in Australia in 2013. It may take to the skies again to validate technologies for the Anglo-French program, which also involves companies such as France’s Dassault Aviation SA, and engine makers Rolls-Royce Holdings PLC and Safran SA.

The nearer-term focus for BAE Systems, though, is on boosting output on parts it makes for the F-35 fighter, including the rear fuselage, which is shipped to Lockheed’s assembly facility in Fort Worth, Texas. The British company built almost 50 rear-fuselage sections last year and expects to produce around 160 when output peaks after 2020. U.S. and international buyers could purchase more than 3,000 of the jets.

Mr. Boardman said sales from designing, building and other F-35 activities should reach around 25% of the military aircraft unit’s revenue around that time. The unit had £4 billion ($5.8 billion) in sales last year.

Making F-35 parts gives BAE Systems about 10% of value on each of the planes that currently cost around $110 million or more depending on the version. The company also is involved in providing some of the sophisticated electronics, adding another 3% to 5% of sales.

RBC Capital analyst Robert Stallard said Thursday that “the F-35 should be a major driver of revenue and earnings growth for Lockheed Martin, the prime contractor, and key suppliers like BAE Systems and Northrop Grumman over the rest of this decade and beyond.” BAE Systems should see its £600 million annual F-35 sales grow to £1.5 billion over the next five years.

How large annual F-35 sales will be for BAE depends on the share of the lucrative spares and maintenance work for the plane the company can win, Mr. Boardman said. It is a business where the partners in building the jet can compete fiercely. BAE Systems has secured an agreement to provide heavy maintenance of the jet in Australia and is working with Northrop Grumman Corp. in Europe to secure component repair contracts.

“The big unknown from our perspective will be how much of the support market we get,” Mr. Boardman said.

The Pentagon estimates it will cost about $1.5 trillion to buy and operate the F-35 over more than 50 years. The plane currently is in service only with the U.S. Marine Corps, which operates a jump-jet version. The U.S. Air Force this year also may declare the plane ready for limited operational use, with others to join later.

Even as the F-35 becomes a bigger earnings contributor at BAE Systems, the company still is pursuing overseas sales for its twin-engine Typhoon fighter it builds in cooperation with Airbus Group SE and Leonardo-Finmeccanica SpA.

Mr. Boardman said the sales success of the Typhoon with Saudi Arabia, Oman and, most recently, Kuwait has fostered “a whole surge of interest” among other Gulf Cooperation Council countries.

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