Uncertain Future For Boeing’s Fighter Jets
The global fighter jets market comprises a limited number of customers but a wide variety of models and makes of fighter jets, making it a highly competitive market to thrive in. In 2009, Lockheed Martin (NYSE:LMT) and Boeing (NYSE:BA) comprised 31% and 24% respectively of the global fighter jets market. [1] However, with the development of Lockheed Martin’s F-35 fighter jet the competitive environment in the market has been seeing a shift. The F-35 has been garnering great support from the U.S. and other partner countries. It is now anticipated that moving forward Lockheed Martin will control over 50% of the market share, bringing Boeing’s market share down to 10%. [2]
We currently have a price estimate of $156 for Boeing, approximately in line with its current market price.
See our complete analysis of Boeing here
Boeing has been producing fighter jets for over 90 years now, so the discontinuation of fighter jet production will be a setback to the company. The segment has already been seeing a slowdown in recent times due to budgetary cuts within the United States, as well as intense competition in both domestic and international markets. If the demand for Boeing’s fighter jets does not see an improvement in the near future, the company will be left with little choice but to discontinue production.
The F/A-18 Super Hornet and F-15 constitute major fighter jet programs within Boeing’s military aircraft segment.
Current orders and backlog support production of Super Hornets through 2017
As of December 31, 2014, 68 F/A-18 Super Hornet jets contracted by the U.S. Navy remained as backlog at Boeing. The 2015 budget allowed for the additional funding of 15 more such jets. However,President Obama’s fiscal year 2016 budget request submitted last month included no additional funding for the Super Hornet jets. [3]
In response to this budget request, the U.S. Navy has indicated the need for 12 F/A-18 jets and 8 F-35’s through its unfunded requirements list. This list will be presented to the Congress for approval in the coming days. [4] This need arises as the U.S. Navy plans to retire 3 squadrons, or 36 older fighter jets on account of them not being serviceable anymore, hence creating a shortfall of fighter jets. To be able to fulfill the additional demand, Boeing will have to place orders for production materials by mid-year. Therefore, it is crucial for Boeing that the Congress and the U.S. Navy come to a consensus on this decision in next couple of months. [5]
Internationally, the Super Hornet has only managed to capture the attention of the Australian government so far. It continues to struggle to win new contracts within international markets and specifically within Asia, which is the fastest growing defense market in the world today. [6] Both South Korea and Japan recently signed deals for fighter jets with Lockheed Martin, over Boeing and other competitors. [7]
One important prospect for Boeing lies in Malaysia. Boeing is participating in the bid to replace Malaysia’s aging fleet by proposing the purchase of the Super Hornets. It is also speculated that Lockheed Martin’s F-35 is not a part of this bid. [8] However, with the weakening currency in Malaysia, the pending decision on this contract has been seeing delays.
If decisions for additional production on both domestic and international fronts are not achieved in a reasonable time frame, Boeing will have to start the process of shutting down the Super Hornet program, which at current production levels will not be able to stretch beyond 2017. [9]
Lockheed Martin’s F-35 continues to dominate the global fighter jet markets
Lockheed Martin’s F-35 has garnered a great deal of support from the U.S. and other partner countries, making it exceedingly difficult for Boeing to win new contracts to be able to continue production.
It is important to note that the cost of production of F-35 has been seeing a decline, which could subsequently translate to a drop in its price. We expect that a drop in prices will further increase the demand for F-35 in the markets. The F-35 is already expected to dominate foreign military markets in the future, capturing over 50% of global fighter jets market after 2018. [10]
Boeing’s F-15 also bears the brunt of the growth of Lockheed Martin’s F-35. The dearth of new contracts might push the company to shut production of the F-15 by 2019, after it makes its final deliveries to Saudi Arabia. [9]
How shutting down production of fighter jets will impact Boeing
In 2014, Boeing reported that it delivered 44 Super Hornets and 14 F-15s. [3] On an average, each Super Hornet brings $55 million in revenues. On the other hand, F-15’s are sold at an average price of $80 million per unit. Additionally, the company earns maintenance revenues for the jets over the course of their lifetime. It is hence evident that Boeing derives significant revenues from the sale of its fighter jets.
However, on a company-wide level, the fall in this section of defense segment revenues will be offset by the increase in commercial revenues at Boeing. Over the course of the past few years, proportion of commercial revenues has been rising, consequently reducing the proportion of revenues derived from the defense segment. Production rate hikes in the commercial segment are expected to drive significant growth in revenues at Boeing in the coming years.
The defense segment has been witnessing a slow down over the past three years, as a result of the budgetary cuts in the U.S. However, moving forward, defense spending is expected to recover. Boeing is the second largest contractor for the U.S. Department of Defense and so an increase in contract volumes should impact its revenues positively. Additionally, the fiscal 2015 budget, which was signed into law in December, fully funds other core Boeing defense programs such as the Apache helicopter and the P-8A Poseidon.
The funded status of Boeing’s other major programs and the anticipated recovery in U.S. defense spending give us confidence that Boeing’s defense business will be more than offset by growth from its commercial aviation business even in the worst-case scenario, where the fighter jet production is discontinued.
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Notes:- Lockheed’s F-35 ‘Program Killer’ May Double Sales, Bloomberg [↩]
- Roundup of Aerospace Forecasts and Predictions, 2015, iBASEt [↩]
- The Boeing Company 2014 Annual Report, Boeing [↩] [↩]
- Exclusive: U.S. Navy wish list has 12 Boeing jets, eight F-35s – sources, Reuters [↩]
- CNO Greenert Warns Congress of Fighter Shortfall, Boeing Super Hornet Line to Close in 2017 Absent New Orders, U.S. Naval Institute [↩]
- Airbus Says Military Demand to Grow Amid Asia Tensions, Bloomberg Business [↩]
- Boeing Expects Growth in Southeast Asia Defense Market, Bloomberg [↩]
- Malaysia Expected To Order Fighters In 2016-20, Aviation Week [↩]
- Boeing Faces a Future Without Fighter Jets, Wall Street Journal [↩] [↩]
- As F-35 Ramps Up, Legacy Fighters Face Existential Threat, National Defense Magazine [↩]