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The defense arm of Boeing (NYSE: BA) won its second massive victory this month. This has raised optimism for a company that recently played a minor role in its important commercial aviation unit, but which may finally be reviving its own growth engine.
A team made up of Boeing and Italy Leonardo (NASDAQOTH: FINMY) won a US Air Force competition to replace the UH-1N Huey helicopters used for missions such as protecting the country's nuclear missile silos. The Air Force has allocated $ 375.6 million to four MH-139 helicopters, which is the first step of an estimated 84 helicopters worth $ 2.38 billion.
The Boeing team beat the competing offers of Lockheed Martin (NYSE: LMT) and Sierra Nevada Corporation, each based on the UH-60 Black Hawk helicopter. Given the long-standing experience of the Army with the UH-60 manufactured by Lockheed Martin and his original Black Hawks sole-source projects to replace the aging Hueys instead of organizing a competition, the victory of Boeing-Leonardo should be considered a failure.
Given the scarcity of major Air Force awards, Boeing's victory should be the subject of protests from its competitors. Earlier this year, Lockheed Martin lost a pre-award protest over the amount of intellectual property that the government was asking competitors to hand over if they were selected. it seems likely that this decision will be taken with care.
Boeing is on a roll
The winning design is based on Leonardo's AW139 model, which has more than 250 government, military and commercial customers from around the world, but who, until now, was unable to gain a foothold with the US government. The helicopters will be built by Leonardo Helicopters in facilities located outside Philadelphia. The first deliveries are scheduled for 2021 and production could continue until 2031.
In its bid, Boeing introduced AW139 over 2 million flight hours and established its supply chain as factors that could reduce program uncertainty and generate savings costs. Indeed, the Air Force praised the competition for significantly reducing the total cost of an initial estimate of $ 4.1 billion.
Boeing Vice President David Koopersmith said in a statement that the winning design "exceeds the requirements of the mission, it is also ideal for VIP transport and offers the Air Force cost savings and life cycle of $ 1 billion. "
The victory continues on Boeing Defense, a unit that represents just one-fifth of the company's total revenue and has been increasingly marginalized in recent years due to the success of commercial designs such as the 737 and 787 Dreamliner.
The unit's flagship program, the KC-46, experienced delays and cost overruns that led Air Force Secretary Heather Wilson to criticize Boeing in March and to ask if society was too focused on its defense projects. .
This is Boeing Defense's second victory over the past 30 days, following an $ 805 million contract for the design and construction of MQ-25A U.S. Navy refueling UAVs. Assuming everything goes well, the navy is expected to order more than 72 aircraft at a cost of more than $ 10 billion.
Any other good news could be on the horizon. Boeing is one of three finalists, along with Lockheed and Leonardo, for a $ 16 billion contract to build new T-X coaches that could be announced from one day to the next.
A word of warning
The price also introduces new risks for both Boeing and Lockheed. The Air Force agreement is a fixed-price firm contract, which means that Boeing and Leonardo will be at the mercy of cost overruns. Boeing's troubled KC-46 victory resulted in similar arrangements, and the company has already supported more than $ 3.4 billion due to higher than expected development costs.
Boeing probably hopes that, given the record of AW139, the development will be simple. But the KC-46 is based on the company's main 767 commercial jet. Changes, by their nature, may result in unexpected complexities, and investors should be cautious in this regard and other fixed price contracts until deliveries begin.
The victory also marks a milestone for Leonardo, who is looking to expand his US government operations. In 2014, the company's US military unsuccessfully sued the US military over the branch's decision to buy Lakota helicopters to Airbus, and has also bid for contracts including a Presidential Transport of Marine One won by Lockheed.
A well-established Leonardo could complicate things for all American entrepreneurs, and Lockheed Martin in particular. Lockheed invested heavily in helicopters in 2015 through its $ 9 billion purchase of Sikorsky from United Technologies, an agreement criticized for its wealth, partly because so few major contracts in the field of helicopters are proposed. Sikorsky, under Lockheed, has been successful in winning new orders, but should expect to face strong Leonardo offers when new opportunities arise.
Safe to hold
It's hard to blame Boeing's investors for focusing on commercial sales. Even after these victories of the Defense, do not expect this unit to take the limelight. But the rise of commercial jet aircraft orders, which has been around for ten years, must stop at some point, and Boeing will have to rely on stable and competitive defense activity when that happens.
Just 18 months ago, Boeing Defense was probably not able to take over if business demand had dropped. These recent successes suggest that an internal redesign early in the year had the desired impact and that Boeing Defense is back.
Boeing's shares have been an excellent investment, up 183% over the last three years and 541% over the last decade. With defense in its arsenal, the company has the ability to maintain this momentum even after the final slowdown in commercial sales.
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Lou Whiteman has no position in any of the actions mentioned. The Motley Fool has no position in the stocks mentioned. Motley Fool has a disclosure policy.
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