Update: Boeing’s Fighter Jet Future Sees Some Relief

Two months ago, Boeing (NYSE:BA) was facing an uncertain future for its fighter jet production. With U.S. military budgetary cuts and intense competition in international markets, the possibility of having to shut down its St Louis manufacturing unit in 2017 was starting to seem like a grim reality for Boeing. The company has been producing fighter aircraft (propeller and jet-powered) for over 90 years now, so the discontinuation of fighter jet production would be a setback to the company. However, Boeing’s expected win in Kuwait should push fighter jet production to continue on for another 2 years until 2019.

We currently have a price estimate of $137.68 for Boeing, approximately 3.5% lower than its current market price.

See our complete analysis for Boeing here

Extension in Production Attributable to Both Domestic & International Contracts

The F/A-18 Super Hornet is a key fighter jet program within Boeing’s military aircraft segment. The Super Hornet particularly struggled to win new contracts within international markets and specifically within Asia, which is the fastest growing defense market in the world today. At a time when domestic defense spending has remained at low levels, gaining traction in international markets has been particularly crucial for all defense contractors. Boeing lost out to competitors such as Lockheed Martin (NYSE:LMT) in various international bids including South Korea and Japan. This makes the anticipated multibillion dollar contract coming from Kuwait an important win for Boeing.

Kuwait is expected to order 28 F/A-18 Super Hornet jets, with an option for an additional 12 jets included in the deal. This deal is valued to be over $3 billion and will help push the company’s fighter jet production to 2019, which without this contract was expected to end in 2017. It is expected to be signed in the coming weeks. ^[1]

The other breather for Boeing comes in the form of more work with the U.S. military. Obama’s initially proposed 2016 budget request included no additional funding for the Super Hornet jets. In response to this budget request, the U.S. Navy included the need for 12 F/A-18 jets through its unfunded requirements list. The need for these jets came up as the U.S. Navy plans to retire 3 squadrons, or 36 older fighter jets on account of them not being serviceable anymore, hence creating a shortfall of fighter jets. The unfunded requirements list was presented to the Congress for approval shortly after. However, Boeing found itself pressed for time while waiting for the Congress and the U.S. Navy to come to a decision, a timeline for which can be hard to predict. To be able to fulfill the additional demand, Boeing would have to place orders for production materials by mid-year, making it extremely time-sensitive. Hence, the Senate Armed Services Committee announcing the approval of the Super Hornets included in the unfunded list submitted by the U.S. Navy last week comes as a welcome breather for Boeing, contributing to the company being able to continue production of fighter jets beyond 2017. ^[2]

What The Additional 2 Years of Production Mean In The Short and Long Run

The additional two years gives Boeing the chance to compete in Canada and Denmark to potentially garner more orders for the Super Hornet. However, most militaries continue to sway towards Lockheed Martin’s F-35 jet. The F-35 has partners in a lot of governments outside of the U.S., who will pick F-35 over Super Hornets since they are already invested in the program. This helps Lockheed Martin remain on track to control 50% of the market share in the future. While production extending to 2019 gives Boeing some relief in the short run, the long-term future of the fighter jet program continues to remain questionable.

Alternatively, the EA-18G Growler, which is a specialized version of the Super Hornet, is also produced in the same facility as the Super Hornets in St. Louis. The additional two years of production will give the U.S. Navy (the only current operator of the Growler) some more time before they have to place orders for more Growlers. The U.S. Navy currently does not have the requirement for additional Growlers immediately but expects that the need will arise in the future, for which it is important that the production plant continues to remain active beyond 2017. ^[3]

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1. Exclusive: Boeing poised to clinch $3 billion-plus Kuwait F/A-18 order, May 6th, 2015, Reuters [↩]
2. U.S. Senate defense bill funds Boeing, Lockheed jets, Reuters [↩]
3. Kuwait’s multibillion Super Hornet order gives boost to struggling Boeing program, May 11th, 2015, India Gazette [↩]