Defense Industry Stabilized in 2010; Challenges Remain for 2011
As the financial crisis hit home and governments across the world worked to stave off rising budget deficits, defense departments also had to take a long hard look at expenditure, forcing resizing, postponement or cancellation of major projects. The impact of these decisions started to hit the defense industry in 2009, with revenues and associated profitability dropping for the first time in seven years. However, analysis from the Strategy Analytics Advanced Defense Systems (ADS) service report, Defense Industry Profitability Gains in 2010, shows that defense industry performance stabilized in 2010.
This analysis is based on a snapshot of 20 companies (Strategy Analytics will be increasing the sample size moving forwards) ranging from prime contractors to second tier suppliers and “specialist” companies that have traditionally focused on a core range of areas within the defense sector.
Strategy Analytics estimates (not all companies have released 2010 year-end results at time of writing) suggest revenues increased year-on-year by 1% in 2010 reaching over $458 B, arresting a downward spiral and stabilizing financial performance for the year. While a positive result, revenue performance in 2010 failed to reverse the losses suffered in 2009, indicating the scale of the challenges faced by the defense industry over the next few years.
2009 marked the first time that defense industry revenues had dropped in around seven years. However, the industry did manage to stay in the black, even as year-on-year profits dropped by over 49%. While revenue losses were not reversed in 2010, companies in general managed to arrest the downward spiral and, more positively, profit margins returned to more traditional levels as year-on-year profits increased by 59%.
As 2011 moves into focus, there were a host of contracts signed both in February in both the US and globally. Off course, the biggest news was the final resolution of the tanker contest. Boeing was announced as the winner of a long and tumultuous bidding battle for a $35 B contract to build 179 aerial refueling tankers for the Air Force.
The initial $3.5 B contract calls for Boeing to design, develop, manufacture and deliver 18 initial combat-ready tankers by 2017.
It would appear that the other bidder in the contest, EADS North America, will for now choose to accept the decision (deadline to mount a protest is March 7) and not prolong an already overdrawn process by staging a protest, though there are no guarantees that political challenges to the decision will still be mounted.
Other contracts, focused more specifically on communications, radar and other advanced defense systems, included:
General Dynamics UK received a series of three contracts worth £33 M. One of the elements will include providing advanced communications capabilities to soldiers operating from patrol bases using High Capacity Data Radios.
EADS North America received a contract from Lockheed Martin to supply its TRS-3D radar for the US Navy's Littoral Combat Ship. As part of a recent Department of Defense award, Lockheed Martin will construct up to 10 Littoral Combat Ships through 2015. Under the terms of its contract, EADS North America will deliver the first radar unit to Lockheed Martin for installation in 2012.
Boeing awarded Raytheon a LRIP contract to develop six long-range, multi-mission maritime and overland surveillance radars plus spares for its P-8A Poseidon aircraft. The APY-10 will replace the APS-137 radar. The radars will be delivered to Boeing as part of the P-8A contract with the US Navy. The P-8A replaces the P-3 aircraft and will be used for surveillance along the US coastline.
Both Raytheon and Lockheed Martin were recipients of $107 M each in the development of the Space Fence program, designed to increase space situational awareness and enhance safety for both manned and unmanned space operations, based around S-band radars to be located at strategic sites around the world.
Lockheed Martin has received a $339.6 M contract option from the US Navy for the fifth satellite in the Mobile User Objective System (MUOS) constellation.
Harris will provide Falcon II 400-watt AN/PRC 150(C) HF systems to Joint Biological Point Detection System (JPBDS), which is designed and deployed to detect and identify biological warfare agents. The AN/PRC-150(C) automatically communicates alerts to headquarters over HF radio links when the system detects the presence of biological agents. The contract is worth $9 M.
Herley Industries received a five-year IDIQ award from a US major prime contractor to provide diplexers and attenuators for use in Radar Warning Receivers (RWR) systems.
SELEX Galileo announced a contract for its PicoSAR AESA surveillance radar. The contract will see three PicoSAR radars sold to a non-NATO export customer as evaluation models, with the potential for a full production run upon successful tests. PicoSAR will be integrated into the customer's lightweight, tactical Unmanned Aerial System (UAS).
Looking ahead to year-end, challenges remain for the industry in 2011, compounded by political inaction at various levels and uncertainties presented by current events on the global stage. Nevertheless, while we don't expect anything spectacular in terms of growth, we believe the industry will retain an upwards growth trajectory this year. However, for companies to succeed in 2011, the focus will have to be cheaper, better, faster, namely the faster delivery of higher performing cost-effective solutions.