A Bell-Sikorsky combination could be too big for the Pentagon to handle.
Bidding for Sikorsky, Reuters reports, rests now with Lockheed Martin and Textron. As noted here a few weeks ago, the tax implications remain daunting for United Technologies, particularly now that Textron’s proposed Reverse Morris Trust has elicited no interest. Spinoff does remain in the running as the high-value option for shareholders. Regardless of what benefits the owners, though, procurement strategists should care about who those owners are. Selling Sikorsky to Textron would create a firm that dominated supply of rotorcraft to the US military, with potentially adverse implications for the conduct of its own buyers.
As I wrote earlier, an independent Sikorsky on the NYSE would change little for the buyer. The new company would need to pay for some new corporate functions from its existing sales forecast. Profitability might suffer, as Sikorsky’s low margins are what led UT to seek an exit. That said, the firm would be a Fortune 500 in its own right, so the costs would be manageable. Moreover, the US Government has shown that it cares more about solvency than profitability, and doesn’t allow its suppliers the margins that would make profit-fueled independent R&D really valuable. A separate Sikorsky should concern almost no one politically.
A Lockheed Martin Helicopters, however, solves some long-standing problems for Lockheed, and maybe for customers too. As Byron Callan of Capital Alpha noted, Lockheed’s interest “is not surprising, given its long-standing work on Sikorsky platforms, including the SH-60 program… and the Combat Rescue Helicopter.” I hate to say it again, but we should also recall two unfortunate aircraft programs which Lockheed screwed up as prime contractor. Its presidential transport effort with Agusta and its Airborne Common Sensor with Embraer failed in large part because the company’s electronics people wouldn’t or couldn’t leverage the experience of its aircraft people. (The Wall Street Journal’s 2006 story about the ACS is illuminating.) With Sikorsky inside, Lockheed next time would have an actual helicopter company to keep it in line.
On the other hand, as Reuters did observe, Lockheed’s efforts to work with other aircraft companies have indeed shown that vertical restraint shouldn’t be feared in this case. That’s the technical term for the refusal by a supplier of a crucial input to work with a competitor, even when that’s what best for the ultimate customer. Chances are, Lockheed would work with all comers, make its money, and keep that main customer happy.
A Bell-Sikorsky combination would indeed create the largest rotorcraft company worldwide. With $10.8 billion in pro forma 2014 sales, Textron’s combined rotorcraft activities would be almost a third larger than those of today’s Airbus. The two product lines overlap only slightly, and that’s generally viewed favorably in antitrust considerations. The problem is that a Bell-Sikorsky would also consolidate most of the US military’s supply of rotorcraft in a single firm. The Pentagon will still buy its Chinooks, and half of each Osprey, from Boeing, but those are declining lines.
The Future Vertical Lift program lies a ways in the future, but a Bell-Sikorsky would have most of the work on the two funded entrants in the Joint Multi-Role rotorcraft demonstration program. Bell is developing another (smaller) tiltrotor, the V-280 Valor; Sikorsky and Boeing are together working on the SB-1 Defiant compound helicopter, an extension of Sikorsky’s work on its S-97 Raider. Airbus Helicopters had considered bidding its own compound concept, the X3, but were put off by the Pentagon’s demands for its intellectual property. Barring some dramatic development, whatever the military gets next will come from Bell-Sikorsky.
As I noted earlier, it’s entirely possible that Airbus would not object to Textron’s buying Sikorsky. As the Pentagon’s dependency on the Texas-and-Connecticut company would be considerable, its immediate solution to re-diversifying its supply lines could be looking closer at aircraft from Mississippi. The US Army’s enthusiasm for Airbus’s low-cost Lakotas looks set to continue, and the US Coast Guard has been happy with its aircraft for a long time. I will not be shocked by an amicus brief against such a deal, and it’s probably a question that Airbus strategists are debating right now.
At best, though, that’s a runner’s-up solution—for both Airbus and the Pentagon. One might even call this mooted company a European-style national champion, and that’s where the problem resides. Buyer behavior could slowly change from encouraging competition to forestalling it. Buying rotary-wing aircraft from Airbus could come to elicit the same sort of political hostility as buying fixed-wing aircraft from Airbus, if supporters of Textron chose to play that card the way supporters of Boeing do today. Would source selectors seek alternatives from Airbus and Agusta Westland, or just presume that they didn’t have any? If so, the deal could constitute a sharp step backwards for transatlantic military-industrial integration.
Is this really what American military procurement strategists would want? From a spun-off and publicly-traded Sikorsky, military buyers would still get their helicopters. A winning bid from Lockheed Martin would still yield helicopters, and maybe fewer fiascos. Should Textron have the winning bid, however, it’s not clear what long-term remedies would support healthy competition for the Pentagon’s business. Change in the strategic conduct of the combined seller, and the quotidian conduct of American military buyers, are hard to gauge in advance.
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security. This essay updates his assessment of 24 June.