June 13 (Bloomberg) -- L-3 Communications Holdings Inc., a maker of defense electronics, won a $2.04 billion Pentagon contract to build the latest U.S. battlefield transport plane, beating bigger rival Raytheon Co.

L-3, based in New York, will lead a team that will make the Joint Cargo Aircraft for the U.S. Army and Air Force. The company received an initial order for 78 airplanes with the work to be completed by June 30, 2012, the Defense Department said today in a statement.

The propeller-driven C-27J aircraft is designed to move troops and re-supply forces using short airstrips. The plane is already used by the Greek and Italian air forces and can carry more payload than its Raytheon competitor. That may have given L-3 the edge it needed to win its first plane program as the lead contractor.

``This is very favorable to L-3; it's a very large contract over a relatively short timeframe, about five years,'' said Peter Arment, an analyst with JSA Research Inc. in Newport, Rhode Island, in a phone interview. Arment rates L-3 stock a ``buy'' and doesn't own any.

L-3 teamed up with planemaker Finmeccanica SpA of Italy and Chicago-based Boeing Co. for the C-27J bid. Raytheon, best known for its Tomahawk cruise missile, led a joint venture with European Aeronautic Defence & Space Co., parent of Airbus SAS.

Shares of L-3 rose $2.13, or 2.3 percent, to $96.65 at 4:23 p.m. in New York Stock Exchange composite trading. Raytheon, based in Waltham, Massachusetts, gained 36 cents to $56.18.

More Aircraft

The planes will replace an existing fleet that includes some aircraft that are more than 30 years old.

The program will grow and today's order is only the initial amount, said Air Force Major General Marshall Sabol. He said he would be surprised if the program didn't climb to at least 145 aircraft. He didn't give a more specific figure for the total potential program value.

``The numbers may change because you have a world that is changing, you have an Army that is growing,'' Sabol said at a press conference in the Pentagon. ``We don't know what that number is going to be in the future. We know as of this date we're happy to say we are moving ahead with the 78.''

Ultimately, the program could involve as many as 200 aircraft valued at as much as $6 billion, according to an estimate by Robert Spingarn and Steve East, Credit Suisse analysts.

Team Effort

The competition between L-3 and Raytheon marked a new approach to military aircraft contracting, where the plane builders serve as subcontractors to team leaders with more experience installing defense electronics. Defense companies are stretching the limits of their traditional expertise to keep growing in anticipation of slower U.S. military spending.

The first deliveries of the C-27J went to the Italian air force in 2001, according to GlobalSecurity.org, a defense- research group based in Alexandria, Virginia. Finmeccanica, Italy's largest defense company, said in July it would build the plane in Florida and Mississippi if it won the contract.

Lockheed Martin Corp., the world's largest defense company, had bid for the contract using a shorter version of its C-130J and was eliminated from contention because the plane didn't meet some technical requirements. The company's C-130 is one of the world's most widely used cargo aircraft, and is flown by the U.S. Air Force.

Aging Fleet

The joint cargo program will replace aging fleets of C-23 Sherpas, C-12 Hurons and C-26 Metroliners, said Howard Rubel, an analyst at Jefferies & Co. in New York. It would reduce the use of CH-47 helicopters and C-130 aircraft as tactical transports in war zones, Rubel said.

The maximum payload of the C-27J is 25,353 pounds, and it can carry 70 soldiers and their gear or two armored Humvees. That's 24 percent more than the 20,400-pound capacity of Raytheon's C-295, according to data from each company. The C-27J can fly 2,300 nautical miles nonstop, which is further than the distance between New York and Los Angeles, with 13,000 pounds of payload. The aircraft will be used for shorter-ranged missions instead of across oceans.

L-3 posted sales of $12.5 billion last year. About 65 percent of that revenue came from its government-services unit, which includes translation work for American soldiers in Iraq and Afghanistan, and its specialized-products division, which makes radio components and flight simulators.

The company's aircraft-modernization unit, which provides upgrades and maintenance primarily to military aircraft, posted 2006 sales of $2.33 billion. About 80 percent of last year's overall sales went to U.S. government customers.

To contact the reporters on this story: Jon Steinman in Washington at jsteinman@bloomberg.net; Edmond Lococo in Boston at elococo@bloomberg.net.

Last Updated: June 13, 2007 18:52 EDT