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Surge in Jet Purchases Reshuffles Market

May 10, 2015 (Photo Credit: MC2 John Philip Wagner Jr., US Navy)

ABU DHABI, LONDON AND WASHINGTON — In the span of just a few weeks, a flurry of orders has reset the global fighter market.

First came the Feb. 13 announcement that Egypt would become the first foreign customer for the Dassault Rafale. Then on April 10, Indian Prime Minister Narendra Modi placed an order for 36 Rafales for his nation. A week later, the United Arab Emirates said it was restarting talks with Dassault about the Rafale, and by the end of April, Qatar has declared its intention to buy the French fighter.

The activity continued last week, with sources telling Defense News that the US government is nearing agreement to sell up to 40 F/A-18 E and F Super Hornet strike fighters to Kuwait.

It's a shocking amount of activity for a fighter market that often sees just one or two procurements a year globally, and one analysts say is being driven by world events in the region.

Doug Barrie, the senior air analyst at the International Institute for Strategic Studies, highlighted that these agreements are all tied to long-standing requirements.

"In India the requirement has been driven by the need to address Air Force squadron numbers in the light of the delays, at best, to the 126 aircraft [Medium Multi-Role Combat Aircraft] project," he said. "In Qatar, the aim was to replace a mature aircraft, and in Egypt there was a need to acquire a multirole platform."

However, he noted that security challenges in the Arabian Gulf region likely helped drive the Kuwaiti and Egyptian decisions.

Jean-Marc Rickli, a professor of defense studies at King's College London, agreed, noting the recent sales in the gulf "must be understood by the drastic geopolitical changes initiated by the social revolution of the so-called Arab Spring, the rise of Iran and the perceived disengagement of the United States in the region."

He also adds that the rise of the Islamic State militant group, commonly known as ISIS, has put strains on the region that are driving the old gulf regimes to beef up their military apparatus.

The rapprochement between the US and Iran is also a major factor, Rickli said, in that it simultaneously gives a sense Iran is gaining regional power and feeds a perception the US is removing itself from the region.

"These factors are forcing the Arab states, and especially those from the gulf, to become more militarily independent and are encouraged in that sense also by the Western states," Rickli said.

Richard Aboulafia, an analyst with the Teal Group, notes that the experience of the US cutting off arms sales to Egypt in 2013 is fresh in the minds of Arab leaders. And while the region has a long history of dual-sourcing military equipment, it has taken on a new importance since.

"Right now, the Arab nations aren't sure the US won't cut them off, and then you couple it with the Iran deals, it makes it much worse," Aboulafia said. "In such cases, the gulf usually turns towards Europe to dual source."

New life for Hornets?

A major Super Hornet sale would breathe new life into the Boeing production line, which is working on new aircraft for the US Navy and Australia, but which will deliver the last of those aircraft by the end of 2017.

The Navy has not officially requested any Super Hornet variants since the 2014 budget. But Congress added 15 EA-18G Growler electronic attack variants into the 2015 defense budgets, and the service listed 12 Super Hornets in its 2016 unfunded requirements list. In its markup last week of the 2016 defense authorization act, the House Armed Services Committee added $1.2 billion to buy the 12 aircraft — a first step in getting Super Hornets into the full defense bills.

"A near-term international sale would be great news for Boeing and the Navy," said Caroline Hutcheson, a Boeing spokeswoman. "It's important to note that the combination of a major sale along with funding for the 12 Super Hornets in the Navy's unfunded requirements list would allow us to continue producing jets without a break in the line."

Hutcheson referred specific comment on foreign military sales to the US government. Neither Navy or State Department officials would comment.

The fact Kuwait operates legacy F/A-18 fighters means the Super Hornet was a logical choice, Aboulafia said, noting it would have been a shock if Kuwait did not purchase another US fighter in some form.

"Kuwait is a bit different than the other GCC [Gulf Cooperation Council] states in their fighter purchases," he said, noting that the country is "closely tied to the American defense industry and thus stands out in its decision making… In addition, Kuwait usually buys American fighters, so it would not be surprising if the emir decided to go through with a purchase."

Boeing officials have said production of two aircraft per month, or 24 per year, is necessary to keep the St. Louis, Missouri, production line at the break-even point, although a slightly slower rate can be managed. Continued procurement of the aircraft by either the Navy or a foreign customer would keep the line economically viable and aide further international sales.

That means that even if Boeing lands a full order of 40 jets with Kuwait, it will buy them only another year or two before the expiration of the line, currently scheduled for 2017.

That's not a ton of time, but Byron Callan of Capital Alpha Partners said that does two important things for Boeing.

First, it buys the company another few months to find its next customer. It also ensures that the production numbers at St. Louis remain steady, which keeps the price from jumping as Boeing is negotiating with other potential customers.

"If you can lock in these higher production rates, that gives you better pricing visibility and maybe lower price," Callan said.

However, the opportunities for Boeing are dwindling. Finland and Belgium are expected to procure fighters in the next few years, and the two closest competitions are in Canada and Denmark. Both nations are industrial partners on Lockheed Martin's F-35 joint strike fighter, leaving analysts to agree they will likely pick the stealthy fifth generation design over the legacy Super Hornet.

Callan also noted that opportunities for future sales of the F/A-18 in the gulf region are slim, given the number of requirements that have already been filled — or are claimed by the F-15, Boeing's other fighter.

Even there, the fear that the US is unreliable comes into play. A source said Boeing may be struggling in Qatar due to waffling on the part of the Obama administration about approving an F-15 sale to Qatar.

Rafale vs. Typhoon

While the Kuwati deal is big for Boeing, it is overshadowed by the sudden, unexpected surge of orders for Rafale. Just as 2014 was a milestone year for Saab's Gripen, driven by orders from Brazil and Sweden, 2015 is shaping up to be a definitive one for Dassault.

In both cases, the deals have revived the near-to-medium term prospects of two European fighter jet makers that analysts believed to be close to death row. Now, those jets both have orders that extends them into the next decade.

"It looked like all fourth gen aircraft were going to die out by 2020," Callan said. "Now that seems to have turned on its head."

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Orders for the Dassault-built Rafale have surged in recent weeks.
Photo Credit: Nicolas-Nelson Richard, AFP

For Dassault, Egypt, Qatar and India changed all that with nearly 100 orders and options being bagged in short order by the French jet maker, thanks in part to big support from the government of François Hollande. And that could grow, with further orders are likely from India and others.

Callan also pointed to another factor that could help Rafale in international competitions.

"There is a dollar-vs.-euro factor that plays to this," he said. "If the euro continues to weaken against the dollar, it could make Rafale a more attractive or competitively priced airplane."

The fallout of Rafale's rise is setting off alarms bells at Airbus, BAE and Finmeccanica, the industrial partners behind the Eurofighter Typhoon project built for the air forces of Britain, Germany, Italy and Spain. As things stand, assembly lines in the four countries have 143 more jets to build before they face closure in 2018; that is unless further export orders are secured to add to the jets already purchased by Austria, Oman and Saudi Arabia.

"Rafale definitely has momentum right now," Aboulafia said. "Britain is becoming more isolationist and France is getting more active in the region. With the high-end fighter market, a lot of it is about buying a strategic relationship."

Notably, Hollande became the first western leader ever to attend a GCC annual summit when they met in Riyadh May 5.

A spokesman for Eurofighter said the consortium is confident Typhoon will find customers over the next three years in places like the Middle East and Asia.

At least one potential sale, to the United Arab Emirates, seems unlikely. A UAE engagement on a possible Typhoon deal fell apart 18 months ago, and following Rafale's win with Egypt and India, the UAE reengaged with the French for a possible large buy of upgraded Rafale jets.

Malaysia is expected to decide on a replacement fighter in 2017 or 2018 and Indonesia, Belgium, Denmark, Poland and Finland are other potential markets for the jet. The best near term hope for sales, though, is a top up of the 72-strong fleet of Typhoons ordered by Saudi Arabia in a government-to-government deal.

Industry executives in London have said there could be progress on a Saudi deal by the end of this year for 48 or more jets, with a possible order for Bahrain following.

The prospects of a new deal with the Saudis has, if not improved, then not diminished by the re-election of a Conservative government in London more engaged in defense diplomacy and exports to the region than a Labour administration would have been.

BAE Systems is responsible for the Typhoon export drive in the rest of the gulf region with Alenia Aermacchi leading the Kuwaiti sales effort. The Italian aerospace company declined to comment on news of the proposed sale of the F/A-18s.

A second industry executive in London said that there are hopes Typhoon could be part of a split buy by the Kuwatis, but he conceded that would be unlikely if the F/A-18 order ends up being 40 jets.

Still, Barrie noted that if the last two months have shown industry analysts anything, it's that things can turn around for a fighter in a hurry.

"Obviously, the partner nations in Typhoon will be disappointed by the turn around in Kuwait, but the combat aircraft market can be fickle, as Dassault would readily recognize," he said.

By Aaron Mehta and Christopher P. Cavas in Washington, Andrew Chuter in London and Awad Mustafa in Abu Dhabi. Tom Kington in Italy contributed to this report.

Email: amehta@defensenews.com | ccavas@defensenews.com | achuter@defensenews.com | amustafa@defensenews.com

Twitter: @AaronMehta | @CavasShips | @Awadz

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