Missile Shield at $10 Billion Sets Up Boeing-Lockheed Showdown

Boeing Co. will compete for the first time to keep its U.S. missile defense work as Lockheed Martin Corp. seeks to wrest away an order for as much as $10 billion.

The Pentagon’s Missile Defense Agency is preparing to take bids on a contract that Boeing has held since 1998 to design, build and operate the arsenal of satellites, radar and high- speed interceptors intended to shoot down enemy intercontinental ballistic missiles in space. The new order will be for management and maintenance.

The contest gives the companies a shot at a decade-long program as the Pentagon reins in spending increases. Riding on the outcome is Boeing’s future as a so-called systems integrator directing projects through suppliers, said Philip Finnegan, an analyst at consultant Teal Group in Fairfax, Virginia.

“For Boeing, what’s at stake in the missile defense program is not just the revenue, although that’s important,” Finnegan said. “It’s also one of the contracts Boeing based its reputation on.”

Bid requests may be issued by the Pentagon as soon as next month, allowing the companies to submit their proposals ahead of a decision next year. The rivals showed off their technology and announced new partners last week in Huntsville, Alabama, at the U.S. Army’s annual Space & Missile Defense Conference.

Boeing’s current missile-defense contract is worth as much as $18 billion for the 10 years ending in 2011, Jim Schlueter, a spokesman for the Chicago-based company, said by e-mail.

“We brought the system into existence,” Greg Hyslop, a Boeing vice president, said in an interview. “We know the ground-based midcourse system better than anybody, how it works and the different pieces that come together to make it work.”

‘Traditional Rivalry’

Orders to manage programs that pull in other contractors are prized in the industry because they offer higher profit margins and the technology risks are spread across several companies. Boeing and Lockheed have a “traditional rivalry” in that business, Finnegan said.

Four of the top five U.S. defense contractors are part of the fray. Boeing, second only to Lockheed in size, has signed up No. 3 Northrop Grumman Corp. Bethesda, Maryland-based Lockheed is teamed with Raytheon Co., the fifth biggest in the U.S.

“Cost is a major factor,” Lieutenant General Patrick O’Reilly, head of the Missile Defense Agency, told reporters on Aug. 18 in Huntsville. “But before we get to cost, bidders have got to demonstrate they’ve the capacity and capability, and also an ability to do upgrades.”

The contract will be for $5 billion in the first five years, followed by an equal amount for the next five, he said.

Line of Defense

The Ground-Based Midcourse Defense project is “our only line of defense” against intercontinental ballistic missiles, O’Reilly said.

When completed by the end of this year, the system will include 30 ground-based interceptor missiles, of which 26 will be in Alaska and 4 in California; satellites; a sea-based radar platform and a command and control center that coordinates all the elements.

The interceptors can strike enemy missiles as much as 200 miles (322 kilometers) above Earth at a speed of 15,000 miles an hour, the Pentagon said.

In the 12 years that Boeing has had the contract, it has overseen testing and development of interceptors made by Orbital Sciences Corp. of Dulles, Virginia; warheads by Waltham, Massachusetts-based Raytheon; and command and control software made by Los Angeles-based Northrop.

More Competition

A Pentagon-wide effort to end no-bid contracts drove the decision to open up the contract for competition, Richard Lehner, a Missile Defense Agency spokesman, said by e-mail.

That opened the door for Lockheed and its team as Defense Secretary Robert Gates’s push to save $100 billion from Pentagon budgets over five years sharpens competition for contracts and spurs new alliances to win major weapons orders.

A victory for Lockheed would give the world’s largest defense contractor a role in every U.S. anti-missile system. The company builds land-based interceptors to destroy short- and medium-range missiles, and the Aegis radar mounted on U.S. Navy ships that can track missiles as well as aircraft.

“We can improve the existing system and we have some very strong concepts,” Mathew Joyce, a Lockheed vice president, said in an interview in Huntsville.

Spending Cuts

Boeing and Lockheed both were stung by Gates’s 2009 move to cap output of the F-22 fighter, for which Lockheed is the prime contractor and Boeing is a supplier.

While Gates has said he wants to prune Pentagon bureaucracy and health spending without chopping into weapons, those savings may not be enough to meet his goals, said Cai Von Rumohr, a Cowen & Co. analyst in Boston.

“In every other defense spending downturn, if you’re looking to save money, they almost always look at the weapons account,” Von Rumohr said in an Aug. 19 Bloomberg Television interview. He rates Boeing as “outperform” and Lockheed as “neutral.”

Boeing, whose defense operations accounted for almost half of its 2009 sales, surged 19 percent to $64.60 in New York Stock Exchange composite trading this year through Aug. 20, compared with Lockheed’s drop of 2.9 percent to $73.20.

Northrop is responsible for computer software that controls the interceptor missiles.

Northrop, Boeing

After expressing interest in challenging Boeing on the missile-defense contract, Northrop “decided that our probability of a win increased if we partnered with Boeing,” Karen Williams, a vice president, said in an interview.

Lockheed announced last week new teammates including Minneapolis-based Alliant Techsystems Inc., Harris Corp. of Melbourne, Florida, and closely held Oregon Iron Works Inc.

It also faced a setback. Missile defense chief O’Reilly said last week that a $400 million contract for a medium-range interceptor missile is being withheld until Lockheed fixes a flawed safety device. Lockheed must show in its bid for the new work that corrective steps are being taken, he said.

Losing the missile-defense contract may be a bigger blow to Boeing, with its weaker defense portfolio, than to Lockheed, the developer behind the $382 billion F-35 Joint Strike Fighter program, said Finnegan, the Teal Group consultant.

In 2009, the Pentagon curtailed the $159 billion U.S. Army Future Combat Systems program managed by Boeing that Defense Secretary Gates said had grown unwieldy. New U.S. orders for Boeing military aircraft are mostly drying up, with the exception of F/A-18 jets for the Navy and the aerial-refueling tanker for which Boeing’s chief competitor is Airbus SAS.

With Boeing depending on international contracts for C-17 military transports and F-15 fighters to keep factories humming now that the Pentagon isn’t buying those aircraft, holding onto the missile-defense program is pivotal, Finnegan said.

“In the long term, Boeing needs to have advanced systems work,” he said.

To contact the reporter on this story: Gopal Ratnam in Huntsville, Alabama, at gratnam1@bloomberg.net.

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