A billion dollars' worth of Chinooks. Another billion dollars' worth of Apaches. Everywhere you look, Boeing seems to be piling up billion-dollar contracts for military aircraft -- and it's not done yet.
Boeing's P-8A Poseidon is America's premier sub-hunting aircraft. Image source: Boeing.
The news Late last month, the U.S. Defense Security Cooperation Agency -- the Pentagon arm responsible for coordinating sales of military equipment to our allies -- notified Congress of an impending sale of military aircraft to the United Kingdom. And believe it or not, this one's nearly twice as big as the Chinook and Apache contracts combined.
According to DSCA's March 24 notification to Congress, the British government has requested permission to buy nine of Boeing's P-8A Poseidon maritime patrol aircraft, plus related "major defense equipment, associated training, and support," for a grand total of $3.2 billion. The goal: To reconstitute a British capability to track Russian submarines in the stormy North Sea -- a capability that has been missing since the Ministry of Defence retired its last Nimrod sub-hunter in 2010.
Heads: Boeing wins. Tails: Everybody else loses.If you've been following this story long, you know that Britain has been casting about for a new patrol aircraft for quite some time now. As recently as six months ago, though, the Brits still hadn't made up their minds as to which plane to buy.
Lockheed Martin's C-130J Hercules was one option, Airbus' C-295 Persuader another, and there was even a chance that Britain would rush headlong into the 21st century and buy MQ-4C Triton surveillance drone aircraft from Northrop Grumman to serve its sub-hunting needs. (Note that Northrop Grumman is also a subcontractor on the Poseidon contract.) Each of these three options had the advantage of being cheaper than the one before it -- and all three of these aircraft would have been cheaper than Poseidon.
In the end, though, Britain appears to have bit the bullet and decided to buy the Cadillac of maritime sub-hunting aircraft, Boeing's P-8A Poseidon.
What it means in dollars and centsAt $3.2 billion for nine Poseidons, Britain is paying roughly $356 million per plane -- a very steep price, given that BGA-Aerowebputs the 2015 "flyaway cost" of a Poseidon atjust $171.6 million. On the other hand, Australia agreed to pay $3.6 billion for just eight Poseidons in 2014, so by that measure, the UK is getting a bargain. It's also worth noting that with Boeing bundling an unspecified amount of related equipment, training, and support into the deal, Britain is really paying a sort of "all-in" price -- i.e., the $3.2 billion isn't just paying for the aircraft and naught else.
That said, don't be surprised if the value of this deal goes much, much higher as time goes by. Last we heard, Britain estimated its need at not nine surveillance planes, but 21 -- the number needed to fully reconstitute the capability lost when it retired its Nimrods. At the price it's seeking to pay for this first batch of Poseidons, that implies an eventual cost of $7.5 billion to acquire 21 planes. And at the 10% profit margin that Boeing earns on its military aircraft division, this implies a total, eventual profit for Boeing of some $750 million.
For Boeing shareholders, this should be welcome news indeed.
The article Britain Goes All In for Boeing's P-8A Poseidon originally appeared on Fool.com.
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