Overseas Partnerships: Brazil's Embraer is developing the KC-390 airlifter to compete with the C-130. Boeing is helping market the KC-390 in the US, UK and select Middle Eastern markets (Embraer)
WASHINGTON — As the second largest defense company in the world, it’s hard to argue that Boeing is positioned poorly to weather a global downturn in defense spending.
But even the industry giant acknowledges that the free-spending days of the past decade are over. The company recently announced an end to production on its C-17 transport aircraft in 2015. A likely loss in South Korea’s fighter replacement competition means the F-15, another longstanding platform, could end production by 2018. The F/A-18 may see production end before 2020 as well.
With legacy platforms nearing their end, Boeing faces a choice on how to proceed into the next decade of defense.
Executives could focus on militarized versions of Boeing’s civilian aircraft fleet, as they did with the KC-46 tanker, which is a modified 767. The company could also focus on the next-generation bomber, an Air Force priority that could be competed at the end of the decade.
But with any competition, winning is no guarantee, and if Boeing struck out on new platforms without a backup plan it could find itself stuck.
Another option would be acquiring another military company, such as the aeronautics wings of BAE Systems or Northrop Grumman, the latter of which would land Boeing a large unmanned aerial systems (UAS) portfolio.
The best strategy, however, may lie overseas.
“If you’ve got a major platform waterfall coming, the rational response is to survey the world and see who you can work with, people who can contribute platforms you can enhance and market,” said Richard Aboulafia, an analyst with the Virginia-based Teal Group.
A recent deal with Brazilian giant Embraer on its KC-390, a new airlift design that the company hopes will challenge the long-held dominance of the C-130, is particularly interesting. Embraer officials are targeting a market of roughly 700 aircraft worldwide. Under the terms of a June agreement, Boeing will help market the plane in the US, UK and select Middle Eastern markets.
Boeing reached a similar deal with Austrian UAS producer Schiebel in 2009, and appears to be following the same path for a deal with Swedish giant Saab. Although company officials have not confirmed a deal, Defense News has reported that Saab and Boeing are close to an agreement to provide a new design for the Pentagon’s new trainer competition. That design would likely draw on the design expertise Saab has developed for its Gripen fighter.
“If you can use your marketing to get it into US service and then parlay that into marketing abroad, there’s something there,” Aboulafia said. “That’s all smart strategy. In the here and now, there’s just a major problem with their own long-running and highly profitable platforms ramping down.”
Steve Grundman, a Lund Fellow at the Atlantic Council and principal of Grundman Advisory, said agreements like the Embraer deal follow a well-established tactic employed by several other American companies, including Lockheed Martin and General Dynamics.
It may seem ironic, Grundman acknowledges, that a big American integrator feels compelled to import a platform back into the US market to address an opportunity, but he thinks it simply reflects real-world changes in customer preferences.
“It is one response US contractors are making to a customer — the Pentagon — that is increasingly unwilling to pay the full development costs for what are essentially mature-type platforms,” Grundman said. “Customers no longer have the time and rich development budgets that would finance an indigenous US company bringing forth a clean-sheet design of aircraft like these for themselves.”
While Boeing is aware of the changing US market, Travis Sullivan, vice president of strategy and business capture for Boeing Defense, Space and Security, said the company is reacting more to a growing global market than a shrinking domestic one.
“The international market is just a great opportunity for us,” Sullivan said. “We’re going to continue to pursue that, notwithstanding what is happening here in the US.”
While acknowledging that the Embraer deal is very important for the company, Sullivan says it is less of a “sea change” than simply a renewed focus on the international market.
And as seen with the Embraer deal, growth and sustainment are easier with a partner. But a one-size-fits-all approach could be counterproductive.
“We’re constantly on the look for inorganic capability, both domestic and global,” Sullivan said. “You can get inorganic capability through a variety of means. Mergers and acquisitions are one way, partnerships are another, joint-ventures are another. We’ll look case-by-case for what is the right potential partner and then the right potential mechanism.”