Here are the companies looking for a $ 12 billion deal on Canada’s fighter jets

Canada is moving forward with a draft RFP for the country’s highly anticipated fighter jet replacement contract. Expect a fun competition, influenced by a potential international intrigue and pitting against aerospace giants, including Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), Airbus, and baby Systems against each other as they seek a prize of at least $ 12 billion.

In a speech at the end of last month, Carla Qualtrough, Minister of Public Services and Supply and Accessibility of Canada, called the publication project “a milestone” in the country’s plan to purchase 88 advanced fighter jets. Comments on the project are expected by the end of the year, and Canada will seek bids by mid-2019 with the hope of awarding a contract at the end of 2021 and starting deliveries in 2025.

Canada has entered five eligible bidders (and their respective aircraft) for the deal: the Lockheed Martin F-35, the Boeing Super Hornet, the Eurofighter Typhoon, the Saab Gripen and the Dassault Aviation Gust. Airbus and BAE are both members of the Eurofighter consortium and Airbus also owns 9.9% of Dassault Aviation.

Boeing’s entry into the Canadian fighter jet competition, the F-18 Super Hornet. Image source: Boeing.

A year ago the Super Hornet was a big favorite, but a lot has changed since then. Here is an overview of the competitive situation today.

The Boeing Bombardier Bomb

The Super Hornet seemed a likely candidate due to its similarities to the jet to be replaced, the CF-18 Hornet. And the jet, while not as technically advanced as the F-35, is a powerful fighter – and at least back then it was significantly cheaper than the F-35. Canada’s allies across the Atlantic will push for the selection of one of the three European entrants, but given Canada’s close relationship (and proximity) to the United States, its military has traditionally preferred to work with American designs. to facilitate coordination with his neighbor.

But Boeing’s chances took a hit last winter after the company filed a trade complaint accusing a Canadian aerospace company Bomber to sell its CSeries passenger jet in the US market at a significantly reduced price. The complaint was ultimately dismissed, but not before Canada canceled a plan to purchase 18 Boeing fighters to provide a bridge until the new contract can be awarded.

Instead, Canada has said it will purchase a fleet of former F-18 Hornets from Australia.

Trade tensions between the two countries have since eased and Boeing could still win in next year’s competition. But at the very least, the dispute has undermined the considerable momentum of Boeing’s efforts and given new life to a potential Lockheed Martin bid.

An original partner coming home?

Canada is a founding member of the international coalition involved in the design of the F-35, and was assumed to be a prospective customer. But current Prime Minister Justin Trudeau, while campaigning for an election in 2015, said his government would not buy the fighter because of the high cost. This began the process which has included purchasing an interim fleet of jets from Australia and holding a new competition next year to select a long-term replacement.

Lockheed Martin seems certain in its attempt to highlight its work lowering the unit cost of the F-35. It can also refer to invoices over $ 1 billion that Canadian companies have received for work done under the F-35 program.

Canada could become the big winner in the competition if Boeing and Lockheed bid aggressively. Lockheed Martin tries to maintain a fighter dominance that dates back to the early 1990s, with its victory over the F-22, and continued when it defeated Boeing to produce the F-35. And while the F-35’s order book is strong and the aircraft is well on its way to becoming a $ 1 trillion program For Lockheed and its suppliers, the company says it is highly motivated to avoid the public relations blow of one of its founding coalition members rejecting the plane in favor of an older alternative.

Boeing, meanwhile, has shown it is ready to compete on price, giving the US Navy a discount in 2017 on an order for 12 new Super Hornets.

Canada will buy American, but which American?

The wild card in the competition is the trade relationship between the United States and Canada. As recently as this summer, when U.S. negotiators clashed with their Canadian counterparts over talks to rework NAFTA, the Trudeau administration reportedly considered a plan to penalize candidate combatants from countries that inflict damage on the national economy.

Assuming that no new trade war breaks out, it’s hard to imagine Europeans winning this competition. Canada’s ties to the US military are important enough to make interoperability a priority. And the alternatives – including the Eurofighter – have had problems competing with US jets even in their home territory, as evidenced by Belgium’s recent decision to choose the F-35 over the Typhoon to replace its fleet. of F-16.

The Canadian deal would be important to Boeing or Lockheed Martin for bragging rights and sales dynamics, but both companies can survive a loss. The Super Hornet program, whose orders were so low in early 2016 that Boeing was considering self-financing its production just to move the line forward, now has commitments from the U.S. Navy as well as a number of international orders. And the F-35 program – in addition to more than 2,000 orders expected from the United States – has orders from a dozen other countries, with competitions coming up in Germany, Switzerland and elsewhere, where it will be the favorite.

Boeing and Lockheed Martin have also enjoyed a constant stream of new defense rewards outside of fighters.

Investors can rest easy owning either stock, although both, I prefer Lockheed Martin for fresh money right now. The Canadian fighter jets deal, whenever it is finally announced, will be a nice addition to someone’s already strong defense portfolio.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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