DTN News: Northrop Will Not Bid For KC-X; Boeing Benefits
Source: DTN News / Int'l Media By Anil Daka
(NSI News Source Info) TORONTO, Canada - March 10, 2010: Yesterday, Northrop Grumman
NOC announced that it would not submit a bid for the $35 billion KC-X, the aerial refueling tanker program. With EADS not willing to make a solo bid, and Northrop deciding
not to protest, Boeing
BA is primed to capture the entire award unopposed. We have factored this scenario in our Northrop and Boeing fair value estimates, so we are maintaining both.
The aerial refueling tanker is one of the largest department of defense (DoD) procurement programs. Today, the Pentagon operates around 415 re-engined KC-135 Stratotankers and 59 KC-10 extender aerial refueling aircraft. Most of these aircraft are old, having entered service in the Eisenhower era. These tankers are also crucial to overseas power projection since they facilitate rapid deployment of other aircraft and enable them to stay in the air longer.
After a botched bidding process that spanned a decade, the U.S. Air Force came out with its final request for proposal (RFP) on Feb. 24. The RFP called for 372 criteria, and the DoD would award the project to the bidder with the lowest price if all conditions are met. The Northrop product, based on the A330 platform, while significantly larger, faced competition from the smaller, but cheaper Boeing 767 version. Northrop decided that the current deal would not create value for its shareholders and decided against bidding again.
We applaud Northrop for maintaining disciplined capital allocation. Throwing equity at a project that guarantees poor returns is a sure way to lower ROIC, and we think Northrop's decision is the best possible route for its shareholders. Further, the extensive use of fixed price contracts for the KC-X program would have subjected the winner to significantly higher risks in the future. Even from a strategic standpoint, Northrop does not lose much. The tanker was not meant to demonstrate superior or innovative technology that would have given the winner an edge in future contests. Most components on the KC-X are mature, and the issue is simply the cheapest way to build the plane.
Winning the award will boost Boeing's defense business after this division suffered from major program cancellations (Future Combat Systems, airborne laser, the F-22) during the past two years. United Technologies
UTX also benefits, since Pratt and Whitney will power the Boeing plane. However, Boeing should play the price card well to create value. Should the firm price its product too high, DoD might be forced to issue a new RFP altogether, botching Boeing's ambitions. At the lower end, Boeing will suffer from poor margins if it lowers its price in an effort to keep DoD happy and eliminate competition. It appears that the fight over the tanker is ending after nearly a decade of jostling.
Source: DTN News / Int'l Media By Anil Daka
(NSI News Source Info) TORONTO, Canada - March 10, 2010: Yesterday, Northrop Grumman NOC announced that it would not submit a bid for the $35 billion KC-X, the aerial refueling tanker program. With EADS not willing to make a solo bid, and Northrop deciding
not to protest, Boeing BA is primed to capture the entire award unopposed. We have factored this scenario in our Northrop and Boeing fair value estimates, so we are maintaining both.
The aerial refueling tanker is one of the largest department of defense (DoD) procurement programs. Today, the Pentagon operates around 415 re-engined KC-135 Stratotankers and 59 KC-10 extender aerial refueling aircraft. Most of these aircraft are old, having entered service in the Eisenhower era. These tankers are also crucial to overseas power projection since they facilitate rapid deployment of other aircraft and enable them to stay in the air longer.
After a botched bidding process that spanned a decade, the U.S. Air Force came out with its final request for proposal (RFP) on Feb. 24. The RFP called for 372 criteria, and the DoD would award the project to the bidder with the lowest price if all conditions are met. The Northrop product, based on the A330 platform, while significantly larger, faced competition from the smaller, but cheaper Boeing 767 version. Northrop decided that the current deal would not create value for its shareholders and decided against bidding again.
We applaud Northrop for maintaining disciplined capital allocation. Throwing equity at a project that guarantees poor returns is a sure way to lower ROIC, and we think Northrop's decision is the best possible route for its shareholders. Further, the extensive use of fixed price contracts for the KC-X program would have subjected the winner to significantly higher risks in the future. Even from a strategic standpoint, Northrop does not lose much. The tanker was not meant to demonstrate superior or innovative technology that would have given the winner an edge in future contests. Most components on the KC-X are mature, and the issue is simply the cheapest way to build the plane.
Winning the award will boost Boeing's defense business after this division suffered from major program cancellations (Future Combat Systems, airborne laser, the F-22) during the past two years. United Technologies UTX also benefits, since Pratt and Whitney will power the Boeing plane. However, Boeing should play the price card well to create value. Should the firm price its product too high, DoD might be forced to issue a new RFP altogether, botching Boeing's ambitions. At the lower end, Boeing will suffer from poor margins if it lowers its price in an effort to keep DoD happy and eliminate competition. It appears that the fight over the tanker is ending after nearly a decade of jostling.
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