Greed isn't good when it sacrifices huge
profits for miniscule margins.
Rich Smith (TMFDitty) Jun 5, 2017 at 8:46AM
A founding member of the nine-nation
international coalition that designed the F-35 stealth fighter, Canada once
planned to acquire 65 of the stealth fighter jets for its air force. Under this
scenario, the F-35's builder, Lockheed Martin (NYSE:LMT), stands to enjoy a
potential $30 billion payday for first selling Canada the airplanes, and then
servicing and maintaining them for decades thereafter.
That's one scenario, at least. Under another,
Canada may buy no F-35s, and Lockheed may get no money at all -- unless Boeing
(NYSE:BA) accidentally saves the day.
Canadian second thoughts
Late last year, in a development disturbing
for Lockheed, the Royal Canadian Air Force announced plans to acquire 18 new
fighter jets to replace its aging fleet of 60 "CF-18" Canadian
variant F/A-18A fighters. Canada's new planes won't be fifth-generation
Lockheed Martin F-35s, though. Rather, the Canadian government has opted to
purchase 18 Boeing-built fourth-generation F/A-18 fighters as a stopgap
measure, while it continues to debate the merits of Lockheed's F-35.
This could turn out to be a pricey
proposition for Canada. By delaying a decision on Lockheed's F-35, the Canadian
government has indicated it will have to pay to "modernize" its
existing CF-18 aircraft, plus pay for the new Boeing F/A-18s. Even so, Canada
may ultimately end up having to buy additional new fighters anyway, because
eventually, those old CF-18s will become too obsolete to fly, even with
upgrades.
As the country continues to hem and haw,
Lockheed is forced to cool its heels and await a final decision on whether one
of the F-35s founding developers will ever buy the plane for itself at all.
Canada's National Post now reports it's entirely possible Canada won't finish
upgrading its air force until "the late 2020s."
Will Boeing save Lockheed Martin's Canadian
bacon?
Here's where this story gets really
interesting. Last month, Boeing -- the beneficiary of Canadian contrariness to
date -- petitioned the Trump Administration U.S. International Trade Commission
to punish Canadian aerospace champion Bombardier (NASDAQOTH:BDRBF) for offering
its new CSeries civilian aircraft to U.S. airlines for sale at unfairly low
prices.
Last year, as you may recall, Delta Air Lines
(NYSE:DAL) placed a 75-plane order (upgradable to 125 planes) for Bombardier's
CS100 civilian airliner. List-priced at $69.5 million per plane, the CS100
already costs less than the cheapest Boeing 737 (the 737-700), which lists at
$82.4 million. But media reports suggest that Bombardier may have offered to
sell Delta its CS100s for as much as 70% off of list price -- as little as $21
million per plane. Additional deals to sell CSeries jets to United Airlines,
Spirit, and JetBlue are also said to be in the works -- and this has Boeing
feeling nervous.
In retaliation for Boeing's move, Canada is
now threatening to "review" its planned purchase of the 18 F/A-18s
described above. Canadian Foreign Minister Chrystia Freeland says Boeing's ITC
challenge is "clearly aimed at blocking Bombardier's new aircraft"
from competing against the Boeing 737, and vowed to "defend the interests
of Bombardier, the Canadian aerospace industry, and our aerospace workers"
-- up to and including by killing the Boeing fighter jet deal in retaliation.
Boeing's boneheaded move
This would be horrible news for Boeing -- and
it's an entirely unnecessary crisis of Boeing's own making. Granted, Boeing's
737 is one of the airplane maker's bigger profit makers in Commercial Airplanes.
But according to Freeland, Boeing itself has admitted that Bombardier's tiny
CS100 doesn't really compete with most larger Boeing 737s. (CSeries actually
poses more of a threat to small passenger jets from Embraer than it does to
Boeing).
What's more, the profits Boeing earns on
Commercial Airplanes pale in comparison to the margins it makes in Military
Aircraft. According to data from S&P Global Market Intelligence, Boeing
Commercial Aircraft sales yield operating margins of only about 4.8% on average.
In contrast, Military Aircraft sales earn Boeing margins of better than 9.8%.
In other words, the F/A-18s that Boeing had
all but succeeded in selling to the Royal Canadian Air Force are all but
guaranteed to be twice as profitable for Boeing as any 737s it might succeed in
selling thanks to its ITC action. And any additional F/A-18s Boeing might
succeed in selling to Canada, should the latter elect not to buy F-35s from
Lockheed, would likewise be twice as profitable for Boeing.
Now, Boeing has put all of those profits at
risk. And it has no one to blame but itself.
Rich Smith has no position in any stocks
mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. The Motley
Fool has a disclosure policy.
Original post: fool.com
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