In a research note authored before Boeing’s (NYSE:BA) third-quarter earnings report was released, RBC Capital Markets analyst Robert Stallard wrote that the “impact of the sequester” on the company’s defense business “is likely to remain muted until next year.”
Despite the airline manufacturer reporting that quarterly profit soared 12 percent from the year-ago quarter, the strength of the commercial airplane business was forced to compensate for weakness in the defense unit, where revenue edged up just 3 percent while margins contracted and profit fell. In particular, the company’s defense operations were impacted by declining government spending and a large charge Boeing incurred from closing the C-17 transport plane production-line.
But still, as Boeing’s third-quarter top-line results made clear, the biggest federal government defense contractors are surviving the spending cuts. Both Lockheed Martin (NYSE:LMT), the largest of the government’s contractors, and Northrop Grumman (NYSE:NOC) reported earnings that beat analysts’ estimates even though sales dipped.
The key to the success of these contractors is their preparation for the era of low defense-spending that has come as the result of high federal budget deficits as well as the end of the Iraq War and the ongoing withdrawal of U.S. troops from Afghanistan. Companies from Boeing to Lockheed to Northrop have taken steps to reduce costs, streamline operations, and even trim workforces.
“These companies have essentially been able to cut costs, streamline” and “frankly, downsize in some cases, but they are managing very well,” Marion Blakey, president and chief executive officer of the Aerospace Industries Association, said in an interview with Bloomberg Television. Boeing shares are up nearly 75 percent year-to-date, shares of Lockheed have advanced 45 percent, and Northrop’s shares have advanced more than 60 percent.
For the federal government, cuts to the Department of Defense’s budget — plus the emergence of alternatives, like drones — have put plans to expand the United States Air Force’s fleet of aging B-52 and B-1 bombers on pause, until now.
On Friday, in a joint statement, Boeing and Lockheed announced their intention to bid on a new long-range bomber to replace the B-52 and B-1. The Air Force is expected to contract as many as 100 of the $550-million jets, which will enter service by the middle of the next decade. If their bids are successful, Lockheed will lead the F-35 fighter-jet program and Boeing will manufacturer the new aerial-refueling plane. Already $6 billion has been earmarked by the Air Force for research and development of the bomber project.
“Boeing and Lockheed Martin are bringing together the best of the two enterprises, and the rest of industry, in support of the Long-Range Strike Bomber program, and we are honored to support our U.S. Air Force customer and this important national priority,” said President and Chief Executive Officer Dennis Muilenburg of Boeing’s Defense, Space & Security unit. “Stable planning, along with efficient and affordable development and production approaches, enables our team to reduce development risk by leveraging mature technologies and integrating existing systems.”
Both Boeing and Lockheed were going to join forces to bid on the Pentagon’s Next Generation Bomber, but the program was canceled in 2009. For Boeing, being the prime contractor for the Air Force bomber would give the company valuable defense work at a time when its business is suffering from declining orders, which have caused some analysts to question whether the company would remain a strong business in the defense sector. But, the Air Force’s F-35 program is cornering a growing portion of the Defense Department’s budget, leaving less funds to finance the Navy’s purchases of Boeing’s F/a-18 carrier-based jets.
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