As Farnborough Airshow Gets Under Way, Big Questions for Defense Industry

T-50 on display at the 2012 Farnborough International Airshow

Top U.S. defense and aerospace companies are storming this week's Farnborough Airshow in the United Kingdom where they hope to sign up new customers and gain fresh insights into where the market is headed.

The good news for American firms is that the defense aviation market is still lucrative. Between now and 2019, more than $120 billion in military aviation hardware procurement and tens of billions worth of maintenance and repair work are up for grabs, according to estimates by the consulting firm Avascent. Also, this year's show will feature a larger contingent of government officials to help boost U.S. exports than was the case at last year's Paris Airshow.

Despite greater government support in wooing international buyers, U.S. firms have reasons to fret about the future, analysts say. American companies are facing an increasingly cutthroat defense market and will see their dominance challenged on several fronts. At the same time, U.S. arms makers are coping with steep cuts to the Pentagon's budget and consider foreign sales "incredibly important," says Roman Schweizer, aerospace and defense policy analyst at Guggenheim Securities.

American manufacturers also have to worry about protecting their current dominance of the international market as new competitors emerge and customers consider lower cost alternatives.
U.S. weapon systems are the gold standard for countries that can afford to buy them, says Schweizer. There is a demand, however, for less sophisticated weaponry that increasingly could be filled by countries like China and Russia.

Another looming concern for American suppliers is the impact of U.S. foreign policy on future arms sales, particularly the perception around the world that that the United States has been indecisive and relatively powerless in the face of major security crises in Iraq, Syria and Ukraine. "U.S. foreign policy is not as well regarded by some of our allies," says Schweizer. Whether that results in a "penalty" for U.S. defense companies is a matter of concern.

Remy Nathan, vice president of international affairs at the Aerospace Industries Association, says the industry is encouraged by the administration’s show of support at Farnborough. "There is a robust U.S. government presence, especially compared to last year's Paris Airshow," he says during an online forum.
Senior officials from the Defense, State and Commerce departments will be helping to promote U.S. products, Nathan says. "Government officials are working together more effectively to coordinate schedules, messages and maximize their message to bolster U.S. companies."

Defense firms welcome the administration's export control reforms that began in 2009, but believe more needs to be done on behalf of U.S. manufacturers, says Nathan. The industry would like to see a "national defense export strategy ... to help maximize coordination and collaboration between U.S. government and industry, so industry has the business intelligence that is required to be successful in a challenging marketplace."

A recent survey reveals considerable anxiety about how U.S. industry will compete internationally in a changing landscape. Of about 350 aerospace and defense executives surveyed by Avascent, 93 percent believe international growth is more important than ever, but U.S. companies are still in search of a winning strategy. "Competition is rapidly increasing in markets worldwide, and U.S. corporate leaders don't feel they're prepared," says Aleksandar Jovovic, defense aviation principal at Avascent. Only 6 percent of executives say they are ready for the challenge of capturing new business outside the United States, he adds. "That's a significant issue for companies."

China is seen as a potentially formidable competitive threat out there, says Jovovic. “The Russian challenge is not new, but China’s impact remains to be determined.” Other nations that are making inroads in the arms market include Israel, India, Brazil, South Korea and Canada. "There is rising competition coming from different countries and markets, and it's happening quickly," he says. For U.S. suppliers, this is a "seismic shift."

Only 7 percent of executives in the survey see the government providing exporters "effective support" to compete for international sales in this new playing field, says Jovovic. "Sales models that worked even three years ago are no longer effective." New competitors worry American firms because they are introducing attractive products that can be purchased more easily without having to go through the red tape gauntlet of the U.S. export licensing process. Established U.S. players will be challenged by entrepreneurial firms such as Saab and Embraer and erstwhile partners such as KAI and TAI, he says.
Russia will not fly its fighter jets at Farnborough this year, presumably because of the ongoing Ukraine crisis. The country’s fifth-generation fighter, the T-50, will not be ready until at least 2017. But the country’s aggressive marketing of its aviation products in developing countries, Jovovic says, will challenge U.S. firms that have not traditionally courted those buyers.

The ITAR-TASS news agency reports that Russia’s arms exporter Rosoboronexport will be at Farnborough offering combat helicopters to potential customers from the Middle East, Latin America and Southeast Asia. “Rosoboronexport expects keen interest from foreign delegations in the super-agile Su-35 multipurpose fighter, MiG-29M/M2 multifunctional frontline fighters, Yak-130 combat training aircraft, Il-76MD-90A military transport aircraft, Mi-35M, Mi-28NE and Ka-52 attack helicopters and aircraft weapons,” the agency says.

Fighter Sales, F-35 Grounding Fallout

Farnborough had been hyped for months as the international trade show debut of Lockheed Martin's F-35 joint strike fighter. But the fleet was grounded due to safety concerns following a June 23 engine fire at Eglin Air Force Base, Florida. It missed last week's Royal International Air Tattoo and remains in doubt for Farnborough, dealing the program a huge public-relations blow at a time when the Pentagon and Lockheed Martin are trying to shore up support for the program and boost sales overseas.

While the F-35 commands the media's attention, it occupies a small high-end niche in a market that is still dominated by less expensive fighters, analysts point out. "Fourth generation aircraft will be the dominant inventory in the next 10-20 years, despite all the talk about fifth generation," says Jovovic. Manufacturers are creating a "fourth and a half" market by upgrading current models with new radars and weapons.  

The Boeing Co. sees Farnborough as a make-or-break opportunity to revive stagnant sales of its F-15 and F/A-18 fighters, says Schweizer. "They need an international lifeline," he says. "Given all the momentum that Lockheed has had with F-35, it would be good for Boeing to have a good show."

Several potential buyers are being courted by U.S. and European fighter makers. Denmark is looking to replace its F-16s with 30 new jets. While Denmark is a partner country on the F-35 program, the Saab Gripen, the F/A-18 and the Eurofighter are in the running, says Byron Callan, defense analyst at Capital Alpha Partners. Malaysia plans a buy of 18 multirole combat aircraft to replace MiG-29s, he notes. Again, the F/A-18, Eurofighter, Gripen and Russia’s Sukhoi Su-30 will be in contention. Qatar has been in the market for 72 new combat aircraft. Media reports that it would select the Dassault Rafale have not been followed by a deal yet, Callan says. “Eurofighter was in the running for this requirement, but we suppose that F/A-18 and possibly a split buy of one of these types and F-35 at a far later date are possible too.” The United Arab Emirates was considering buying 60 Typhoons, but that deal fell apart in Dec. 2013,” Callan says. “It is conceivable that the Boeing F-15 could be evaluated for this requirement.” Other countries that could be in the multi-role fighter market in the 2014 to 2017 timeframe include Colombia, Finland and Kuwait.

Fighter upgrades are becoming a growing source of business for companies, especially as more countries postpone major investments in new aircraft. Upgrades for existing F-16 and Eurofighter fleets are creating significant opportunities, says Callan.

Drone Sales, Future of Unmanned Aviation

Unmanned aircraft are an important segment of the market, but get only a fraction of the overall aviation procurement dollars. “In the short to medium term, manned aircraft get the bulk of spending,” says Jovovic. In the military sector, buyers who can afford high-end drones have become more demanding as they worry about the threat of air-defense systems. The technology to allow drones to operate in so-called “non permissive” environments is still in development. Most drones sold today do not meet those requirements.

On the commercial side, the market has gone from buoyant to glum in recent months as manufacturers worry about delays in Federal Aviation Administration plans to allow drones in U.S. airspace, says Robert Wiecezak, commercial aviation analyst at Avascent. Uncertainty about FAA certification is a “big issue,” he says. “I'm rather pessimistic about the future of commercial unmanned air vehicles.” The buzz that Amazon.com generated with its plan to deliver packages via drones masks deep problems the industry has to resolve, says Wiecezak. “The de-confliction issues in the airspace are massive,” he says, referring to the challenge of avoiding mid-air collisions in congested space. A modern air-traffic control system, called next-gen, would facilitate the introduction of drones into the airspace, but the technology has yet to be put in place in the United States. “We're having significant problems implementing next-gen technology for traditional aircraft,” says Wiecezak. “Frankly, if we can't solve those problems in the next five to 10 years, it will be difficult to handle thousands of UAVs across the United States delivering packages.”

A recent investigation by the Washington Post that exposed the poor safety record of UAVs is likely to give the FAA pause about allowing commercial drones, says Jovovic. “The coverage certainly did not do the unmanned community any favors,” he says. Manufacturers contend that the Post stories reflected data from 10 years ago and paints a picture of a technology that is now long gone, he says. Unmanned aviation, nonetheless, will move more slowly than people expected initially.

Lower Cost Tactical Aviation

Making a big splash at Farnborough this year is Textron’s commercially developed light attack aircraft, the Scorpion, which the company unveiled a year ago and for which it still has no customers.
The company is positioning the two-seat Scorpion as a low-cost alternative to military fighters and high-end drones for surveillance and light-attack missions. Experts are watching this program as a bellwether for changing customer demands in favor of lower cost weapon systems. They see Scorpion as a possible alternative to attack helicopters and fast jets that have become very expensive to buy and operate, but they are still not ready to predict who will buy this airplane or when. Schweizer says Textron needs to better explain the mission and capabilities of this aircraft if it hopes to drum up sales. “I would love to have a better understanding of the business case and the value proposition behind Scorpion,” he says. It is not clear what makes it unique vis-à-vis light attack aircraft made by competitors such as Beechcraft and Embraer. There are others companies in the trainer and surveillance aircraft market, and it is not clear where Textron precisely fits in, he notes. “It'll be interesting to see what sweet spot they envision for this aircraft.”

Topics: Aviation, Joint Strike Fighter, Tactical Aircraft, Business Trends, Business Development, International, Procurement