FORTUNE: This Pentagon Program Will Upend Combat Jet Industry

By Clay Dillow, Fortune

For all the talk of shrinking global defense budgets and sequestration, the U.S. military’s three prime combat aircraft contractors—Lockheed Martin, Boeing, and Northrop Grumman—have enjoyed a good run of late, with each company’s stock currently bumping up against its 52-week high. But don’t expect the smooth sailing to last, says one prominent industry analyst.

A U.S. Air Force contract set to be awarded this summer is set to upend the status quo, likely leading to a major move by one of the top three contractors to acquire a piece of another, says Richard Aboulafia, vice president for analysis at aerospace and defense consultancy Teal Group. In other words, if you only pay attention to one thing in the defense space this year, keep a watchful eye on the Pentagon’s Long Range Strike-Bomber (LRS-B) decision.

If you’ve never heard of the Air Force’s long range strike-bomber, that’s by design. The super-secretive program has been on the flying branch’s wish list for years, though details surrounding the aircraft and its potential design remain scarce even as the Pentagon wants to spend $100 billion dollars on it. The program will produce 80 to 100 aircraft (at roughly $550 million per copy), replacing the Air Force’s legacy fleet of B-52 and B-1 bombers with a stealthy, long-range, nuke-capable strike aircraft entering service around 2020.

A program so big and so central to the USAF’s core competencies will shape America’s military aerospace priorities for the next two decades at least. But its impact will become immediately apparent this summer when the Air Force decides whether Northrop Grumman NOC 0.33% or a collaboration between Boeing and Lockheed Martin will ultimately build and maintain its LRS-B fleet, Aboulafia says. With no other major combat airframe contract on the horizon and work on existing contracts running out, the loser of the competition will have to gracefully exit the combat aircraft business or make a big move to stay relevant.

Lockheed Martin LMT 0.14% , with the $400 billion F-35 Joint Strike Fighter program in its back pocket, can withstand the loss of the LRS-B contract. But between Northrop Grumman and Boeing BA -0.52% something’s got to give, Aboulafia says. Northrop Grumman’s last prime aircraft contract was for the B-2 Spirit stealth bomber, which entered service more than a decade ago (only 21 of the aircraft were built). Boeing’s only existing combat jet assembly line will cease production in 2018 unless it finds a new buyer for its F-18 or F-15 fighter jets.

“The broader problem is that two of the three are running out of work,” Aboulafia tells Fortune. “There’s nothing wrong with Northrop Grumman or Boeing as companies, but Northrop Grumman hasn’t built a new military aircraft in many years, and Boeing’s legacy military aircraft will end production by the end of this decade. So this becomes make or break, basically.”

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