Stephen Harper’s Conservative government may not be the only casualty in Monday’s electoral upset in Canada.
Justin Trudeau, the leader of Canada’s victorious Liberals and soon-to-be Prime Minister, has vowed to cancel the country’s purchase of 60 F-35 Joint Strike Fighter jets from Lockheed Martin (LMT) and instead focus on bolstering its Navy.
Trudeau’s victory marks another setback—albeit a small one—for the military program as Lockheed Martin continues its efforts to drive down the per-aircraft price of the F-35 by boosting production rates. However, Lockheed’s loss will likely translate into someone else’s gain as Canada shops for a less expensive alternative to replace its aging CF-18s fighter jets.
Canada has been part of the F-35 program essentially from its origins in 2001, when Lockheed Martin beat out Boeing for the privilege of building a new fighter jet. Canada pledged $150 million to aid the aircraft’s development, alongside several foreign partners including Japan, Norway, Denmark, Australia, and the U.K. That initial investment bought Canada—and the Pentagon’s other foreign partners—the right to acquire F-35s later at a lower price.
Canada’s Conservative government had previously announced it would acquire at least 60 jets, likely purchasing between four and eight F-35s each year at $80 to $100 million per aircraft starting in 2017. Monday’s Liberal victory puts that order in serious doubt since Trudeau intends to scrap the Conservative’s F-35 buy.
If Trudeau follows through on the promise, Canada will lose the $150 million already invested in the F-35’s development, and Lockheed would lose what would have been billions of dollars in sales to the Royal Canadian Air Force (and likely millions more on follow-on contracts for ongoing maintenance).
For Lockheed, the loss of 60 orders in a program that will eventually produce thousands of aircraft is negligible. Should Canada withdraw from the F-35 program, the more significant industry impact would be the competition to replace it. Possible contenders to replace Canada’s vintage CF-18s include the twin-engine Rafale from France’s Dassault Aviation, the single-engine Gripen manufactured by Sweden’s Saab Group, and the Eurofighter Typhoon.
But perhaps no one in the aerospace world stands to come out a bigger winner from Monday’s election than Boeing. The manufacturer makes the F/A-18 Hornet jets, which is a cousin of Canada’s current fleet of CF-18s fighter jets. “The cheapest way they could go might be the Gripen, but frankly the biggest potential winner from the election is the Super Hornet,” says Richard Aboulafia, vice president of analysis at aerospace and defense consultants Teal Group. “It fits into their existing fleet, it’s a relatively low-cost option, and it has two engines which Canada has historically preferred.”
A 60-plus aircraft order for its Super Hornet—the latest variant of the F/A-18 and current workhorse fighter for the U.S. Navy—would be a significant boon to Boeing’s defense business. With the U.S. Navy slated to replace its Super Hornets with the new F-35C, Boeing (BA) has aggressively sought new orders that would keep its St. Louis production line open beyond 2017, when current orders run out.
“Both Dassault and Boing have seen some new life breathed into the Rafale and the F-18,” Byron Callan, an analyst with Capital Alpha Partners, says. “And a 60-airplane opportunity is certainly in the bigger-than-a-breadbox category.”
The other great unknown surrounding a potential withdrawal from the F-35 program is its impact on Canadian industry. In shopping the F-35 to partner nations, Lockheed Martin sweetened development deals with so-called “offsets,” or arrangements to produce certain components of each partner nations’ F-35s within that country.
The offer of skilled, high-tech jobs and revenue for manufacturing firms made the F-35 an easier political sell. It’s now unclear exactly how much a Canadian withdrawal from the program will impact Canadian industry. It’s possible that whatever companies compete for the F-35s replacement might dangle similar deals in front of Canadian subcontractors to make their aircraft more competitive, Callan says. However, it’s too soon to tally the economic impact on Canadian subcontractors if that F-35-related business evaporates.
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