Takeaway: BA is increasing its market share of Pentagon fighter orders at LMT's expense

Boeing is on the rise again as a supplier of fighters to the Pentagon.  

Indications are that the Pentagon's FY 2020 budget will propose to buy new F-15's for the first time in more than 20 years.   

  • The Air National Guard wants 100 new aircraft to replace its aging F15 models. 
  • Assuming that unit costs are $100M, an order of 12-15 aircraft per year would be a pleasant $1.5B surprise for BA in 2020
  • Such an order has not previously been reflected in any budget documents.  

St Louis will be humming 

  • Although the last delivery of a new F-15 to the USAF was in the early 2000s (first delivery was 1974), the St Louis F-15 production line has remained viable through foreign sales. 
  • Timing for such an unexpected US order could not be better for Boeing.  It dovetails directly behind the planned 2019 completion of production of an order of 84 F-15SAs for Saudi Arabia, once seen as possibly the last big order for the aircraft.
  • St Louis was already working a F/A-18E/F multiyear procurement of 24 aircraft per year through 2023 for the Navy =  ~$2B per year. 

Given the essentially zero sum game that is the Pentagon budget, any increase in Boeing fighter orders for the Air Force will come at the expense of Lockheed Martin's F-35A sales to the Air Force. 

  • Congress appropriated 56 F-35As for the Air Force in FY 2019.   The Air Force's published 2019-23 plan was to procure 48 in 2020, ramp up to 54 per year beginning in FY 2021 and go to 60 per year in 2024.   
  • We expect that the Air Force will propose to flatten its planned F-35 procurement to just 48 aircraft per year through FY 2024.  This would be a reduction of 30 aircraft over the FYDP from the 2019 plan = ~$500M per year loss in projected orders for LMT. 
  • The Department of Navy planned buy of 36 F-35Bs and Cs in 2020 ramping up to 44 per year later appears to remain unchanged.

Why the change?  

  • The Air Force has decided that it can live with a mixed fleet of fourth and fifth generation fighters for a while longer. Stealth is not required for homeland defense. The F-15 can function like a "truck" carrying large numbers of external weapons on its sorties.  
  • Sustainment cost.  Although F-15 is likely to cost at least $15M more per copy in procurement than the F-35, it will likely cost less to maintain. New F-15s will certainly cost less to maintain than the old F-15s being replaced.
  • The Pentagon wants to keep Boeing viable as a second tactical fighter provider.  There are some politics involved as well...

For the moment this is still just headline risk.  After all, just two weeks ago the President wanted to cut $33B from the expected $733B Pentagon topline and then this past Friday said he wanted to add $17B to the request: a $50B swath of uncertainty.  And that's before it gets to Congress.  We are a year away from knowing how this will finally turn out.