Boeing has sold its Apache tank killer to over a dozen other countries—with more to come.
Boeing’s
The company’s commercial aircraft unit saw 30% revenue growth last year, while its global services unit seems to be thriving.
But the defense side of the house is saddled with a series of burdensome fixed-price contracts for development programs from which there is no near-term escape.
The programs were bid too aggressively at a time when commercial lines were throwing off cash, and the company now must live with the resulting losses.
The company has since sworn off fixed-price contracts on new military projects, even as competitor Northrop Grumman
Northrop beat Boeing in a competition for the bomber by bidding a very low price—in fact, much less money for each production aircraft than Boeing typically charges for an empty Dreamliner. Now it too must live with the consequences.
The challenge for Boeing, a contributor to my think tank, is how to get through the current rough patch in its defense business to a time when profitability can be restored.
Part of the solution is winning new programs on reasonable terms, such as the Air Force’s planned Next Generation Air Dominance fighter.
Another part of the solution is executing smartly on the business already booked, and mining an extensive backlog of programs for opportunities to boost margins.
However, the fastest way to begin fixing BDS, as the defense unit is called internally, is to sell more of what it already makes. And on that front, there is good news from the State Department’s latest summary of recent overseas arms sales.
The summary reports that amidst a surge in the government’s Foreign Military Sales program, Boeing products claimed over a third of total FMS sales in fiscal 2023. Specifically:
- A $12 billion sale of AH-64E Apache attack helicopters to Poland, which will make it the second biggest operator of that aircraft in the world after the U.S. Army.
- A $8.5 billion sale of CH-47F Chinook cargo helicopters to Germany, and a second $1.5 billion sale of Chinook to the Republic of Korea.
- A $5.9 billion sale of the Boeing 737-derived P-8A Poseidon maritime patrol aircraft to Canada, confirming Poseidon as the world’s leading airborne submarine hunter.
These four transactions, by themselves, represent more revenues than BDS books in a typical year. Each sale will take years to play out, but if Boeing can continue its foreign sales campaign at anything approaching the pace of 2023, its financial challenges will be gradually eliminated.
It’s not as though rotorcraft and patrol aircraft are the only products BDS has to offer foreign customers. It sells a raft of other military items from tankers to munitions through the Foreign Military Sales and direct commercial sales programs comprising U.S. international arms transfers.
Its Joint Direct Attack Munition alone is used by three dozen countries, and derivatives of that technology are being turned into new sales opportunities. Politico reported last month that a ground-launched version of the related Small Diameter Bomb will soon be delivered to Ukraine.
So, the path forward for Boeing Defense is not hard to see: sell more products overseas, mine the backlog for margin-expansion opportunities, and book new domestic business on profitable terms.
Boeing has a good shot at winning the Air Force’s next combat aircraft, because with Lockheed Martin
The profitability of Boeing’s military portfolio is actually better than earnings reports suggest because, as Byron Callan of Capital Alpha Partners notes, much of the high-margin military support and services business was moved into the Global Services unit several years ago.
But even within the business areas that BDS still commands, there are plenty of opportunities going forward for achieving a return to profitability. It just takes time.
DISCLOSURE: As noted above, Boeing contributes to my think tank—the Lexington Institute.
