Northrop Gets Defense Lifeline in $80 Billion Bomber Contest

Northrop Grumman Wins $80B Bomber Contract
  • Smallest suitor wins biggest warplane contract this decade
  • `Transformational' award cements status as first-tier supplier

Northrop Grumman Corp., shut out of prime contracts for U.S. warplanes since the B-2 in the 1980s, won a Pentagon sweepstakes valued at as much as $80 billion to build the Air Force’s Long-Range Strike Bomber.

In beating a team of Lockheed Martin Corp. and Boeing Co., Northrop overcame the world’s two largest defense contractors and secured a financial lifeline stretching into the 2020s. The plane, still highly classified after years of planning, will be the military’s first new bomber since the Cold War and one of the biggest U.S. weapons systems of the next decade.

“There was a David and Goliath situation going on,” said Richard Aboulafia, an analyst at consultant Teal Group. “This is disappointing for Lockheed Martin, pretty bad for Boeing, but transformational for Northrop Grumman. They go from being a collection of operating units to a first-tier prime with a strong central core.”

Northrop surged to a record high Wednesday, extending a rally that began when the Defense Department announced the award late Tuesday after the stock market closed. Drexel Hamilton LLC raised its recommendation to buy from hold, a boost for the lowest-rated company among top Pentagon contractors, based on data compiled by Bloomberg.

The new plane will join the B-2 and is due to be deployed in the mid-2020s as the successor to the 37-year-old B-1 and the Eisenhower-era B-52. The Air Force wants a durable, stealthy aircraft that can fly deep into enemy territory to attack hidden or mobile targets.

Secret Shape

What that plane will look like is still unknown, at least to the public. A Northrop commercial during the Super Bowl subtly tried to link its jet -- shown as a shrouded flying-wing shape -- to past aviation glories such as the B-2, which entered service in 1989. But there has been no indication whether the new jet will resemble that shape or some other design.

Northrop’s proposal is “the best value for our nation,” Air Force Secretary Deborah Lee James said at a news conference at the Pentagon.

Development, Procurement

Based on figures released Tuesday, which exclude the cost of any related future military construction, the bomber program calls for spending $23.5 billion in development plus $56 billion on procurement, or about $564 million for each bomber in 2016 dollars.

“Northrop has won ‘the’ military aircraft award of the decade, and assuming that it goes to plan this will be a key driver of revenue growth for at least the next 10 years,” Robert Stallard, an RBC Capital analyst, said in a note to clients.

Stallard estimated that the program could add about $1 billion in annual revenue starting in 2018. Howard Rubel, an analyst with Jefferies LLC, projected that the plane could account for as much as 10 percent of Northrop’s sales -- 2014’s total was $24 billion -- within a few years.

‘Legacy Experience’

Northrop’s “legacy experience with the B-2 helped them understand what was required,” Rubel said in a telephone interview. The company also has major contracts building drones with advanced technology for the military.

Northrop climbed 5.5 percent to $190.45, an all-time high, at the close in New York. Boeing fell 0.4 percent and and Lockheed declined 0.9 percent.

Lockheed and Boeing could choose to protest the award, which typically must happen within two weeks, according to Nick Taborek, an analyst with Bloomberg Intelligence. Given the years of research that went into the decision, the chances of overturning it “are likely even slimmer” than the usual 4 percent success rate, Taborek said Tuesday in a report.

Lockheed, Boeing

The plane also was of less-urgent financial consequence to Lockheed, the builder of the F-35 fighter, and Boeing, the commercial-and-defense giant whose military programs include the KC-46 tanker. However, Boeing is working to find new military contracts to replace its F-15 and F/A-18 fighter jet manufacturing, which is approaching the end of production, said Aboulafia, the Teal Group analyst.

Boeing and Lockheed were “disappointed” by the Pentagon’s choice, the companies said in a joint statement. “We will have further discussions with our customer before determining our next steps.”

Northrop’s bomber will employ a family of secret, strike technologies including munitions; sensors needed to find targets; jamming capabilities to suppress enemy radar; and communications able to survive the electromagnetic pulses from nuclear detonations. The first planes will be piloted and outfitted with conventional weapons, followed by a version that can carry nuclear arms. A drone version may follow.

Suppliers Secret

Also still secret: subcontractors such as engine suppliers. Citing national security concerns, the Pentagon said they wouldn’t be identified. The Air Force did disclose on Tuesday that Congress has appropriated $1.9 billion since 2011 on projects to reduce the risks of some technologies to be used in the aircraft.

The Pentagon’s announcement came on the eve of Northrop’s third-quarter financial results on Wednesday. The Falls Church, Virginia-based company boosted its 2015 profit forecast and reported quarterly earnings that beat analysts’ estimates as sales rose in three of its four divisions.

“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,” Chief Executive Officer Wes Bush said in a statement. “Our team has the resources in place to execute this important program, and we’re ready to get to work.”

Three main issues helped drive the government’s decision: Costs were given the same weight as payload and range for the competing designs, said Loren Thompson, a defense analyst with the Lexington Institute. Boeing and Lockheed have contributed to the institute.

The price tag per plane would soar if far fewer aircraft are built than the fleet envisioned by the Pentagon. Costs for the B-2 skyrocketed to $2.2 billion apiece as a projected fleet of 132 bombers was slashed to 21 after the Cold War ended.