A400M rollout, Seville
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Airbus’ A400M is a EUR 20+ billion program that aimed to repeat Airbus’ civilian successes in the military market. A series of smart design decisions were made around capacity (35-37 tonnes/ 38-40 US tons, large enough for survivable armored vehicles), extensive use of modern materials, multi-role capability as a refueling tanker, and a multinational industrial program; all of which leave the aircraft well positioned to take overall market share from Lockheed Martin’s C-130 Hercules. If the USA’s C-17 is allowed to go out of production, the A400M would also have a strong position in the strategic transport market, with only Russian IL-76 and AN-124 aircraft as competition. To date, 184 orders have been placed by Germany (60), France (50), Spain (27), Britain (25), Turkey (10), South Africa (8), Belgium (7), Malaysia (4), and Luxembourg (1); and Chile has expressed an unfinalized interest in 3 planes.

Right now, the firm’s biggest issue is timing. In November 2007, “Airbus A400M Program Delayed 6-12 Months” covered ongoing issues with Airbus’ new military transport. Those issues escalated, and project is currently under moratorium as all parties decide what to do. Cancellation is not a realistic contractual option for most customers, but late deliveries can be refused, giving both Airbus and its customers negotiating leverage in talks.

This DID Spotlight article covers the latest developments as the A400M project slides toward production. A key multinational agreement has now extended the program’s moratorium, but South Africa has pulled out, and Malaysia is announcing major delays…

• The A400M Program: A Snapshot
• The A400M Program: Airbus’ Dilemmas
• Updates & Key Events [updated]
• Additional Readings
  
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E-737 Wedgetail
over New South Wales
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The island continent of Australia faces a number of unique security challenges that stem from its geography. The continent may be separated from its neighbors by large expanses of ocean, but it also resides within a potential arc of instability, and has a number of important offshore resource sites to protect. Full awareness of what is going on around them, and the ability to push that awareness well offshore, are critical security requirements.

“Project Wedgetail” had 3 finalists, and the winner was a new variant of Boeing’s 737-700, fitted with an MESA radar from Northrop Grumman. That radar exchanges the traditional AWACS rotating dome for the E-737’s stationary antenna and its “top hat” look.

Project Wedgetail’s flight has not been smooth. DID’s FOCUS articles offer in-depth, updated looks at significant military programs of record. This one covers contracts, events, and key milestones within Australia’s E-737 program, from inception to the current day. The latest developments include much more precise information regarding the radar’s problems…

• Project Wedgetail: Program and Participants
• Contracts & Key Events, 1997 – Present
• Additional Readings
  
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Hawaii Superferry
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In his April 6/09 discussion of the FY 2010 budget, Secretary of Defense Robert M. Gates said that the US military wanted to charter another 2 “JHSV-like” fast catamaran ships from 2009-2011, until the JHSV ships begin arriving. That meant JHSV-winner Austal would find its products competing once more with Incat, which has had 4 of its wave-piercing catamarans chartered by various American services. Their Swift wave-piercing catamaran is currently chartered by the Navy as HSV-2, just as the Austal-built Westpac Express is chartered by US Military Sealift Command for the Marines.

One obvious option was the Hawaiian Superferry catamarans, a larger pair of Austal-built ships that resemble the Westpac Express. In late March 2009, the ferries were sidelined following a Hawaiian court decision, which mandated additional environmental reviews for the service. Unfortunately, a federal charter may become more complicated, as the firm has just filed for Chapter 11 bankruptcy. The firm reportedly has just $1 million in cash, and is facing a $2.9 million principal and interest payment on one of the ferry construction loans. MarineLog’s “Hawaii Superferry files for Chapter 11” explains the situation, and details the firm’s various creditors.

Doosan K21 concept
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South Korea is steadily becoming a force to be reckoned with in the global defense market. Its world-leading shipyards are successfully building and and delivering vessels that include KDX-III AEGIS destroyers and Dokdo Class LHD amphibious assault ships. Its aerospace firms are beginning to see orders from the ROKAF and beyond for trainer (KT-1, T-50) aircraft, are partnering with Eurocopter to create a new medium helicopter (KHP), and will soon offer a compelling lightweight fighter (F/A-50). On land, the indigenous K1A1 tank was followed by the XK-2 “Black Panther,” which was exported to Turkey as the Altay. The K9/K10 mobile howitzer offering is expected to grab a significant chunk of that global market over the next decade. Now, a modern Infantry Fighting Vehicle looks set to round out those offerings.

Doosan is a large Korean conglomerate, whose best known brand is probably Bobcat construction equipment. Other offerings range the gamut, including South Korea’s Kentucky Fried Chicken outlets, Doosan Feed agricultural supplies, franchised “Donga” private schools; and the new Doosan DST subsidiary, which manufactures the K21 KNIFV. October 2008 saw the first major order placed, and now a German NGC subsidiary has won a sub-contract…

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MiG-35D
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As Sukhoi’s SU-30 family of large, multi-role fighters has come to dominate Russian aircraft exports over the past decade, the positions of Sukhoi and MiG have reversed. Now MiG is the deeply secondary design bureau, and Sukhoi is the firm designing Russia’s flagship fighters. Russian weapons exports have risen sharply over the past 5 years, but the overall volume of orders for Russian manufacturers has plunged without the Soviet empire’s vast arms budget, network of dependent clients, and the global military tensions and warfare that accompanied its drive for expansion.

That has created serious trouble for RAC MiG. Their MiG 1.44 design lost to Sukhoi’s PAK-FA in the competition to become Russia’s future fighter, their MiG-AT lost the future trainer market to the Yakolev/Aermacchi Yak-130, and their flagship MiG-29 now struggles to find buyers on the international market, despite multi-role upgrades. India is buying about 45 MiG-29K aircraft for its aircraft carriers, and the omnidirectional thrust-vectoring MiG-29OVT/MiG-35 variant is a candidate in India’s 126-plane MMRCA competition, but sales elsewhere have been slow. Algeria’s cancellation of its $1.3 – 1.5 billion, 34 plane MiG-29 buy has hit the company hard on multiple fronts. Even Russia’s recent $615 million purchase of the 28 MiG-29SMT multi-role fighters from that deal will not solve the firm’s $1.5 billion in reported debts…

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BR710 engine
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At the end of November 2007, engine maker Rolls-Royce employed around 39,500 people in 50 countries: around 23,300 are employed in the UK, 8,300 in North America, 2,300 in Germany, 3,400 in the Nordic countries, 680 in Asia with an additional 2,000 working in joint ventures, and about 1,500 in the rest of the world. One of their managerial foci is the metric of sales per employee, and this has underpinned their approach in a number of areas, including investments in process controls and IT systems.

The firm is now negotiating with its employees and their unions with the aim of reducing 2,300 staff and management positions (about 5.8% of their workforce), focusing on overhead and support functions. The Independent is reporting that most of the job losses are expected to be in Britain, where executives hope to use voluntary buyouts. The firm says that it does not intend to lay off manufacturing employees, though a separate union/political battle is being fought over the proposed closure of the Merseyside, UK plant and relocation of its production to Mount Vernon, OH, USA. Rolls-Royce’s release said that the firm “will continue to recruit graduates, apprentices and those required directly to deliver growth.”

While the firm cites “external headwinds” like increasing raw material costs and the weak US dollar, the reductions are expected to have no net impact on the Group’s 2007 or 2008 performance, once all costs are factored in. The most likely explanation, therefore, appears to be the straightforward one of a corporation creating a leaner support structure and managing to its key metrics like productivity and sales per employee. Rolls Royce release | Reuters report | UPI report.

By 2005, QinetiQ (pron. “kinetic”) was a vital UK defense research firm whose owners included the British government and The Carlyle Group. This was a transformation from its previous role as part of Britain’s DERA government research agency, but relations remain close and the firm is involved with a wide variety of UK defense projects. DID has covered a number of projects in which QinetiQ has been involved.

As a second step in line with the UK’s 1998 Strategic Review that pressed for the movement of defense research to the private sector, QinetiQ announced on January 12, 2006 that it was headed for an IPO. Each of the current owners would sell a part of their holding in connection with the Global Offer, which was originally expected to raise gross primary proceeds of about GBP 150 million for the MoD, plus significant secondary proceeds from the sales by the MOD and the Carlyle shareholders.

The IPO ended up raising over GBP 600 million from a partial sale of shares, but now a recent NAO report concerning has ignited sharp political controversy…

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The Boeing Company board of directors has just approved a new repurchase plan for up to $7 billion of common stock, above and beyond the $8 billion invested in this area since resuming repurchases during 2004. This includes the $3 billion buy back that the board approved in August 2006, which is nearing completion.

Boeing Chairman, President, and Chief Executive Jim McNerney said that “We are executing a balanced cash deployment strategy that’s serving Boeing and its shareholders well.” The next wave of share repurchases will be made on the open market or in privately negotiated transactions.

Share buybacks seem to be popular in the industry, and it can be useful for our readers to understand them better. Investopedia has a very solid, very readable explanation of share buybacks and the accompanying shareholder positives and negatives. Once you’ve read that, the McKinsey Quaerterly’s September 2005 article “The Value of Share Buybacks” is an excellent next step for the larger corporate perspective. The money paragraph?

“Companies shouldn’t confuse the value created by returning cash to shareholders with the value created by actual operational improvements. After all, the market doesn’t.”

Noga Light products
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India Defence reports that Israeli firm Star Night Technologies Limited’s subsidiary, New Noga Light, has won a 100 million shekel (NIS, currently about $25 million) tender to supply more night vision equipment to 2 mountain divisions of the Indian Army. Star Night had already received an 38 million shekel (NIS) order from India’s army in November 2006, and its total 2006 sales amounted to NIS 57 million.

Israel’s business daily Globes added that the order will be supplied over a two-year period, the firm is currently negotiating with Indian authorities on a date for the start of deliveries. A Ha’aretz newspaper report, however, said that the Israeli company is to provide 35% of the contracted items by mid-2008. A toehold in this market may be significant over the longer term, if the right local partners can be found – those of watching US night-vision buys weren’t surprised when India Defence added:

“Though almost all the front line units and those engaged in counter-insurgency have been equipped with night vision devices, according to Army estimates such equipment worth over USD 500 million was still needed to arm the remaining units.”

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Yes, it’s that time again. Obviously, the results below are extremely brief, and we’ve now added Boeing and Raytheon. Full statements and figures can be found at each of the linked URLs:

• Boeing Company. Boeing’s overall revenue rose 15% to $61.5 billion reported and earnings were up 7% to $3.014 billion, but a slight decline in operating margins dropped reported net income by 14%; on the other hand, record operating cash flow of $7.5 billion offers strong liquidity, and commercial aircraft sector sales, backlog, et. al. remain very strong. Boeing’s stock price rose after the release. Boeing Integrated Defense Systems (IDS) also had its ups and downs; revenues were up 4% to a record $32.4 billion, but problems with its 737 AEW&C program and associated penalties in Turkey and Australia were visible on the bottom line. While Boeing IDS operating margins absent divestitures were higher in 2006 than 2005, the hit to “Precision Engagement & Mobility Systems” dropped the 2006 figure to 9.3% vs. 12.6% in 2005 (including divestitures) despite gains from F-15 fighter sales and H-47 helicopter contracts. Network and Space Systems saw a 2% revenue decrease and 32% earnings decrease from 2005, while Support Systems which includes the C-17 GSP and other offerings was the only solid winner with revenues up 14% and earnings up 9%. See Q4/2006 results release [PDF format] | Webcast | Financial Slide Presentation [PDF format].

• General Dynamics. Earnings from continuing operations for 2006 grew by 18.1% to $1.71 billion, or $4.20 per share on a fully diluted basis, compared with earnings of $1.45 billion ($3.58 fully diluted) in 2005. Revenue for the full year of 2006 increased 14.7% to $24.1 billion, compared with $21 billion for 2005.

• Lockheed Martin. Net earnings for the year ended December 31, 2006 were $2.5 billion ($5.80 per share), compared to $1.8 billion ($4.10 per share) in 2005. Net sales were $39.6 billion, up 6% from $37.2 billion. Cash from operations was $3.8 billion, and Return on Invested Capital (ROIC) was 19.2% compared to 14.5% in 2005.

• Northrop Grumman. Income from continuing operations for 2006 rose 13% to $1.6 billion ($4.44 per diluted share), from $1.4 billion ($3.83 per diluted share) in 2005. Sales for 2006 were comparable to 2005. Net income for 2006 rose 10 percent to $1.5 billion ($4.37 per diluted share), from $1.4 billion ($3.85 per) in 2005. Total operating margin for 2006 increased 12% to $2.5 billion from $2.2 billion, driven by higher operating margin in all 4 of the company’s businesses, and double-digit percentage increases in Information & Services and Ships operating margin.

• Raytheon: Total 2006 net sales were $20.3 billion, up 7% from $19.0 billion for 2005. In 2006, net income rose 47% to $1.283 billion ($2.85 per diluted share) vs. $871 million ($1.92 per diluted share) in 2005. Improved operating results at Integrated Defense Systems, Missile Systems and Network-Centric Systems combined with lower net interest expense and a reduction in pension expense, brought income from continuing operations up 35% to $1.107 billion ($2.46 per diluted share) compared to $818 million ($1.80) in 2005. Net income for 2006 included $176 million of income from discontinued operations, and Raytheon’s sales of its civil aircraft division was factored in to the way it reported its results, as well as the results themselves. See release for details.
  
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