Home » Aviation » Lockheed: DoD Focused on Lowest Price in Recent Competitions; May Affect LM Participation in Future Bids


Lockheed: DoD Focused on Lowest Price in Recent Competitions; May Affect LM Participation in Future Bids

An undated picture of five F-35B and a single F-35C. Lockheed Martin Photo

Lockheed Martin officials say their loss to Boeing in three recent aircraft competitions indicates that Pentagon weapon buyers are valuing low price tags over high-tech capabilities, which may lead the company to question its participation in some future competitions.

The company reported strong revenue growth and expected solid earnings in the future, but during a Tuesday morning conference call with Wall Street analysts, company officials sounded burned by losing out on three significant contracts during the recently completed third quarter of 2018.

“We do see that affordability is a very important element for them,” said Marillyn Hewson, Lockheed Martin’s chief executive, referring to the Pentagon’s weapons buyers.

In a competition pitting designs from Lockheed Martin, General Atomics and Boeing, the Navy awarded Boeing an $805-million award in August to build the first four unmanned carrier-based aerial refueling tankers, the MQ-25A Stingray. Ultimately, the Navy wants to purchase 72 more vehicles, for a program price of roughly $13 billion. Boeing also beat out Lockheed Martin for a pair of Air Force contracts – $2.38 billion to replace the Air Force fleet of H-1 Huey helicopters, and $9.2 billion for the new fleet of Air Force T-X trainer jets.

“We believe our proposals represented outstanding technical offerings at our lowest possible pricing,” Hewson said. “Had we matched the winning prices and been awarded the contracts, we estimate that we would have incurred cumulative losses across all three programs in excess of $5 billion; an outcome that we do not feel would have been in the best interest of our stockholders or customers.”

Hewson and Bruce Tanner, Lockheed Martin’s chief financial officer, downplayed the long-term significance of missing out on this trio of large contracts. Lockheed Martin reported revenues of $14.3 billion for the quarter, compared to revenues of $12.3 billion a year ago. Earnings for the quarter were $1.5 billion for the quarter, compared to earnings of $963 million a year ago.

Increased sales of F-35 Lightning II Joint Strike Fighters as production increases, as well as increased demand for missiles, were vital to the revenue increases. Looking forward, even with Pentagon spending not expected to grow, Tanner expects Lockheed Martin’s profits from sales to grow, resulting in cash from operations to remain in the $7-billion range for the next three years.

However, neither Hewson nor Tanner masked their disappointment in the selection of Boeing over Lockheed Martin for the three aviation programs.

“Those were disappointing for a lot of reasons. But the fact they really decided, all three, on an LPTA (lowest price technically acceptable) basis, didn’t help the situation,” Tanner said. “It’s not getting the best capabilities for the warfighter in the hands of the warfighter.”

A year ago, when discussing the MQ-25 program, Navy officials suggested capability was their primary focus. Cost estimates were specifically not addressed because the Navy wanted to learn what was possible, Rear Adm. Mark Darrah, Program Executive Officer Unmanned Aviation and Strike Weapons, told USNI News in July 2017.

“When we put a number out there, eerily they tend to get to that number and go backwards, go backwards in their development, so they hit that number. We are taking a different approach this time. We’re not going to define that number at this point and direct them to provide us with their input so that we can adequately and accurately determine what they truly can do,” Darrah said in the 2017 interview.

On Tuesday, Hewson acknowledged the types of projects Lockheed Martin bids on in the future could be affected by the Pentagon’s focus on price when seeking new weapons programs.

“We’re going to pursue good business opportunities for us,” Hewson said. “We have talked about this before: affordability is an important value for them.”

Artist’s concept of a Lockheed Martin Multi-Mission Surface Combatant. US Navy

Hewson also addressed the growing speculation over whether defense contractors would be allowed to continue doing business with Saudi Arabia, as the United States government still grapples with the fallout from the death of journalist Jamal Khashoggi after last seen entering the Saudi consulate in Istambul. The kingdom is a Lockheed Martin customer, but Hewson said the company had relatively minor exposure to any fallout from having arms deal nixed by the U.S. government.

Currently, the largest contract Lockheed Martin has with Saudi Arabia is to build the kingdom’s fleet of four multi-mission surface combatant ships, based on the Littoral Combat Ship, worth $6 billion. Saudi Arabia just awarded Lockheed Martin a $450-million detailed planning and design contract, which is related to the planned four-ship purchase.

“The largest order we’ve been waiting on obviously is for THAAD (Terminal High Altitude Area Defense), ” Tanner said. “That has not taken place yet. Not sure when that will take place. The interesting thing with the THAAD order is, while it brings a significant increase in backlog, the resulting sales, profit, and cash flow with that order are very much pushed to the right.”

Required upgrades to Saudi Arabia’s radar technology will delay the $15-billion THAAD order delivery for at least four years, Tanner explained. Without the technical refresh, he said Saudi Arabia would be unable to use the missiles effectively.

“I think we have in 2019 about less than half a billion dollars of sales planned, and I looked out into in 2020, and it’s less than $900 million in sales,” Tanner said. “So it’s not a huge amount of dependency on the activity, even though the opportunities we’ve described are much larger than that obviously.”

  • omegatalon

    The is the Trump Effect as the DoD have been given orders for programs to keep things simple and cheap.

    • Matthew Schilling

      Terrible, especially since making things complicated and expensive has worked out so well for the Ford Class CVNs!

      • Matthew Schilling

        If a new Nimitz class carrier had been laid down the day we started building Ford, it would’ve been completed and commissioned three years ago. It would already be back from completing its first cruise, fulfilling the mission for which it was built. And, it would’ve cost multiple billions less than has been spent on the Ford to-date. That extra cash ought to have been spent on the new and, as of yet, unproven technology meant for the Ford.
        Actually, we could’ve laid down the Ford several years later than we did…and still had it ready, really ready, no later than it will finally be!

    • Ed L

      Diesel Boats Forever

  • omegatalon

    Trump would probably never authorize the F-35 program despite it’s 18:1 kill ratio over 4th GEN fighters and simply bought more F-16 and F/A-18 Super Hornet because they’re cheap.

    • Bubblehead

      Those exercises and kill ratio’s don’t mean anything until you give into the specifics of the exercise which are classified.

  • MaskOfZero

    A factor not mentioned in the article is the requirement to keep specialized local arms industries and supply chains healthy. Boeing is being encouraged, and its fighter plants in St. Louis can stay open.

    There are many factors in Boeing winning, but it is not only the low cost–and LM has nothing to complain about–they have gotten very big slices of the aviation pie–as has Northrop-Grumman.

    • RunningBear

      “KC-46 missed an initial delivery August 2017, Aug, Sep, Oct, 2018”; while all three new contracts were on the basis of LPTA (lowest price technically acceptable), not delivery!

      Gee!, If they never deliver, are the program offices going to continue their payment schedules? Not a bad scam!

      but…..if they miss the first delivery of each of the three contracts, perhaps they can be cancelled and the contracts rebid on delivery!

      IMHO
      Fly Navy
      🙂

      • muzzleloader

        I cannot understand how the KC-46 is being boluxed up so badly.
        It is based on a commercial airframe like every tanker the USAF has developed over the last 70 years, and refueling hardware is not exactly new school.

        • RunningBear

          – The KC-46’s boom has an unacceptably high chance of scraping the
          skin of receiver aircraft. ..F-35, F-22, B-2 and.. the B-21… ..
          – The Remote Vision System—a
          control console with 3D screens that takes the place of a window and
          boom operator’s pod traditionally built into the tail of a tanker
          aircraft.

          Both of these birthing problems have promised to be fixed, neither were implemented on the -135
          Certifications by civil and AF authorities have drug on, too long.

          Waiting 50yrs. is another problem in developing a legacy system, perhaps they forgot how to build them and worse yet the AF forgot how to specify them.

          ….anyhow “maybe” the FIRST one will be delivered next month, Nov., 2018; better late than never!
          IMHO
          Fly Navy
          🙂

          • SDW

            Don’t leave out that the AF thought that they needed to tell Boeing how to build 737 green aircraft. (Experience building a few thousand of them didn’t seem to count.)

          • RunningBear

            KC-46A is built by combining;
            -200ER fuselage,

            -300F wing, gear, cargo door and
            floor,

            -400ER digital flightdeck and flaps, uprated engines,

            -“6th-Gen” fly-by-wire fuel delivery boom
            The plane was designed by Boeing and built to meet the USAF specifications, similar to all of the 1,100+ B-767s.
            IMHO
            Fly Navy
            🙂

          • SDW

            My proofreader had the day off. I had in mind the 767 when I typed 737.

            The USAF largely ignored the FAA cert process for the *767* based KC-46 but I don’t think they even tried that hard to coordinate testing and other certification requirements. The FAA required that to give the KC-46 cert that the USAF (and Boeing’s processes) required Boeing had to undergo a much more involved process than either the USAF or Boeing anticipated. Boeing also failed to nail down just who required what before signing the contract.

            The boom and the other problems would have fit much better in a process that didn’t require occasional standing still to wait for the bureaucracies to catch up.

            There is no arch-villan in this tragi-comedy unless you blame the perfect three-way storm that merged bureaucracies . Nor is there a shining hero or a helpless victim unless you count the Boeing shareholders.

            all the above is just my opinion….

  • DaSaint

    Boeing has its large commercial division to soften the blow of any ‘losses’ from the defense sector.

  • Bubblehead

    Boeing is suffering massive loses in the KC-46 Tanker.

  • DaSaint

    I wouldn’t worry about LM, nor drink their Kool-Aid regarding not bidding on future projects. Unlike Boeing, they don’t have much of a commercial offset. Most of their business is defense-related, so if they don’t win, they won’t eat. They may just need to learn to be more competitive and more cost effective. Novel concept.

  • b2

    The last of the three recent wins by Boeing mil group was for the MQ-25. This will be the next big pig n’poke vehicle y’all will be discussing in here within 4-5 years…

    The only reason we have all varieites of Hornets today is because of the business and miltary decisions made in times of “peace” before even 9-11 (1994-1999) and that the Hornet series was “in-production” and “good enough”. We didn’t need “purpose built” Naval VF, VA(M) and VS aircraft to be in the “Peace”….. Following that P-8 was just an off the shelf mod… in certain ways less capable than its predeccessor… V-22 and KC-46..both have their own stories to tell I won’t go into that..

    That is why I am curious to see what they have for the “developmental” MQ-25… I automatically assume it will be only “good enough” being a Boeing product, but heck, anything must be an improvement over andF-18 Superhornet refueling one another… right? But $800B is a lot of “science fair project”.

    Bottom line- At a minimum every US citizen who votes should accept nothing less than “15K of give at 500NM” …no tricks…no gimmicks… And not a pound less… If we get otherwise every ex-Air Boss should be keel hauled on a nimitz class.

    Am I cynical? You betcha.

  • Jffourquet

    The tax payer may be better served if Lockheed does not bid on DoD programs. Just look at the F-35. Ten years late, tens of billions of dollars over budget.

    • Mk-Ultra

      Which is usually what happens with programs of this magnitude. You judge the end product, and the F-35 is it far the best product you can buy with cost overrruns

  • Wondering

    Lower your profit margins

  • Wondering

    Lower your profit margins.

  • Ed L

    Wonder what pockets the Bribes are flowing into

  • RobM1981

    Dear Lockheed,

    OK

    Love,
    The Taxpayers