WASHINGTON \u2013\u00a0Northrop Grumman has won the contract to build the U.S. Air Force’s next-generation Long Range Strike Bomber (LRS-B), an industry-shaping award\u00a0that breathes new life into the world’s sixth-largest defense company.<\/p>\n\n\n\n
After U.S. financial markets closed Tuesday <\/span>the evening of Oct. 27, Defense Secretary Ash Carter and Air Force leadership announced that Northrop beat out\u00a0the team of Boeing and Lockheed Martin\u00a0for the contract, which is expected to top $55 billion over the life of the program. It’s the\u00a0largest military aircraft contract<\/a>\u00a0since Lockheed Martin won the Joint Strike Fighter (JSF) more than a decade ago.<\/p>\n\n\n\n Northrop\u00a0now has the Pentagon’s blessing to build\u00a0a new fleet of aircraft to replace the Air Force’s aging B-52s and B-1s.\u00a0As builder of the B-2 stealth bomber, Northrop\u00a0beat out a joint Lockheed Martin-Boeing team in a closely\u00a0watched competition that has lasted months longer than anticipated.<\/p>\n\n\n\n Speaking at the announcement, Air Force Secretary Deborah Lee James said the bomber would “allow the Air Force to operate in tomorrow’s high-end threat environment” and praised the work that went into the selection, in a move that sounded like a preemptive shot to any attempt by Boeing and Lockheed to challenge the award decision.<\/p>\n\n\n\n James said service acquisition officials\u00a0“carefully considered” the offers from both teams, with the entire process carried out “with a high level of transparency with our industrial partners\u2026 we believe our decision represents the best value for our nation.”<\/p>\n\n\n\n The contract is broken up into two parts \u2014 the cost-plus incentive fee development contract awarded today, and a separate agreement on the first five low-rate initial production lots that will be fixed-price incentive fee. Those first five lots will cover the production of 21 bombers.<\/p>\n\n\n\n The service requested that two\u00a0independent government cost estimators look at the program. The two groups\u00a0projected that each bomber will cost $511 million in 2010 dollars on average if 100 planes are built, Air Force officials told reporters on Tuesday\u00a0\u2014 substantially less than the original $550 million target cost set by then-Secretary of Defense Robert Gates. This translates to $564 million per plane in fiscal year 2016 dollars.<\/p>\n\n\n\n LRS-B’s projected unit cost is higher compared to the B-1, but significantly lower relative to the $1.5 billion price tag of Northrop’s B-2, according to an Air Force handout. The expected development cost overall for LRS-B is also lower than for the B-2, at $23.5 billion.<\/p>\n\n\n\n The Air Force did not say the value of the contract announced on Tuesday.<\/p>\n\n\n\n At the announcement, service officials revealed:<\/p>\n\n\n\n What remains unknown at this time \u2014 details about the plane itself. The size, weight and payload remain unknowns, as do the extent of its stealth capabilities.<\/p>\n\n\n\n Northrop’s win is a game-changer for the aerospace company, which is currently the sixth-largest defense contractor, behind Lockheed and Boeing. With the contract in hand, Northrop will no longer struggle to retain its grip on the combat\u00a0aircraft market. Not only does the bomber contract boost Northrop’s aviation capital, it also likely keeps the company’s Palmdale, California, facility afloat.<\/p>\n\n\n\n Northrop’s win is unlikely to directly result in a seismic reshaping of the aerospace and defense landscape, analysts said.<\/p>\n\n\n\n The bigger issue for the defense industrial base is who the subcontractors are for engines, avionics and other major subsystems on the project, many areas of which are classified, said Byron Callan of Capital Alpha Partners.<\/p>\n\n\n\n “As much as there’s all this attention on Lockheed\/Boeing and Northrop Grumman, it has much broader implications for the rest of the aerospace defense industry,” he told Defense News before the announcement revealed that the subcontractors had already been selected.<\/p>\n\n\n\n A spokesman for engine manufacturer\u00a0Pratt & Whitney, which makes the F135 engine used to power the F-35 joint strike fighter, said the company “congratulates Northrop Grumman for their selection on this very important program” but\u00a0declined “to comment on any other questions regarding the Long Range Strike Bomber program.”<\/p>\n\n\n\n The Air Force indicated Tuesday that the Pentagon structured the competition so that the health of the industrial base would not be a factor in the final decision. The selection was made based on the cost and technical proposals, officials said.<\/p>\n\n\n\n “We’re always concerned about the industrial base in general,” said Assistant Secretary of the Air Force for Acquisition\u00a0William A. LaPlante, adding that “the specific industrial base was not at all a criteria in the source selection.”<\/p>\n\n\n\n In a June research report, RBC Capital Market’s Robert Stallard’s foresaw little impact on any of the major players’ stock prices resulting from today’s selection.<\/p>\n\n\n\n “From a stock perspective, we think many in the investment community think Northrop is a Buy either way as it goes up on a win, and without a win it MUST break itself up. We’re less convinced of this strategy in the near term as we think NOC is pretty decent the way it is, has growth from F-35 and will be in strong position for UCLASS, but a loss would certainly excite some investors on consolidation,” he noted.<\/p>\n\n\n\n Richard Aboulafia, an analyst with the Teal Group, said Northrop Grumman’s victory means “they’ll be the second biggest combat aircraft prime, and possibly the only survivor other than Lockheed Martin by the time the next generation of combat aircraft competitions arrive.\u00a0As for Boeing, they can either gradually return to being the mostly civil jetliner company they were before they bought McDonnell Douglas, or they can make a bid for Northrop’s combat aircraft unit.”<\/p>\n\n\n\n But recent comments by Pentagon acquisition chief Frank Kendall on consolidation among primes threw ice water on the suggestion that Boeing would move to buy Northrop now that it won the contract, Callan said.<\/p>\n\n\n\n “Wall Street will still speculate that [because] Northrop won, it will get taken over,” he said. “That’s implausible, at this point, as long as current leadership is around. It’s just not clear to that a new set of people in 2017 are going to have radically different views than Kendall and company.”<\/p>\n\n\n\n Unsurprisingly, the two competitors released statements reflecting the results.<\/p>\n\n\n\n “The Air Force has made the right decision for our nation’s security,” Wes Bush, chairman, chief executive officer and president of\u00a0Northrop Grumman, said in a statement. “As the company that developed and delivered the B-2 Spirit stealth bomber, we look forward to providing the Air Force with a highly capable and affordable next-generation Long-Range Strike Bomber.<\/p>\n\n\n\n “Our team has the resources in place to execute this important program, and we’re ready to get to work,” Bush added in the statement.<\/p>\n\n\n\n Boeing and Lockheed, meanwhile, said they were “disappointed by today’s announcement.”<\/p>\n\n\n\n “We will have further discussions with our customer before determining our next steps,” the statement said. “We are interested in knowing how the competition was scored in terms of price and risk, as we believe that the combination of Boeing and Lockheed Martin offers unparalleled experience, capability and resources for this critically important recapitalization program.”<\/p>\n\n\n\n Protest Likely<\/strong><\/p>\n\n\n\n So what’s next?<\/p>\n\n\n\n For the Pentagon, the hard part is about to begin. A bid protest seems inevitable given that LRS-B is the first major military aircraft acquisition program since the JSF award in 2001, and likely the last until the sixth-generation fighter next decade. A lengthy protest period could not only delay the program’s start\u00a0but also set up a nasty public relations fight.<\/p>\n\n\n\n Boeing and Lockheed will likely wage intense lobbying campaigns to rally support for a protest. Boeing is expected to tap the Missouri delegation, including influential Democratic Sen.\u00a0Claire McCaskill\u00a0and Republican Sen. Roy Blunt, while Lockheed will look to the Texas delegation, particularly Fort Worth’s Republican Rep. Kay Granger and House Armed Services Committee Chairman Rep. William “Mac” Thornberry, also a Republican.<\/p>\n\n\n\n Earlier on Tuesday, before the announcement and after a hearing on streamlining\u00a0defense acquisitions, Thornberry acknowledged concerns over a possible LSR-B\u00a0protest and the litigious nature of acquisitions in general.<\/p>\n\n\n\n “It’s part of the way acquisition culture has developed that every bid award has protests, and you’re expected to protest\u00a0\u2013\u00a0basically with no penalty,” he told reporters. “So, a number of members have had ideas about improving that situation, and it’s something that we will continue to discuss.”<\/p>\n\n\n\n One expert\u00a0predicted the Missouri and Texas delegations will come out swinging for the Boeing-Lockheed team.<\/p>\n\n\n\n “McCaskill will go to war for this and Texas will back it,” one defense\u00a0analyst told Defense News.<\/p>\n\n\n\n Of the two, Boeing clearly has the most at stake. While Lockheed’s position is safe, with the JSF about to ramp\u00a0up production, Northrop’s win could squeeze Boeing out of the combat-aircraft manufacturing market. Most of the company’s products are commercial derivatives, like the KC-46A tanker, and its two remaining military aircraft lines are coming to a close. The last Navy F\/A-18 will be delivered in 2018, and the final Air Force F-15 will be delivered in early 2019. After that, the company’s St. Louis factory may be shuttered.<\/p>\n\n\n\n To keep the St. Louis facility afloat, the US Navy could opt to extend the F\/A-18 line for up to 10 years, a move that could bridge the gap between now and the sixth-generation fighter, which is expected to go into production in the late 2020s. Winning a contract to build the Air Force’s new fleet of trainers could also hold St. Louis over, but as one of several competitors, Boeing can’t bank on a positive outcome.<\/p>\n\n\n\n Boeing potentially has another option: It could try to buy Northrop’s aerospace unit. Once Northrop has completed the LRS-B design, divesting the business to another party might make sense to investors, according to\u00a0analysts who spoke to Defense News on background to talk openly about the contract award.<\/p>\n\n\n\n On the other hand, some analysts say\u00a0Boeing is unlikely to be shut\u00a0out<\/a>\u00a0of the business of designing and producing combat aircraft. The company does not need an LRS-B victory to stay in business\u00a0and has not signaled that it would rethink its business strategy based on the recent contract award, Callan said.<\/p>\n\n\n\n LRS-B is unusually mature for a program at this stage of development, as the Air Force has already completed much of the testing and risk reduction. Although there are no indications a complete prototype has flown, the team has already built\u00a0component prototypes and scale models for testing. LaPlante recently indicated the plane could begin flying relatively soon after selection.<\/p>\n\n\n\n The next challenge for Northrop\u00a0will be integrating the mature technologies already developed in LRS-B’s pre-award phase. The main areas of risk are integrating the engines and placing antennas onto the airframe, officials have said.<\/p>\n\n\n\n Part of the reason the LRS-B\u00a0program is so advanced at this stage is due to being handled by the Rapid Capabilities Office, a small group inside Air Force acquisitions that handles secretive programs such as the X-37B space plane.\u00a0Right now, there is no plan to change the LRS-B\u00a0program\u00a0management, officials have said, but the Pentagon may re-evaluate as the program moves forward.<\/p>\n\n\n\n The Air Force plans to buy 80 to 100 Long Range Strike-Bombers to replace its aging B-52s and B-1s, which the service plans to retire in the mid-2040s. The new aircraft will be significantly stealthier than the B-2, capable of carrying conventional and nuclear weapons.\u00a0Initial operating capability is slated for the mid-2020s, with nuclear certification planned two years after that.<\/p>\n\n\n\n The target price is $550 million per plane in 2010 dollars.\u00a0To help achieve that price point, the Air Force is looking to draw on available, mature technologies, rather than launching new developments. At the same time, the Air Force will use an open-architecture approach to design a plane that can be easily upgraded with new technologies over its lifetime.<\/p>\n\n\n\n Email:\u00a0lseligman@defensenews.com<\/a><\/p>\n\n\n\n