On November 6th, United Technologies Corporation (UTC) closed the sale of its Sikorsky aerospace unit to defense giant Lockheed Martin for $9B. Does this acquisition improve the strategic position of both companies or will Sikorsky prove to be a white elephant?
Using analytical frameworks (SWOT analysis and Porter’s Five Forces), it’s become clear to us that Sikorsky plays in a tough business which is getting tougher.
Steep capital requirements and the complexity of defense procurement discourages new entrants and thus, this is one competitive force that Sikorsky is less likely to contend with. However, the typically “all-or-nothing” nature of defense contracts coupled with enormous development costs, long product lifecycles (making opportunities to win new business less frequent), and growing international competition make profitability ever more difficult, even for established incumbents.
Lockheed Martin, Sikorsky’s new parent company, is very different from United Technologies. It is possible that both Sikorsky and Lockheed Martin will be able to generate value from their relationship that the old UTC-Sikorsky relationship never could. Conversely, Lockheed Martin - already a mammoth company - could be suffering from classic “bigger is better” syndrome in acquiring a well-known but ultimately incompatible business. Our assessment of strategic fit starts with a consideration of the Lockheed Martin’s current business portfolio, which today includes:
- Aircraft (Includes: C-130 Hercules, F-16 Fighting Falcon and F-35 Joint Strike Fighter)
- Electronic Warfare
- Ground Vehicles (including armored fighting vehicles and rocket artillery)
- Missiles and Guided-Weapons
- Radar Systems
- Naval Combat Systems (including the Littoral Combat Ship)
Certainly, Sikorsky is now part of a broad and deep portfolio of defense products.
With this in mind, we see five things which Sikorsky and Lockheed Martin must do to avoid the white elephant syndrome and extract real value from the transaction:
- Continue to lead by winning the contract(s) to replace the H-60 series of helicopters.
UH-60 Black Hawk helicopters have been the backbone of the U.S. Army helicopter fleet for over thirty years, with several thousand units delivered. No other current Sikorsky product offering represents the potential unit volume or revenue which the company realized from the 60-series aircraft. To remain a world-leading supplier of rotorcraft, Sikorsky needs to win the contract to replace the Black Hawk. Failing to do so would likely mean that arch-rivals Boeing or Bell Textron would produce the H-60’s replacement. This would relegate Sikorsky to also-ran status for a generation and might threaten the company’s very existence. With so much at stake, it seems that Lockheed must have a pretty high confidence level that they and Sikorsky can be successful in this critical procurement. As the leading defense contractor in the country, LM likely has influence and experience within the defense establishment that UTC could only dream of. This influence significantly increases the effectiveness of the lobbying effort which must accompany Sikorsky’s offering to replace the 60-series helicopter.
- Diversify and find other buyers for the CH-53K King Stallion.
The newest helicopter in Sikorsky’s stable is actually a development of the venerable CH-53 platform which dates back to Vietnam. The CH-53K King Stallion is a world-class heavy-lift platform, one of only a handful available today. Sikorsky’s main challenge to the CH-53K is that to-date, nearly every customer on earth has chosen to procure Boeing’s CH-47 Chinook platform instead. Sikorsky will need to find ways to chip-away at Boeing’s near-monopoly in the segment. Otherwise, the CH-53K could wind up a low-volume platform representing a mere footnote in Sikorsky’s history. At present, Sikorsky is slated to deliver approximately 200 King Stallions to the United States Marine Corps, the aircraft’s only major customer to-date. Due to the U.S. Army’s commitment to Boeing’s CH-47 platform, Sikorsky in unlikely to find significant additional volume for the King Stallion within the U.S. military. However, LM’s fixed-wing aircraft offerings include a number of platforms which are ubiquitous throughout the western world, including the C-130 transport aircraft and the F-16 fighter jet. With the procurement of these aircraft by dozens of foreign partners, LM has a line of sale into foreign militaries that Sikorsky could not match as part of UTC. This significantly increases their ability to market the King Stallion.
- Avoid being usurped by substitute products using new technology and invest in unmanned product offerings.
Unmanned aerial systems directly threaten several Sikorsky products. While unmanned vehicles are unlikely to replace large troop/passenger-carrying aircraft like the Black Hawk and King Stallion any time soon, Sikorsky’s portfolio of light helicopters is vulnerable. Unmanned aerial systems (UAS) have the capability to perform many of the missions for which Sikorsky markets their light piston and turbine-powered helicopters. At present, unmanned rotorcraft are performing reconnaissance (Northrop Grumman’s Fire Scout) and logistics (Kaman’s K-Max) missions for the U.S. military. As unmanned systems become more widely available and capable, the market for manned military aircraft, even helicopters, is likely to see slowing or even negative growth in the coming decades. LM already has an advanced unmanned aerial system program, including the aforementioned K-Max which is managed by a joint Kaman-Lockheed Martin partnership. LM’s other UAS offerings include fixed and rotary-wing as well as lighter-than-air platforms. The addition of Sikorsky’s product line offers LM the opportunity to develop more complex and capable rotary-wing UAS derived from Sikorsky technology. The presence of a dedicated UAS division within LM is an indicator of LM’s interest in and commitment to UAS. We expect to see Sikorsky technologies migrating to this unit and perhaps even more explicit collaboration between Sikorsky personnel and the LM UAS team in the not too distant future.
- Curtail investment and forget about manned fixed-wing aircraft.
While Sikorsky is near-synonymous with helicopters, the company has a limited portfolio of fixed-wing aircraft. These products include the M28 turboprop and the Reconnaissance Fixed-Wing Aircraft (RFWA). The M28 turboprop, licensed from Polish manufacturer PZL, is at best a “me-too” offering in an already crowded field of twin-engine turboprop transports. This product is unlikely to see significant growth in such a fragmented and near-commoditized market. Sikorsky’s RFWA is a legacy platform dating back to the 1980’s. Arguably, light and slow manned fixed-wing reconnaissance aircraft like the RFWA are an anachronism in an era of unmanned systems. No one is going to pay two pilots to loiter over an area of interest when a drone can do just as good of a job. Sikorsky should divest their manned fixed-wing offerings, especially since Lockheed Martin already has a large and extremely successful portfolio of manned fixed-wing aircraft. This portfolio includes a number of offerings which have a much lower vulnerability to unmanned substitutes than the RFWA such as the F-22 Raptor and the F-35 Joint Strike Fighter. Unlike reconnaissance aircraft, high performance fixed-wing (and stealthy) combat aircraft are currently the exclusive domain of manned platforms and are likely to remain so in the near-term. Sikorsky’s meager offerings are unlikely to move the needle on LM’s position in the segment. A more likely scenario is the transfer of Sikorsky’s manned fixed-wing offerings to LM’s aircraft division, allowing Sikorsky to focus solely on rotorcraft. The loss of these systems from the Sikorsky balance sheet likely has no meaningful effect on their revenue or profitability.
- Integrate Sikorsky’s legacy after-sale support business into LM’s Training & Logistics unit.
There are thousands of 60-series helicopters in service around the world. Despite the U.S. Army beginning the process to procure a replacement, thousands of airframes will stay flying well into the middle-part of this century. These airframes represent untold millions in revenue for spares, service, upgrades, and training. Under UTC, Sikorsky could have captured this revenue to supplement income from sales of new airframes. However, as a world-leading supplier of fixed-wing aircraft, LM likely already has a large, capable, and profitable after-sale support business. While Sikorsky previously claimed the ability to service a number of LM’s platforms (C-130 and F-16), it is unlikely that Sikorsky’s after-sale support capabilities exceed those of LM. A likely scenario is that technical service contracts owned by Sikorsky (at least for non-Sikorsky aircraft) will be transferred to LM’s Training and Logistics unit. Revenue derived by Sikorsky from after-sale support could even be stripped from the company balance sheet entirely. Such a move would pressure Sikorsky to generate profits solely from the sale of new airframes, a driver not present under UTC.
Sikorsky is a legendary aerospace company; their products having been a major part of the U.S. military helicopter fleet for sixty years. However, their mainstay product is reaching the end of its lifecycle. The company will need to step into the future and not only find the “next big thing” but convince the U.S. Department of Defense to buy it in quantity.
Lockheed Martin’s acquisition of Sikorsky appears to significantly strengthen their ability to do precisely that.
Sikorsky is now able to reap the benefits of a well-connected and influential parent company, a critical factor in selling an H-60 replacement and generating additional volume from the King Stallion. The backing of a much more capable and complimentary parent company strengthens their ability to develop and market their core manned rotorcraft products.
As for Lockheed Martin: they have bought into a lucrative defense market segment which was previously missing from their portfolio. They have also added additional incremental revenue from Sikorsky’s fixed-wing and after-sale support businesses. It's no white elephant, Lockheed Martin’s Sikorsky’s acquisition significantly improves both companies’ strategic position.