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Boeing Is Losing a $400 Billion Dogfight

Lockheed Martin looks like it'll win the job of sole supplier for the Pentagon's next-generation fighter jets

Boeing is bracing for yet another big blow. Pentagon sources tell BusinessWeek that Lockheed Martin is positioned to beat out Boeing for the largest defense contract in U.S. history -- a $225 billion order for next-generation fighter jets to replace the F-16. With an additional $175 billion in sales to U.S. allies over the next 25 years, the contract is worth at least $400 billion.

Contract engineers confirm they've been asked to submit applications to Lockheed, but not to Boeing, to work on the jet. "Nobody is asking me for my résumé to work on Boeing's program," says an aerospace contract engineer. "It's only Lockheed." The Pentagon plans to announce the winner on Oct. 26, after five years of testing.

Pentagon officials aren't talking publicly. During an analysts' call on Oct. 18, Boeing Chairman and CEO Philip M. Condit said not to count out his company. "Right now, this thing is dead level," Condit said. That's not the view shared by Air Force officers. Says one senior Air Force general: "The Lockheed design wins hands down."

The Air Force will buy 60% of the initial 3,000 planes, known as the Joint Strike Fighter. The rest go to the Navy, the Marines, and to Britain.

HIGH STAKES.

  Lockheed JSF Program Director Tom Burbage says his team is cautiously optimistic, noting the contract is crucial for the Bethesda (Md.) defense contractor. "If we're going to remain a fighter contractor in the future, then we need to win this program," Burbage says. "This is immensely important."

The stakes are high for both jet manufacturers. The JSF, a multirole advanced-strike fighter, will be the only manned fighter rolling off the production line after 2013. By then, Lockheed's F-16 and F-22 and Boeing's F/A-18 will have ended production.

The winner could become the military's sole supplier of fighter jets. The loser would likely leave the fighter-jet business eventually. "If the government sticks to a winner-take-all acquisition strategy, the losing company will be hard-pressed to retain the skills required to compete as a prime [contractor] in the manned tactical fighter program," says Michael Heinz, Boeing's deputy JSF program manager.

SPLIT PRODUCTION?

  Federal lawmakers and some Pentagon officials have suggested splitting the contract between the two manufacturers to preserve the military industrial base. Senator Christopher Bond (R-Mo.), who represents the state where Boeing's military aircraft business is based, has introduced legislation that would call for such a split. Other scenarios include giving the loser up to one-third of the contract as a key supplier to the prime manufacturer.

Such an arrangement already exists in the F-22 fighter program, which is just starting initial production. Lockheed is the prime contractor, and Boeing is a key supplier. But Lockheed officials oppose carving up the JSF program. "Any premature split of the contract would lose the cost savings," Lockheed's Burbage says. "It's very important that the government picks one guy to lead this thing."

Analysts agree that the winner-take-all strategy has been crucial to keeping down program costs. The Pentagon has said it wants the conventional variations of the JSF for the U.S. Air Force and Navy to cost no more than $30 million each. The vertical-lift versions for the U.S. Marines will cost $40 million. "Whatever doubts the services may have about giving the whole program to one company are eclipsed by the savings they expect to get from the JSF program," says Loren Thompson, a defense analyst for the Lexington Institute.

DESIGN DIFFERENCES.

  So far, Lockheed has the edge. Its design to replace the F-16 is simply better on technical and aesthetic grounds, analysts say. Boeing was forced to redesign its tail section, and its forward placement of the engine creates a center-of-gravity challenge. Lockheed, on the other hand, opted for the more traditional placement of the engine in the rear of the fuselage, which more evenly balances the plane and makes the engine easier to replace and maintain.

Lockheed has apparently answered skeptics about the viability of its untested "lift-fan" system, developed by Rolls Royce. "The lift-fan concept works," Burbage says. And it is favored over Boeing's "direct-lift" system, Pentagon sources say.

More important, Lockheed's design caters to the government's biggest customer: the Air Force. "Lockheed never lost sight of who was buying the most planes," says Richard Aboulafia, an aerospace analyst for Teal Group. "It still comes down to the plane. It still has to fly well, perform well, and it helps to look well, too."

Boeing's design for the JSF looks like "a flying frog with its mouth wide open," say Air Force and Pentagon sources, who have tastelessly dubbed it "Monica." The top Air Force leadership is dominated by fighter pilots, and "they want a plane that looks like a Corvette, not a truck," says a Pentagon insider.

JOB RAMIFICATIONS.

  Boeing officials, of course, say looks aren't a crucial part of the design and argue in favor of the jet's performance and the company's ability to meet the Pentagon's cost target. "We design our planes to go to war, not to the senior prom," scoffs a Boeing spokesman. Boeing's Heinz adds that the design may not look as "traditional as other configurations, but it certainly meets the performance and cost criteria."

For Boeing, losing the JSF would come at a bad time: It's already cutting 30,000 jobs at its commercial aircraft division in the wake of the September 11 attacks. Winning the JSF contract would have restored 6,000 jobs in Seattle and St. Louis. Lockheed's Forth Worth (Tex.) factory, which now builds F-16s, would likely need up to 9,500 new workers if the company wins the contract.

Boeing still makes F-18 fighters and C-17 cargo jets. "Boeing will always build airplanes," Aboulafia says. "If Lockheed loses, it has no long-term air framework." But losing the JSF will mean Boeing likely will turn into the military's supplier for large cargo and refueling aircraft, while Lockheed becomes the sole builder of fighter jets.

By Stanley Holmes in Seattle

Edited by Douglas Harbrecht

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