Bloomberg News

BAE Butts Into Lockheed’s $3 Billion F-16 Servicing Work

January 08, 2013

F-16 Fighter Jet Upgrades

BAE Systems Plc is targeting higher international sales from upgrading out-of-date F-16 fighter jets made by Lockheed Martin Corp. Photographer: Bruno Fahy/AFP via Getty Images

BAE Systems Plc (BA/) is encroaching on a $3 billion market for F-16 upgrades dominated by Lockheed Martin Corp. (LMT:US), which makes the fighter jets.

BAE last year beat the Pentagon’s biggest contractor for a deal to refurbish about 130 of South Korea’s jets. It was the first time a company other than Lockheed has won such work through the U.S. Foreign Military Sales program, according to Dave Herr, president of BAE’s support solutions business.

Now, London-based BAE wants to boost international sales by taking even more of Lockheed’s F-16 business. “We’re looking at potentially where to take this next,” Herr said in a phone interview. “It’s a big opportunity for us.”

Shrinking defense budgets in the U.S. and Europe and a lack of affordable new fighter jets have heightened competition for aircraft upgrades, said Kevin Brancato, a Washington-based defense analyst at Bloomberg Government. For Lockheed, this means defending its turf from rivals that may soon include Boeing Co., the Pentagon’s No. 2 contractor.

With more than 2,200 F-16s sold outside the U.S. to countries including Egypt, Turkey, Greece, Thailand and Chile, refurbishing the jets offers lucrative opportunities for competitors to take market share away from Lockheed, Brancato said.

“Demonstrated performance is what sells, and here BAE is getting its test,” Brancato said in a phone interview. “They have a very good chance of winning further business, presumably because they’re underbidding what Lockheed is offering.”

F-35 Jet

Lockheed may be focusing so much on the F-35 jet, the Pentagon’s most expensive weapons program, that it let its guard down on the F-16 work, said Richard Aboulafia, a defense and aerospace analyst with Teal Group, a consulting firm based in Fairfax, Virginia.

“Lockheed Martin has left itself uniquely vulnerable,” Aboulafia said in a phone interview. “The only thing worse than cannibalizing your own market is having someone else do it for you, which is kind of what’s going on here.”

The Bethesda, Maryland-based company may be concerned that refurbishing older jets could cut into its future market for the F-35, he said.

The $396 billion F-35 program is behind schedule and suffering from escalating costs, potentially providing an opening for contractors offering cheaper upgrade packages to existing military jets.

F-16 Upgrades

Lockheed is “committed to meeting the sustainment and modernization needs of F-16 operators around the world for decades to come,” Benjamin Boling, a company spokesman, said in an e-mail.

The development of the F-35 doesn’t have any bearing on the contractor’s commitment to providing F-16 upgrades to its customers, Boling said.

“While the F-16 remains the most capable and cost effective 4th generation fighter available today, nothing can match the 5th generation capabilities that the F-35 offers,” he said. “The 4th generation and 5th generation markets are inherently different at this point.”

Lockheed has made more than 1,100 upgrades to F-16s, Boling said. In September, it won a $1.85 billion deal with the U.S. Air Force to upgrade 145 of Taiwan’s F-16 jets.

The U.S. military has purchased 2,256 F-16s, and other nations have acquired 2,271, Boling said.

Boeing Competition

Another competitor may soon emerge.

Boeing (BA:US) is interested in international F-16 upgrade opportunities, said Ellen Buhr, a company spokesman.

The Chicago-based contractor has experience with the aircraft through its work on a program to convert retired F-16s to drones used for military target practice. It “would welcome the chance to apply that knowledge to F-16 upgrade efforts,” Buhr said.

Because budgets for new programs are being reduced in many countries, “customers are increasingly seeking to extend their use of current aircraft,” she said. “That opens the door to upgrade opportunities.”

BAE’s Herr said his company is also looking at “a range of potential opportunities” to upgrade other aircraft and ships for international customers.

Some of the F-16s date to the 1980s. The upgrades are designed to prolong the jets’ lives and to provide more modern electronics and software packages. BAE provides about 40 percent of the electronics and other mission equipment used in F-16s as a subcontractor to Lockheed.

Air Force

BAE isn’t pursuing work with the U.S. Air Force to upgrade its fleet because the service has indicated it intends to stick with Lockheed, Neil Franz, a BAE spokesman, said in a phone interview.

The value of the South Korea agreement hasn’t been disclosed by BAE because the contract is still being finalized. It was announced in July by the country’s defense acquisition agency, which said it would seek U.S. government approval of the deal.

The company has talked with other nations about F-16 upgrades, Herr said, though he declined to identify them. Work refurbishing the jets for countries other than the U.S. is valued at as much as $3 billion, BAE estimates.

“We are engaging with a number of other countries and learning more about their needs,” Herr said. “It’s clear that more and more nations are voicing an interest and a desire for another choice.”

To contact the reporter on this story: Nick Taborek in Washington at ntaborek@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $196.43 USD
    • 0.66
    • 0.34%
  • BA
    (Boeing Co/The)
    • $131.24 USD
    • 1.21
    • 0.92%
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