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Morningstar | Boeing's T-X Trainer Win Is a Nice Positive but it has Much Broader Strategic Implications

On Sept. 27 a Boeing-Saab partnership was awarded a contract for the U.S. Air Force's next generation training jet. The workshare split between Boeing and Saab remains unclear, but Boeing appears to be taking the lead on assembly, while Saab is more focused on development engineering and production of the aft fuselage. Although the T-X trainer win is a positive and comes on the heels of two other wins (the U.S. Navy's MQ-25 and the U.S. Air Force's UH-1N replacement) we were already modeling accelerating growth for Boeing's defense business and we don't think T-X will materially impact Boeing until 2023. As a result, we anticipate increasing our fair value of $320 by less than 5%.

The U.S. Air Force emphasized price; a Lockheed executive even mused out loud last year that T-X had become a “low price shootout.' This means Boeing probably made a decision to absorb the nonrecurring costs it incurred (perhaps $2 billion) during the development of its all-new trainer with Saab. Boeing pricing also had to overcome the risk adjustment the U.S. Air Force likely put on their clean-sheet design because competing offerings from the Lockheed Martin-KAI team (the T-50A) and Leonardo DRS (a modified M-346) were more mature. In addition, T-X development will be conducted under a fixed price contract, which means Boeing and Saab will shoulder the financial risk should cost overruns materialize.

We think the T-X trainer win has three, broader strategic implications for Boeing: it positions the company for the next generation U.S. Air Force fighter, it potentially gives Boeing a new light attack jet product, and it makes the launch of Boeing's next-generation mid-size, or NMA, commercial aircraft a bit more likely. We think that the Black Diamond manufacturing initiative that reportedly underpins T-X may also play a role in the NMA's production. This win lends credibility to Black Diamond and could enable cross-program synergies, thereby improving the NMA business case.

Per U.S. Air Force budget documentation, the approximately $1.3 billion system development and demonstration phase will end in late 2022, at which point the T-X program will move to production and deployment. However, we think there is a risk of delay, which means higher margin production work may not occur until 2024. Over its life the program will likely be worth more than the $9.2 billion IDIQ contract announced today. The baseline program calls for 350 trainer aircraft and 46 ground-based training systems, and these totals are included in the announced contract value. While we don't think there is a massive international market for Boeing and Saab's T-X trainer, we do believe that roughly 30-45 upgraded T-X models in addition to the 350 aircraft are likely to be ordered by the U.S. Air Force for Red Air adversary training.

We also believe the T-X trainer program is well-insulated from potential budget cuts due to the aging T-38s that desperately need to be replaced; the fleet has experienced a host of reliability issues and crashes. Indeed, the last Northrop Grumman T-38 aircraft was delivered in 1972. Moreover, even if budget cuts or a slower procurement cadence materialize for the program, Boeing would stand to benefit since it is under contract through 2026 to maintain and upgrade the existing fleet of T-38s.

It's unlikely that there will be another major Department of Defense aircraft program awarded in the next 10 years and Boeing went into the T-X competition knowing that by the late 2020s its fighter assembly lines in St. Louis could finally be winding down. A lack of a fast jet production line could hinder the company's ability to bid on the U.S. Air Force's next-generation fighter aircraft program and put Boeing at a distinct disadvantage relative to Lockheed which will most likely still be producing F-35s out of Fort Worth. Over the near- to mid-term, we also think that the T-X trainer design could be modified and sold as a light attack aircraft. This development would not be favorable for Textron, which is trying to sell its own light attack jet, the Scorpion.

Turning to the next generation mid-size aircraft program--a wide-body commercial aircraft that Boeing could launch next year--the T-X program reportedly makes use of Boeing's secretive Black Diamond manufacturing technology initiative, reducing production time and in-service maintenance costs, we think Black Diamond could also play critical role in delivering an NMA with a price tag sufficiently low for airlines and lessors. This win might lend more credibility to the Black Diamond effort and enable Boeing to share manufacturing best practices between the military T-X trainer aircraft and the commercial NMA assembly line. Indeed, these kinds of cross-company synergies between the defense and commercial arms have been a priority for CEO Dennis Muilenburg.