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Despite Flat Market, New Airlift Options Emerge

Jun. 19, 2013 - 10:24AM   |  
By AARON MEHTA   |   Comments
Deployed Soldiers, Airmen work together to keep tr
New Customers? A C-17 Globemaster III delivers bundles of fuel in Afghanistan. A Boeing official said new countries have expressed interest in ordering the airlifter. (US Air Force)
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WASHINGTON — As the US begins the much-ballyhooed “pivot” away from the Middle East and toward Asia, the Pentagon’s requirements are shifting as well.

It would be logical to assume that with the vast distances in the Pacific, the US and its allies would need to invest in airlift capabilities. But the reality is different: Experts warn that there is little growth for the military transportation market on the horizon.

“It’s flat,” Richard Aboulafia, an analyst with the Teal Group, said. “It shouldn’t be flat; it’s a market that should grow, but I’ve seen very little evidence it will.”

The market is a victim of the current economic climate, with budgets tightening in the US and Europe, the regions that have traditionally had the most airlift capability. But it also speaks to the way military transportation is viewed as a lower priority than fighters and more glamorous programs.

“The first thing you’d do if you were emphasizing a pivot to Asia would be to emphasize airlift capabilities. The growth drivers are there, but the economic resources are not,” Aboulafia said. “It’s one of the more bizarre stories you’ll hear.”

One of the looming challenges to military transport is the potential end of production of Boeing’s C-17 Globemaster. Current contracts on the C-17 end in the third quarter of 2014, something Aboulafia blames on “shortsightedness” by governments willing to push off needed upgrades to their fleet in favor of other projects.

To extend those lines, Boeing will need to find new customers for the plane. Doing so in this economic climate may be difficult, but Tommy Dunehew, Boeing’s vice president of business development for mobility, surveillance and engagement, insists he is “bullish” about the plane’s chances.

Dunehew said there are “five to six” new countries that have expressed interest in the C-17, and, while he declined to name which, he identified the Middle East, Africa and Asia as regions with “a lot of potential.” Previous reports have linked the C-17 to both Saudi Arabia and South Korea.

Countries looking for similar capability may turn elsewhere — perhaps to Europe, where the Airbus A400 has set itself up as a challenger. The company is expected to make its first delivery to France in 2013 and will be flying at the Paris Air Show this week.

New Competition

While the market remains mostly flat for military transportation, Brazil’s Embraer said its KC-390 presents an opportunity to move in on the market dominated by Lockheed Martin’s popular C-130J.

“When we thought about [the KC-390], it was the first time we looked at the international market also, not just the Brazilian requirements,” Luiz Carlos Aguiar, Embraer’s CEO, said during a March 14 interview conducted as part of a company-sponsored trip for reporters to Brazil.

“We saw there were 2,000 old airplanes all over the world in more than 70 countries, very well spread out with a diversified base of potential customers. We looked at that and saw there was only one aircraft available in the market being produced and being delivered.”

Embraer expects delivery of the first transport in late 2015 or early 2016.

But Aboulafia, who calls the plane an “intriguing prospect,” warns there are challenges to the KC-390. The engines’ location underneath the wings could make it unsuitable for the kind of special operations that the C-130J has become known for, and it is unclear if the Brazilian company can deliver the plane at a cheap enough price.

Additionally, because the US dominates the market, the reality is that Embraer has a very narrow window.

“About half the C-130s are owned by the US,” he said. “As long as the C-130J is around, the KC-390 is going to have a real tough time penetrating the US market.”

It is more likely that the KC-390 can make inroads among smaller countries, in batches of 10 or 20, than making a big international splash.

For its part, Lockheed remains confident that the C-130J will continue to dominate the market.

“We see the C-130 as being much more relevant to the missions of our customers,” Steve Pigott, Lockheed’s head of business development for international air mobility, said during a May interview.

“Certainly, Embraer is a great company, they make great airplanes,” he said. “We’re cognizant of what’s going on. [But] we believe firmly in the design of the C-130 airplane. It has served 70 air forces very well, and we’re going to continue to update it.”

After-Market MRO

With sales of new planes down across the board, companies are increasingly turning to after-market upgrades and repairs as a way to ensure cash flow for the future.

Rolls-Royce, for example, hopes to reap financial benefits from its Series 3.5 engine enhancement to the C-130, a retrofit that the company claims could expand life on older C-130 models through 2040.

With the C-17, “we always have plans for enhanced capabilities,” Boeing’s Dunehew said. “We’re always looking at the future, anticipating what’s going to be out there. You can’t be a company that looks back and sits back because that’s not a good strategy for a long-term business.”

But while the maintenance, repair and overhaul (MRO) market has been strong in the past, it also has contracted as countries try to wring every dollar out of older aircraft.

The MRO market for Western military aircraft sits at about $60.7 billion, Hal Chrisman, vice president with services firm ICF International, said. But that number is driven by a “budget dichotomy” where certain regions are shrinking and others, particularly Asia and the Middle East, are increasing their spending.

In Asia, China’s investments are driving US allies to up their spending; in the Middle East, Saudi Arabia, UAE and Egypt are pushing MRO spending.

“It’s important to note that with reduced production and a reduced procurement budget, there is a need to increase the MRO budget,” Chrisman said. “The mission is still there, and the only way to accomplish the mission without buying new airplanes is making the older airplanes live longer and be more capable.”

The MRO market for the key Western-made military transports mentioned above was $5.5 billion in 2012. ICF International analysts project that number to grow slightly at around 1.7 percent annually through 2021, a fairly small increase in the market that will leave American companies with little room to grow their businesses in this area.

Chrisman expects the overall MRO market to contract slightly in 2014 before beginning to tick up. But it is unlikely to reach the heights of the last decade, when a significant amount of MRO was being done in theater in Iraq and Afghanistan.

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