F-35 Dominance, And Budget Cuts, Are Forcing Lockheed Martin's Rivals To Hunt For Sales In Increasingly Unstable Markets

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F-35
The United States does not need and cannot afford the Pentagon’s request for the F-35 Joint Strike Fighter, which will cost -- incredibly -- a mind-boggling $134.5 million per plane.

By the time the Lockheed Martin F-35 is fully combat-ready in 2018, it will be well on its way to 50 percent of the global jet fighter market

That success, unprecedented in the history of military aviation, could push U.S. and European current-generation fighters -- which do not have the stealth capabilities of the F-35 -- out of production for good, according to Richard Aboulafia, a top expert in the defense and aeronautical industry. But the threat the F-35 poses to current jet fighters only underscores a far deeper issue in the defense industry: The new fighter's success may push Lockheed Martin's rivals to sell advanced, lethal aircraft to countries that may be unstable, led by undemocratic regimes or turn hostile to Western interests. Cuts in the U.S. defense budget may have the same effect. 

“The U.S. has always had the advantage that it has a really large military, meaning there was a lot of business for contractors,” said Ivan Eland, a senior fellow at the Independent Institute, a non-profit research organization. “But when that business dries up for whatever reason -- budgets cuts, sequestration, or all the money is being sucked into this F-35 super project -- we start selling to places we probably shouldn’t.”

The sale of 10 Apache helicopters to Egypt in April by Boeing, according to Eland, was one such sale. “That sale of Apaches to Egypt was madness,” he said. “Egypt has gone back and forth -- from Hosni Mubarak to the Muslim Brotherhood then to Sisi. These revolutions go in cycles, so that sale is a good piece of business one minute, then it’s a humanitarian disaster when the weapons are turned on the population the next.”

But that is nothing new in the world of defense sales. After all, the United States makes regular military sales to Saudi Arabia, which may be a close U.S. ally but has a questionable human rights record. And in the late 1970s the U.S. sold the repressive Iranian government of the shah one of the most advanced aircraft fleets in the world -- but after the Islamist revolution of 1979, those state-of-the-art F-14 Tomcat fighter jets were suddenly in the hands of a U.S. enemy.

The State Department released a statement in early 2013 that showed that foreign defense sales had more than doubled, going from $34 billion in 2011 to $69 billion in 2012. Boeing’s international sales, for example, now make up nearly a quarter of its defense-sector revenue. 

It’s been more than ten years since the U.S. bought an F-16, which is still the mainstay of its air force.  The only thing that keeps the Fort Worth, Texas, plant open is sales to foreign buyers, like Israel, Iraq and the United Arab Emirates, all good customers for the Lockheed Martin (NYSE:LMT) jet. Boeing (NYSE:BA), Lockheed's only jet fighter rival in the U.S., will end production of its F/A-18E/F Super Hornet by 2020, unless the National Defense Authorization Act tells the U.S. Navy it can buy more. And Boeing's other jet fighter, the F-15 Eagle, is not faring much better: After a contract with Saudi Arabia runs out, it has no more buyers.

The U.S. Air Force, Navy and Marine Corps, as well as the biggest nations allied with America, have all moved on to the F-35, a multi-role airplane touted as being so versatile it can replace at least four different aircraft -- although many critics beg to differ.

“It’s not a positive picture. It’s a very difficult future for the fighter industrial base globally,” Aboulafia, who is vice-president of the Virginia-Based Teal Group, told National Defense magazine in an Aug. 19 report.

The F-35 costs are estimated to top $1 trillion by the time the program ends in 2055, according to a Pentagon report. Current international partners are expected to purchase around 400 aircraft between them, with the U.S. looking to buy upwards of 1,800.

But the F-35s dominance stands for more than just a shift in jet fighter industry, it represents a historical marker in defense policy that affects the entire defense industry. So-called Tier I defense contractors, such as Boeing, Lockheed Martin, Northrop Grumman (NYSE:NOC), Raytheon (NYSE:RTN), BAE Systems (LON:BA) and General Dynamics (NYSE:GD) have all been selling more abroad, according to Aboulafia. The U.S. military cut more than 20 percent of its procurement spending between 2012 and 2013; at the same time foreign military sales increased by more than fifty percent year-on -year to just under $70 billion.  

That growth of sales abroad presents risks. If ISIS militants were able to seize U.S.-made tanks, armored vehicles and guns sold to the Iraqi government, then it's possible that one day a radical militant group could capture the F-16s currently being sold to Iraq, and turn them against the West. "That's all part of a dangerous game," Eland said. "Often times it’s internal factors rather than what's happening on the ground in say Egypt or Syria that dictate what we do, namely lobbyists in Washington. It's hard to strike a balance between foreign policy and what the nations's powerful industrial arms complex want."  

The U.S. can still cut off support for the products sold by American companies if they fall into the wrong hands. “It all ceases to have any meaning pretty quickly after there is a revolution because where do they get parts, software upgrades from?” Aboulafia said. “The thing about complex platforms is they are not like a surface to air missile -- all of these advanced weapons are defunct pretty soon after because there is no access to parts.”

However, access to parts, while difficult for America’s enemies, is still possible. In the 1980s, F-16s were sold to Venezuela, then a friendly nation. A regime change turned Venezuela into an American adversary, so parts and upgrades stopped being delivered from the U.S. -- yet, Venezuelan F-16 are still a relatively serious threat, in part because of smugglers. A federal indictment filed on June 25, 2012, accused four people from Florida of supplying F-16 parts to Venezuela through a shell corporation based in Spain and the U.S.

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