Rick Clough, Anthony Capaccio, and Julie Johnsson / Bloomberg & David Axe / Quartz – 2015-10-29 01:41:08
Northrop Gets Defense Lifeline in $80 Billion Bomber Contest
Rick Clough Anthony Capaccio Julie Johnsson / Bloomberg
(October 28, 2015) — Northrop Grumman Corp., shut out of prime contracts for US warplanes since the B-2 in the 1980s, won a Pentagon sweepstakes valued at as much as $80 billion to build the Air Force’s Long-Range Strike Bomber.
In beating a team of Lockheed Martin Corp. and Boeing Co., Northrop overcame the world’s two largest defense contractors and secured a financial lifeline stretching into the 2020s. The plane, still highly classified after years of planning, will be the military’s first new bomber since the Cold War and one of the biggest US weapons systems of the next decade.
“There was a David and Goliath situation going on,” said Richard Aboulafia, an analyst at consultant Teal Group. “This is disappointing for Lockheed Martin, pretty bad for Boeing, but transformational for Northrop Grumman. They go from being a collection of operating units to a first-tier prime with a strong central core.”
Northrop surged to a record high Wednesday, extending a rally that began when the Defense Department announced the award late Tuesday after the stock market closed. Drexel Hamilton LLC raised its recommendation to buy from hold, a boost for the lowest-rated company among top Pentagon contractors, based on data compiled by Bloomberg.
The new plane will join the B-2 and is due to be deployed in the mid-2020s as the successor to the 37-year-old B-1 and the Eisenhower-era B-52. The Air Force wants a durable, stealthy aircraft that can fly deep into enemy territory to attack hidden or mobile targets.
What that plane will look like is still unknown, at least to the public. A Northrop commercial during the Super Bowl subtly tried to link its jet — shown as a shrouded flying-wing shape — to past aviation glories such as the B-2, which entered service in 1989. But there has been no indication whether the new jet will resemble that shape or some other design.
Northrop’s proposal is “the best value for our nation,” Air Force Secretary Deborah Lee James said at a news conference at the Pentagon.
Based on figures released Tuesday, which exclude the cost of any related future military construction, the bomber program calls for spending $23.5 billion in development plus $56 billion on procurement, or about $564 million for each bomber in 2016 dollars.
“Northrop has won ‘the’ military aircraft award of the decade, and assuming that it goes to plan this will be a key driver of revenue growth for at least the next 10 years,” Robert Stallard, an RBC Capital analyst, said in a note to clients.
Stallard estimated that the program could add about $1 billion in annual revenue starting in 2018. Howard Rubel, an analyst with Jefferies LLC, projected that the plane could account for as much as 10 percent of Northrop’s sales — 2014’s total was $24 billion — within a few years.
Northrop’s “legacy experience with the B-2 helped them understand what was required,” Rubel said in a telephone interview. The company also has major contracts building drones with advanced technology for the military.
Northrop climbed 5.5 percent to $190.45, an all-time high, at the close in New York. Boeing fell 0.4 percent and and Lockheed declined 0.9 percent.
Lockheed and Boeing could choose to protest the award, which typically must happen within two weeks, according to Nick Taborek, an analyst with Bloomberg Intelligence. Given the years of research that went into the decision, the chances of overturning it “are likely even slimmer” than the usual 4 percent success rate, Taborek said Tuesday in a report.
The plane also was of less-urgent financial consequence to Lockheed, the builder of the F-35 fighter, and Boeing, the commercial-and-defense giant whose military programs include the KC-46 tanker. However, Boeing is working to find new military contracts to replace its F-15 and F/A-18 fighter jet manufacturing, which is approaching the end of production, said Aboulafia, the Teal Group analyst.
Boeing and Lockheed were “disappointed” by the Pentagon’s choice, the companies said in a joint statement. “We will have further discussions with our customer before determining our next steps.”
Northrop’s bomber will employ a family of secret, strike technologies including munitions; sensors needed to find targets; jamming capabilities to suppress enemy radar; and communications able to survive the electromagnetic pulses from nuclear detonations. The first planes will be piloted and outfitted with conventional weapons, followed by a version that can carry nuclear arms. A drone version may follow.
Also still secret: subcontractors such as engine suppliers. Citing national security concerns, the Pentagon said they wouldn’t be identified. The Air Force did disclose on Tuesday that Congress has appropriated $1.9 billion since 2011 on projects to reduce the risks of some technologies to be used in the aircraft.
The Pentagon’s announcement came on the eve of Northrop’s third-quarter financial results on Wednesday. The Falls Church, Virginia-based company boosted its 2015 profit forecast and reported quarterly earnings that beat analysts’ estimates as sales rose in three of its four divisions.
“As the company that developed and delivered the B-2 Spirit stealth bomber, we look forward to providing the Air Force with a highly-capable and affordable next-generation Long-Range Strike Bomber,” Chief Executive Officer Wes Bush said in a statement. “Our team has the resources in place to execute this important program, and we’re ready to get to work.”
Three main issues helped drive the government’s decision: Costs were given the same weight as payload and range for the competing designs, said Loren Thompson, a defense analyst with the Lexington Institute. Boeing and Lockheed have contributed to the institute.
The price tag per plane would soar if far fewer aircraft are built than the fleet envisioned by the Pentagon. Costs for the B-2 skyrocketed to $2.2 billion apiece as a projected fleet of 132 bombers was slashed to 21 after the Cold War ended.
This Is Why the US Is Spending
$80 Billion on a New Long-range Stealth Bomber
David Axe / Quartz
(October 27, 2015) — A key component of US military power is to get a major upgrade. Pentagon officials said Tuesday that Northrop Grumman will build up to 100 new long-range stealth bombers for the Air Force, at a cost of $79 billion. It’s arguably the most important US military initiative in years.
Details of Northrop’s bomber design remain classified, but experts agree on what is required. “Stealth, a payload capacity of approximately 20,000 pounds and a range of 4,000 to 5,000 nautical miles,” according to Mark Gunzinger, an analyst at the Center for Strategic and Budgetary Assessments in Washington, DC.
Those capabilities, combined with a network of overseas bases, will allow the US to maintain an important advantage over military rivals. Russia and China have long-range bomber capabilities, but neither can match the reach and sophistication of the US program, which can reliably hit targets anywhere in the world.
The Pentagon is counting on the new bomber’s radar-evading design, which should allow the aircraft to penetrate the sophisticated air defenses that Russia and China are deploying in growing numbers. The bomber will also be capable of carrying nuclear weapons, giving it value as a strategic deterrent.
Northrop will build 21 bombers by 2025 and the remaining 79 over the following decades. Pentagon accountants estimate each bomber will cost $790 million, including development costs. That’s actually pretty cheap. The Air Force’s last bomber, the B-2, set taxpayers back around $2 billion for each of 21 copies.
Northrop was widely expected to win. Having built the B-2, the company has more recent bomber experience than rivals Lockheed Martin and Boeing. Northrop has also developed a small, stealthy robotic bomber prototype for the Navy.
General Mark Welsh, the Air Force chief of staff, praised Northrop’s design during the announcement. “Its range, survivability and payload flexibility will ensure we can execute our global power mission.”
You can follow David Axe on Twitter @daxe.
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