President Obama's Parting Gift to Boeing: $31.2 Billion in Defense Contracts
When Kuwait announced in April that it will be buying $9.1 billion worth of fighter jets from Airbus (NASDAQOTH: EADSY), that sounded like bad news for Boeing (NYSE: BA). For months, the Obama administration had been dragging its feet on approving a sale of Boeing's competing F/A-18 fighter jet to Kuwait. Ultimately, Kuwait chose to buy fighters from Airbus, which was quicker to approve the deal.
Could Boeing's F/A-18 regain air supremacy? Image source: Getty Images.
Saved by the bell
Kuwait is a nation of just 3.4 million people. At a cost of roughly $2,700 per citizen, the purchase of 28 Eurofighter Typhoons from Airbus represents a huge investment for the country. (Note: Airbus is the largest shareholder of the Eurofighter consortium that makes the Typhoon. BAE Systemsowns a 33% stake in the consortium.) And yet, it seems Kuwait has not yet run out of money to spend.
Two weeks ago, in a rather surprising announcement, the U.S. Defense Security Cooperation Agency notifiedCongress of Kuwait's continued interest in buying F/A-18s from Boeing (apparently in addition to the Typhoons from Airbus). As explained in DSCA's notification, Kuwait intends to purchase 32 F/A-18E fighter jets and eight more advanced F/A-18F fighters from Boeing. Total cost: $10.1 billion.
Nor was this the only good news Boeing shareholders got last week.
Cast your eyes south
Simultaneous with the announcement of the Kuwait fighter deal, DSCA notified Congress of a second -- even bigger -- sale of Boeing fighter jets to the Middle East. Just a few hundred miles to the south of Kuwait likes the peninsular nation of Qatar, and the Qataris seem even more infatuated with Boeing planes.
According to DSCA, Qatar is seeking permission to purchase 72 F-15QA fighter jets from Boeing for the princely sum of $21.1 billion. That makes the total value of Boeing contracts being sought here $31.2 billion.
What it means for Boeing -- and its investors
It's hard to overestimate the importance of these defense deals to Boeing, now that the Obama administration has permitted them to proceed. (Congress has literally never rejected a foreign arms dealonce the DSCA has given official notification).
From a sheer dollars-and-cents perspective, Boeing's military aircraft division earns 9.8% pre-tax profit margins on the planes it sells -- the second-highest profit margin of any Boeing division. Ultimately, the $31.2 billion in revenue flowing from the two deals named above should earn Boeing pre-tax profits well in excess of $3 billion, worth nearly 43% of all the profits that Boeing generated from all its businesses last year.
But the significance of these deals is even greater than that.
With demand for its fourth-generation fighter jets waning, Boeing had been planning to shut down production of its F-15s by 2019. F/A-18 production was likely to cease in 2017. Boeing Defense head Leanne Carethas been heard talking about how Boeing needed to "evolve" beyond fighter jets entirely, and refocus its efforts on building planes it can actually sell -- KC-46 Pegasi, C-17 Globemasters, and P-8A Poseidons.
Thanks to these last-minute sales, though, Boeing's fighter jets business has a new lease on life.
Consider: Last year, Boeing produced and delivered 35 F/A-18 model aircraft to its customers around the world. At that build rate, the Kuwaiti deal will extend F/A-18 production by more than a year. Indeed, if Boeing can slow its production rate just a bit, the production line could operate even longer -- giving Boeing more time to find even more buyers, to extend its lifeline even further.
Meanwhile, Boeing's F/15 was already producing at the much slower rate of just 12 planes per year. Qatar's order for 72 new F-15s extends the lifespan of that model aircraft by six more years!
Turns out, thanks to these two last-minute contract wins, Boeing may not have to quit the defense business after all.
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