Analysis: South Korea setback shows pressure on Boeing warplane orders

Wed Sep 25, 2013 1:06am EDT
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By Andrea Shalal-Esa

WASHINGTON (Reuters) - South Korea's decision to reopen bidding for a fighter-jet contract rather than accept Boeing Co's (BA.N: Quote) F-15 Silent Eagle signals a wider problem for the aerospace giant: revenue from its most profitable but aging military aircraft is winding down.

At the same time, U.S. government budget cuts have dimmed the prospects of Boeing developing replacements for the higher-margin legacy aircraft, such as the F-15, acquired when it merged with McDonnell Douglas in 1997.

That suggests overall profit margins from Boeing's defense business will come under pressure in coming years. It is a situation worsened by the rock-bottom bids the company has made to build a new U.S. Air Force refueling plane and the U.S. ground-based missile defense system.

"Revenues from their legacy aircraft programs are going to ramp down to painful levels" over the next three years, said Richard Aboulafia, analyst with the Virginia-based Teal Group.

"The day of reckoning has just been accelerated a notch."

Boeing's defense business already generates the lowest profit margins of the big weapons makers, and is likely to head even lower, analysts say.

Manufacturers are relying on foreign orders to help them weather the U.S. spending downturn. But Seoul's decision to launch a fresh fighter competition, announced early Tuesday, highlights the vagaries of foreign military competitions. Once-solid orders can vanish overnight, often through no fault of the bidding company.

In the South Korean competition, Boeing had followed all the bidding rules and cemented its close, six-decade-old ties with the South Korean government and industry. Behind closed doors, some government officials were describing Boeing - the only company that came in under Seoul's 8.3 trillion won ($7.7 billion) ceiling - as the likely winner.   Continued...

South Korea's Defense Ministry spokesman Kim Min-seok leaves after a briefing at the Defense Ministry in Seoul September 24, 2013. REUTERS/Kim Hong-Ji