Brazilian Air Force Commander, Lieutenant-Brigadier Saito, writes a text message to an unidentified person named Araujo at the National Congress in Brasilia
By Andrea Shalal-Esa
WASHINGTON (Reuters) - Brazil's decision to buy Swedish fighter jets instead of F/A-18 Super Hornets from Boeing eliminates its most promising foreign-sales prospect just as the U.S. company faces critical decisions about extending the jet's production line past 2016.
The loss of the $4.5 billion contract for 36 planes is the latest blow to Boeing's defense division, whose F-15 fighter jet last month lost a potential 60-plane order from South Korea to Lockheed Martin Corp's next-generation F-35 fighter.
Without new orders, both programs, based in St. Louis, Missouri, could fold in several years, effectively putting Boeing out of the fighter-jet business until a next-generation plane is developed, a decade or more in the future. The closures would follow the shuttering of Boeing's C-17 military transport plane production, in Long Beach, California, set for 2015, also because of sagging sales.
All these prospects present a near-term threat to Boeing's defense business. Fighters and C-17s accounted for 40 percent of Boeing's military aircraft deliveries so far this year. Military aircraft sales totaled $11.5 billion in the first nine months of 2013, down from $11.9 billion a year ago. (Boeing does not break down revenue by product line.)
Spokesman Conrad Chun said Boeing was disappointed about the loss in Brazil but remained confident about the Super Hornet's prospects in Europe and the Middle East.
The outlook for new domestic or foreign contracts is also diminished by budget cuts in the United States and financial constraints abroad, leading to delays in contract decisions in some key foreign markets.
Without fighters and the transport planes, Boeing's military aircraft business would be largely reliant on Apache and Chinook helicopters and the P-8 antisubmarine plane.
Boeing's lucrative after-sale market would be undermined as well. More than 80 percent of the money earned on a fighter jet comes from sales of spare parts, upgrades and support services over the jet's lifespan of 30 years.
SLOWING PRODUCTION TO MAKE ORDERS LAST
Boeing executives deny they are in a dogfight with Lockheed's F-35, and say the two jets will be compatible for defense needs on board U.S. aircraft carriers for decades.
But even before the Brazil loss, Boeing was boosting its lobbying efforts to get U.S. lawmakers to buy more F/A-018s or EA-18G electronic attack planes, known as "Growlers."
It also is cutting costs on the production line, investing in automation and slowing output of the F/A-18 to make the orders last longer as it tries win more sales against the F-35.
Boeing still has orders for 73 more F/A-18s and 45 more EA-18Gs, which will carry it to the end of 2016. For Saudi Arabia it is building 84 F-15s, enough to keep production running through 2018.
F/A-18 production is slowing from four planes a month to three to preserve the line, said Mike Gibbons, F/A-18 program manager. Boeing needs to build around two planes a month to maintain it, he said. [ID:nL2N0JT03T] That would require orders for 60 additional planes from the Navy to carry production through 2020, when countries in the Middle East and others such as Canada and Denmark would need to replace their jets.
Boeing had hoped orders from Brazil, Malaysia and other countries could fill the gap. Now Brazil is a lost cause, and Malaysia recently said it was postponing its fighter competition.
The Gulf holds promise, but Boeing's F/A-18 could face rivalry there from the F-35 around 2020, when the Pentagon is considering allowing sales to the region.
The U.S. Navy is a different story. Officials laud the jet's performance and the ease of maintenance. They say Boeing's reliable F/A-18 deliveries have allowed the fleet to maintain enough fighters on carriers to cover delays in the F-35C, which is not slated to be ready for operational use until 2018 or 2019.
They say they are studying options to keep the Super Hornet line running, although there is no formal requirement to replace older Hornets and no money to pay for new planes.
That is why Boeing is turning to lawmakers to add funding for extra F/A-18 planes, which they have done in the past.
DEFENSE HAWKS DOWN
Behind closed doors on Capitol Hill, congressional aides briefed on the program say Boeing is pushing a proposal to replace 44 of the 280 F-35 C-models the Navy plans to buy with Super Hornets, a move it argues could save the Navy $2.3 billion over several years.
Boeing has stepped up marketing activities over the past year, bringing a trailer-sized simulator to Capitol Hill, showcasing the Hornet at a variety of foreign air shows and helping organize a 35th anniversary party for its first flight at a Maryland naval air base this month.
The company is also promoting what it calls the "Advanced Super Hornet," a package of upgrades that would improve the plane's range, avionics and other capabilities. But company officials say upgrades alone will not support the production line.
Earlier this month, Randy Forbes, a Virginia Republican and member of the House Armed Services Committee, urged Defense Secretary Chuck Hagel to keep the F/A-18 line running, calling reliance on a single tactical aviation supply line too risky. [ID:nL2N0JL00N] Other lawmakers have sent similar letters.
How much traction the Boeing proposal will ultimately get in Congress remains unclear.
U.S. lawmakers, keen to maintain well-paying jobs in their home districts, have often added funding to weapons programs, frequently defying the Pentagon's wishes and even an occasional presidential veto threat. Such earmarks have grown rarer, however, in the current budget environment, and military officials say training, maintenance and staffing shortages are putting lives at risk.
Boeing's support in Congress has also waned in recent years after the deaths of some key backers, including Senator Ted Stevens and Representative John Murtha. Others lost their seats to Tea Party candidates who care more about cutting federal deficits.
F-35 PICKING UP MOMENTUM
Another obstacle is the Pentagon's $392 billion commitment to the F-35 fighter and its efforts to lock in U.S. and foreign orders that will help drive down the cost of the most expensive U.S. arms programs.
The new warplane is several years behind schedule, and its cost is nearly 70 percent higher than projected, but government officials say Lockheed is now making progress, completing flight tests and resolving technical problems. The Marines are slated to start using the plane in combat in 2015.
Pentagon leaders have made clear that the F-35 is their top acquisition priority, and that they will resist any Navy moves to order more legacy warplanes like the F/A-18.
The cost of the F-35 is also dropping, according to program manager Lorraine Martin. Last week she said a conventional takeoff A-model would cost around $75 million in 2019, putting it on par with current planes like the F/A-18 and negating one of Boeing's key selling points.
Boeing says the F/A-18 costs about $51 million, including engines and radar, but congressional aides say the price is closer to $70 million when targeting pods and other equipment that is standard on the F-35 are added.
In the end, one of Boeing's biggest problems may be one faced by all companies as they near the end of production of a product, said one industry executive.
"When buyers think you are wounded they run away. No one wants to be the last buyer of any particular airplane."
(Reporting by Andrea Shalal-Esa; Editing by Alwyn Scott and Prudence Crowther)