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Market Still Flat, But Signs of Hope

Mideast, Asia Offer Pockets Of Promise Globally

Jul. 13, 2014 - 02:08PM   |  
By AARON MEHTA   |   Comments
Emirati citizens walk past a US-made F-15 Eagle fighter jet displayed at the Dubai Airshow. With continuing upgrades and sustainment business, aircraft such as the F-15 and F-16, which have large customer bases, remain a viable market.
Emirati citizens walk past a US-made F-15 Eagle fighter jet displayed at the Dubai Airshow. With continuing upgrades and sustainment business, aircraft such as the F-15 and F-16, which have large customer bases, remain a viable market. (Karim Sahib / AFP)
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Farnborough International Airshow

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WASHINGTON — Military and industry leaders gathering this week at the Farnborough International Airshow likely will bring a more positive business outlook than they had two years ago, when budget uncertainty hung over the show like a proverbial cloud.

But while tentative optimism may reign, experts warn not to expect a major boost in global procurement over the next several years.

On the whole, analysts agree, the military aviation market will remain largely flat.

The largest market driver remains the Middle East, where countries continue to spend on high-end technologies.

One exception to the flat market is fighters, although that comes with a very large, very expensive asterisk.

“The topline of the fighter market is growing, but that’s because of the growth from the F-35,” said Richard Aboulafia, an analyst with the Teal Group. “If you break it down to F-35 versus everyone else, everything else is shrinking.”

Because the F-35 is such a driver of growth, any bumps in the road could send reverberations across the industry, said Douglas Barrie, senior fellow for military aerospace at the International Institute for Strategic Studies in London.

“It’s increasingly important that the F-35 remain pretty much on schedule and on course [to help] partner air forces plot their way forward,” Barrie said.

Competing with the F-35 are six other Western-made jets: the Saab Gripen, Eurofighter Typhoon, Dassault Rafale, Boeing’s F-15 Strike Eagle and F/A-18 Super Hornet, and Lockheed Martin’s F-16 Falcon.

The dual-engine Typhoon, Rafale and Super Hornet will continue to fight over a shrinking market that is increasingly being dominated by the F-35. Brazil’s December selection of the Gripen, a smaller, less expensive option, drove home how tough the path forward for those other fighters will be.

For the F-15 and F-16, planes with wide, long-term customer bases, the situation may not be as dire, in part because parent companies Boeing and Lockheed Martin can continue to tap those bases with a long line of upgrade and sustainment contracts.

The F-16, for example, is operated in 25 countries. Many of those customers continue to make upgrades, said Roderick McLean, vice president and general manager of Lockheed’s F-16/F-22 Integrated Fighter Group, who also notes that as the F-35 enters service, countries looking for a capable, cheaper option may turn to the older Fighting Falcon.

“There are some countries transitioning from F-16 to F-35 who are looking to offload those F-16s, and I think there will continue to be a market out there for additional F-16 customers receiving those planes, whether they are new F-16s or third party transfers,” McLean said.

The transfer of older F-16s to new operators also puts new markets in play, McLean said. This year, Romania purchased 12 older F-16 models from Portugal, which then contracted with Lockheed through the US government to upgrade those jets — creating a new sustainment market for the company.

“Because of our knowledge of working so many variants over so many years, we have the unique ability to go into countries and say ‘here is the best way we can help you modernize or sustain your airplanes based on the mix of airplanes you have,’” McLean said.

Companies banking too heavily on maintenance, repair and overhaul (MRO) may find that market just as flat as production, warned Hal Chrisman, vice president with services firm ICF International.

Air forces are flying less to save money in budget-constrained environments, he said, thus putting less wear and tear on aircraft and slowing the need for maintenance operations.

However, there are some pockets of MRO growth, including small amounts in Latin America, larger markets in the Middle East and two major nations in the Pacific.

“We’re seeing significant growth in Korea and Japan, countries being threatened by China,” Chrisman said. “Their defense budgets are growing pretty significantly. They’re flying more, patrolling more and demonstrating the ability to project force. They’re doing exercises to make sure that it’s visible that they have the ability to do something China doesn’t like.”

One interesting trend that may emerge is the battle between Russia and China for the military aviation market.

“In what we might have called non-aligned states [in] Africa, Latin America, some Pacific countries, you will see China start to develop their presence there,” Barrie said. He points out that the JF-17 could be a low-cost replacement for a number of nations that have aging fleets of MiG-29 fighters.

“It would be a squadron here, a squadron there, but over a number of nations it could build up to a perfectly respectable market,” he said. “So I think you will see the Chinese more active in the export market, not challenging the traditional Western markets but perhaps bumping into the Russians in the export arena over the next decade.”

While the two may clash, it will be over a relatively small number of customers, Aboulafia said.

“I think the days of anticipating a breakthrough into the world market for Russia and China are behind us,” he said, pointing out that India, which many had thought would become a major customer for those two nations, has moved increasingly toward procuring Western military equipment

That leaves very small sales opportunities around the globe and only a handful of nations, such as Uganda or Venezuela, which would look to procure notable quantities of equipment from China or Russia.

“What are the characteristics of this market? Highly suspect procurement practices, very low margins, very low standards,” Aboulafia said. “It’s just a terrible place to be.” ■


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