Monday, March 27, 2017

Lockheed’s $29 Billion Copter Poised to Win Pentagon’s Approval

The Pentagon is poised to review -- and probably approve -- a new helicopter from Lockheed Martin Corp. to transport heavy cargo for the Marine Corps in a program valued at as much as $29 billion.

The Defense Acquisition Board has scheduled a March 30 meeting to review whether to approve low-rate production for the first 24 of a planned 200 King Stallion helicopters. The initial contract would cover two of the aircraft capable of lifting 27,000 pounds (12,200 kilograms), according to Defense Department documents. Quantities would grow annually, to four next year and 14 in fiscal 2021, according to the latest published acquisition report.

The Sikorsky CH-53K King Stallion helicopter.
(Lockheed Martin)

Approval to proceed would be the first major acquisition decision under Defense Secretary James Mattis. It would also begin to unlock the revenue Lockheed expects to reap from sales, spares and repairs over the life of the program. The latest budget plan increases spending to $1.9 billion in fiscal 2020 from $892 million this year, including development.

The “big” revenue potential for the helicopter designated the CH-53K was the primary incentive for Lockheed’s $9 billion acquisition of the Sikorsky helicopter unit from United Technologies Corp. in 2015, Bruce Tanner, Lockheed’s chief financial officer, said in an interview. He said the King Stallion is the same size as its predecessor, the Super Stallion, but can haul triple the cargo.

“Frankly, when we acquired Sikorsky it was the 53K program that drove most of our valuation as to why we wanted to own Sikorsky,” Tanner said. “It was the fact of that aircraft.”

Potential Overshadowed

The King Stallion has international sales potential as well, and discussions are under way with Germany and Israel, Tanner said. “From a revenue perspective it is going to be the lion’s share of what we expect from Sikorsky for the next 10 to 15 years, probably, once it gets into production,” Tanner said.

The helicopter’s potential was overshadowed as Lockheed wrestled with accounting-control weaknesses and plummeting commercial helicopter deliveries at Sikorsky.

Cheap fuel prices have slowed offshore oil and gas drilling and sapped demand for the large helicopters that industry uses to ferry people and equipment. Deliveries of commercial choppers are expected to generate less than $300 million in revenue this year, down from sales of about $1.25 billion in 2014, before Lockheed’s acquisition, according to estimates by Jefferies.

The King Stallion should generate more than $500 million this year for Lockheed, according to Howard Rubel, a defense analyst at Jefferies.

The Marines will probably be the biggest customer, although there’s a chance the Navy could join in if it needs to add a craft with larger capacity, Richard Aboulafia, a defense analyst with the Teal Group, said in an email.

The commercial market is less promising. “Much of the world heavy lift market has gone with Boeing’s CH-47 over the past few decades,” Aboulafia said. “The CH-53K might be too big and expensive to change that.”

‘Lot of Money’

Democratic Representative Niki Tsongas questioned the helicopter’s currently projected production cost of $122 million per chopper at a congressional hearing on March 10.

That’s “a heck of a lot of money,” Tsongas said. “And even if there is no additional cost growth, it seems worth pointing out that $122 million per aircraft” exceeds the current cost of Lockheed’s F-35. The latest Air Force model of the advanced fighter jet is estimated to cost $94 million each, including engines.

The King Stallion’s cost is estimated to drop below $89 million after full-rate production begins, Marine Lieutenant General Gary Thomas, deputy for programs, said at the hearing. “That’s still very expensive and we’re working very hard with” Lockheed “to keep the cost down and to drive value for the taxpayer.”

Testing Office

A spokesman for the Pentagon’s test office said in an email that the helicopter is on course to meet its key performance parameters for range, payload and reliability, citing a Feb. 24 assessment. Army Lieutenant Colonel Roger Cabiness said the helicopter has so far demonstrated it’s reliable and available 85 percent of the time needed -- exceeding the 83 percent required at this point.

The King Stallion has demonstrated to date that it has the capability to support the “most stressing” Marine missions, Cabiness said. Still, one of the helicopter’s most serious problems is the high temperature of engine exhaust from two of its three engines, which must be fixed, the testing office assessment found.

“We will continue to track system maturation as we further demonstrate the capabilities of the aircraft and implement any needed improvements,” Mike Torok, Lockheed’s program manager for the CH-53K, said in an email. “We remain confident as we head toward” the Pentagon decision.

(Anthony Capaccio and Julie Johnsson - Bloomberg Technology)

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