Boeing Scores Big Win in Navy Drone Competition

Boeing (NYSE: BA) has emerged victorious in the competition to build the U.S. Navy's first carrier-based drone, a major shot in the arm for a contractor that, despite its size and aeronautics expertise, has struggled in recent high-profile aircraft competitions.

The U.S. Navy on Thursday announced an $805 million contract for the "design, development, fabrication, test, verification, certification, delivery, and support" of four MQ-25A Stingray drones. Assuming all goes well, the Navy is expected to order upward of 72 of the aircraft at a cost of more than $10 billion.

Boeing beat out competing bids from Lockheed Martin (NYSE: LMT) and privately held General Atomics to win the award. General Atomics was seen by many as the favorite to win the competition due to its expected cost advantages, and Boeing in February hedged its bets by signing on as a subcontractor on the GA effort.

Northrop Grumman unexpectedly dropped out of the competition last October, leaving three finalists.

A long route to sea

The award comes 12 years after the Navy started talking about bringing drones to the carrier deck and represents a much less ambitious project than what was originally envisioned. The Navy had originally wanted an aircraft with stealth characteristics and the ability to carry a large payload of weapons and later focused on long-range surveillance and intelligence missions.

The final competition was for a tanker aircraft, with the Stingray designed to increase the effective strike range of a Navy carrier's air wing by up to 400 nautical miles, nearly doubling a carrier's air attack range. It would also decrease the wear and tear on other Naval aircraft, most notably the F/A-18 Super Hornet fleet. The Hornets are currently the primary carrier tanker, with the Navy estimating that upward of 30% of the Hornet fleet is devoted to aerial refueling.

The Navy hopes to have the first four Stingrays operational on carrier decks by 2024, an aggressive timeline. In addition to the final design, production, and testing work required of the drones, the Navy is also working to develop a carrier-based control station and to network the drones to the other carrier aircraft.

A much-needed win

Boeing is a powerhouse when it comes to designing and building aircraft and has significant expertise in aerial refueling thanks to its work on the KC-46 tanker. But for all the company's resources, its recent track record when it comes to defense aircraft is mixed at best.

The KC-46 tanker is over budget and behind schedule, leading Air Force Secretary Heather Wilson in March to lash out at Boeing and question whether the company is overfocused on its commercial operations to the detriment of defense projects. Boeing has also lost out in some recent high-profile competitions, including the joint strike fighter, which went to Lockheed Martin, and the long-range strike bomber, which went to Northrop Grumman.

The company's defense unit also was caught up in tariff and commercial aircraft disputes with Canada that could cost it a $12 billion Super Hornet contract and future business.

Thanks to the Stingray contract, Boeing Defense is getting a high-profile, morale-boosting win at a moment in time when the business could use one.

Value in diversification

The Stingray contract in and of itself isn't a reason to go out and buy shares of Boeing, but it does help make the case for why Boeing is a good long-term investment. An extended up cycle in commercial aerospace, including massive demand for Boeing's 737 and 787 models, has made the company lopsided. Today Defense, with space and security included, only accounts for about one-fifth of total Boeing revenue.

That commercial sales surge will fade eventually, and as it does, Boeing will want to lean on its Defense unit to pick up some of the slack. Boeing has an impressive array of military platforms, but some of the most successful items, including the Super Hornet, the F-15 Strike Eagle, and the Apache helicopter, were added via acquisition. And as noted, Boeing's internal designs in the joint strike fighter and strike bomber competitions fell short.

Winning this Navy competition shows Boeing Defense can compete and win high-profile military aircraft awards, and the internal expertise the company develops in the years to come as the Stingray is finalized should only strengthen Boeing's chances of winning future drone competitions.

It's only one contract, but this competition is a major victory for Boeing.

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