Lockheed Martin (LMT) investors are looking north his month as Canada decides whether to buy the F-35 stealth fighter, in what would be one of the Canadian military's biggest investment decisions this decade.
For months, Canadians have debated whether to proceed with plans to buy the F-35 to replace its aging fleet of CF-18 fighters. Last week, Canadian Public Works Minister Diane Finley announced that a decision to proceed (or not) is imminent -- and could be announced within just the next few weeks.
Pause and rewind
As recently as 2012, Canada's path to F-35 deployment looked like it was on autopilot. The country was operating 64 fourth-generation CF-18 fighter jets (the Canadian variant of America's F/A-18A). It would buy 65 fifth-generation F-35s to replace them -- simple as that.
The global economic slowdown, however, and worldwide defense budget crunch that followed it, soon had Canada rethinking the F-35 program's cost, estimated at $8.3 billion, or close to $128 million per plane. Meanwhile, alternative suppliers of fighter jets -- everyone from Boeing (BA) to Dassault to BAE Systems (BAESY) -- were queuing up and clamoring that they could sell Canada fighters nearly as good as the F-35, and for a much more attractive cost. And so Canada hit pause on the autopilot, and invited these competing companies to give it more information on their wares.
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Now that the process of considering this information is just about complete, Canada is ready to make a decision -- to pick up where it left off with Lockheed Martin two years ago, or to change course.
"Two roads diverged in a wood..."
Which way will Canada ultimately turn? It depends entirely on whether the country considers capability or cost to be paramount.
Last year, in a contest that echoes the one Canada is conducting today, three companies bid to sell South Korea a fleet of 60 new warplanes:
- Lockheed set the bar high with a bid price of $10.8 billion for five-dozen F-35s.
- Eurofighter countered with its Typhoon, at a price tag believed to range from $6.1 billion to $8.1 billion.
- Boeing offered its new F-15SE Silent Eagle at price believed to be below $7.4 billion. (For context, military aviation website Deagel.com has most F/A-18 variants selling for about 10% below the price of the F-15.)
Dassault, apparently deeming its plane either too pricey, or too incapable of competing, did not bid at all.
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As you can see, every single offering in the Korean competition undercut Lockheed Martin on price. But at the end of the day, Korea threw caution (and accounting) to the wind -- and accepted Lockheed Martin's offer anyway, for the single reason that it was the only true fifth-generation stealth fighter available.
Fast forward to today, and Canada is faced with a similar choice. Almost certainly, all of the companies hoping to steal pole position from Lockheed Martin in this race will bid low to do it. But if Canada wants a true stealth fighter, this still remains a one-horse race -- and Lockheed remains the odds-on favorite to win it.
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