Canadian Defence Review

 

July 2013

 

F-35 Lighting II: Industry highlights the economic benefits

Lockheed Martin’s next-generation fighter aircraft has surprising cross-country business support.          

 

Canadian defence sector procurements rarely occur based on a product’s merit alone. Political, economic, financial and other interests, all inevitably worm their way into a process that many believe should be driven by military necessity. So it has been surprising that proponents of Lockheed Martin’s controversial F-35 Lightning II have thus far mostly focused arguments in favour of this next generation fighter on its capabilities. The process has been led by Royal Canadian Air Force and Department of National Defence officials, who have repeatedly lauded the aircraft’s low stealth footprint, flexibility and other attributes.

 

In recent weeks that strategy has expanded. Spurred by the federal government’s decision to review Canada’s participation in the F-35, business leaders have also begun to speak out about the considerable economic benefits stemming from the aircraft’s development. “It’s a great opportunity to take part in an initiative of global scope,” says a Lockheed Martin spokesperson. “Beyond equipping Canada with the most modern and up-to-date defence technology, participation in the F-35 Lightning II program, will enable its aerospace industry to remain at the forefront of industry technological innovations and help it reinforce its role as a global sector leader.”

 

Projected: $10 billion in economic opportunities

What is often surprising to many Canadians is the fact that this country has been a leading player in the F-35 program right from the start. Its early investments (which total $230 million to date) position it amidst an exclusive group of nine partner nations (the US, Canada, the UK, Netherlands, Australia, Denmark, Norway, Turkey and Italy) which can participate in the aircraft’s global supply chains.  With close to 4,000 aircraft expected to be produced over the project’s lifecycle, that isn’t chicken feed.

 

“This is a very important program,” says Larry Glenesk, co-chair of a 20-member Canadian JSF Industry Group, which is being formed to help promote the fighter. “The last jets that Canada bought will have been around for more than three decades by the time they are retired. The new ones will last at least as long. So it’s crucial we make the right decision.”

 

For Glenesk, the F-35 Lighting II is the clear best choice. Despite the fact that the Canadian government has yet to sign a formal contract to buy the fighter jets, and has asked other manufacturers about alternatives, this industry veteran doubts that a new formal competition will be opened.

 

“The economic benefits that Canada derives from participation in this program are huge,” says Glenesk. “There have already been more than $450 million in contracts awarded to Canadian companies. Furthermore there are projected to be $10 billion in overall development and production opportunities, which will generate 53,000 person years of work over the life of the deal.”

 

Avcorp: developing new technologies

Glenesk’s “day job” as vice-president of business development at Avcorp Industries, the sole-source supplier of outboard wing assemblies for the F-35 carrier variant, gives him a first hand view of how the process is unfolding. The publically-traded company, which employs 430 people at its aero-structures facility in Delta, British Columbia and between 80 and 90 at its composites plant, in Burlington, Ontario, provides an excellent example of how participation in the fighter jet program is benefitting industry.

 

Avcorp built and equipped a 6,000 square foot secure, climate-controlled area, within its main plant, to house production.

“We could eventually land as much as $600 million in new business for ships sets that we will producing for the first 340 carrier aircraft,” says Glenesk. “That number could rise to close to $1 billion, if the US Navy, as expected, orders an additional 200 aircraft to replace its Super Hornets.”

 

The investments are more than worth it says Glenesk. Not only will the F-35 orders create and maintain Canadian aerospace jobs, they will also significantly expand the company’s capabilities. “We are getting access to highly-sophisticated know-how,” says Glenesk. “This will surely boost our productivity going forward.”

 

One example, a technology transfer from Lockheed Martin and BAE Systems, includes development of highly-sophisticated motors and cutting tools to drill the more than 2,000 holes needed in each wing assembly ship set. The process, known as “stack-drilling,” involves drilling holes through five layers of composite skins and the underlying aluminum and titanium substructures, all within extremely tight tolerances.

 

Magellan: western Canada gets in

According to Scott McCrady, Magellan Aerospace’s JSF program director, benefits stemming from Canada’s involvement are well-spread across the country. That’s particularly true for Magellan’s Winnipeg-based Bristol Aerospace division, where the company is setting up a 138,000 square foot advanced composite manufacturing facility to supply the program.

 

“It’s been great for the region’s economy,” says McCrady. “We are making significant capital investments and setting up equipment ranging from precision milling to coordinate measuring and other machinery.” This all adds up to about 100 Magellan employees directly assigned to F-35 related work, who will put in more than 2,000 man years over the projected program life. Local universities and colleges will also be kept busy, training the workers who will operate specialized Non-Destructive Testing (NDT) and other equipment.

 

The new investments could not have come at a better time, because it looks like the Bristol unit will be kept busy. Magellan has already booked close to $100 million worth of business on the project and those numbers are heading north. In June the company signed a memorandum of understanding (MOU) with BAE Systems to produce 1,000 sets of horizontal tails for the F-35 conventional take-off and landing (CTOL) variant, which accounts for about half of all F-35s that will be built. According to company officials, the first Magellan-built production horizontal tail assembly is expected to be installed and tested on an F-35 by early 2014.

 

Work on this component alone, which will take place during the coming two decades, could be worth as much as $1.2 billion over the life of the program. When all of Magellan’s contributions are added up, JSF-related manufacturing work could be worth as much as $2 billion.

 

Héroux-Devtek: a “once in a lifetime” opportunity

Gilles Labbé, president of Montreal-based Héroux-Devtek, for his part, doesn’t mince words when it comes to the F-35 Lighting II.  “It’s a once in a lifetime chance,” says Labbé. “The ability to bid on all the global supply-chain business is key. When else will Canadian aerospace businesses be able to produce parts for a major project of similar scale”?

 

Labbé knows first hand how much that kind of business is worth. Last year Héroux-Devtek sold several of its factories to Precision Castparts, including one in Texas, which was heavily involved in supplying the F-35 program. The deal generated an estimated $230 million after expenses, at a highly attractive EBITDA multiple, in part because of the $1 million in parts that its Texas locale in particular was producing for the Lightning II.

 

Not surprisingly Heroux-Devtek’s involvement in the JSF at its existing facilities continues. Labbe, expects that the company will produce between $150,000 to $200,000 worth of parts per aircraft, notably the flight-critical up-lock systems which open and close the planes’ under-carriage doors and the actuation system to retract and extend its landing gear. The overall work could be worth than $20 million in annual billings by the time the F-35’ annual production reaches its expected 150 unit pace.

 

Pratt & Whitney: pressure from a one-engine plane

One of the F-35 Lightning’s most significant innovations relates to Lockheed Martin’s claims that this next generation fighter aircraft can fulfill the missions to which it is assigned in Canada with just one engine. If the company is right, this would be a major advance. The challenges posed by large distances in the remote and cold Arctic regions, were one of the main reasons that the F/A-18, which has two engines, was initially chosen to fulfill this key role several decades ago.

 

The F-35’s one-engine configuration puts huge pressure on the supplier of this key component, Pratt & Whitney, whose Canadian subsidiary will also be involved in the project. “We are producing the fourth and fifth stages inside the compressor, two integrally bladed rotors, which are a crucial component of the overall engine,” says Richard Bertrand, vice-president (government affairs) at Pratt & Whitney Canada. “Because of the high quality standards in our facility, we will be able to produce it all as one piece, with higher tolerances and a longer shelf life, leading to a far superior product.”

 

Ironically Pratt & Whitney Canada’s involvement in the F-35, which amounts to about $45 million in contracts to date, appears modest relative to its capabilities. The company employs an impressive 6,200 highly skilled professionals throughout the country, including 5,000 in Montreal. Its $500 million annual budget makes it one of Canada’s leading research and development technology leaders, which should be primed to make further advances as the initiative progresses. “We have identified $1 billion in potential engine opportunities here in Canada,” says a company spokesperson. “You can be sure that we will be trying to book more of that work.”

 

GasTops: embedded in a long supply chain

When the US government approved the purchase of the F-35 Lightning II more than a decade ago, it was the largest military procurement in history for that country. Although Canada has been projecting to buy fewer planes, the procurements, if completed, would set records here too. So it is hardly surprising that production on the project will require a huge extended supply chain, which is leaving open numerous opportunities for niche players.

 

One example is Ottawa-based GasTops, which earlier this year announced that it has shipped its 10,000th Metalscan sensor, a product that monitors debris in oil. According to Dave Muir the company’s president, lower-tier status has not prevented GasTops from making important contributions to JSF. In fact, the precision of early problem detection technologies such as GasTops sensors, which provide crucial engine bearing and blade health information, is one of the main reasons that Lockheed Martin officials believe that the F-35 Lightning II can do its job in Canada with just one engine.

 

Debris accumulation in the oil is one of the key indicators of a malfunction, so Metalscan sensors, which will be used in the F-35, play a key role in helping determine if an engine is working properly. ‘We sell our sensors to UTC Aerospace, a sister company of Pratt & Whitney, which itself is a sub-contactor,” says Muir. “So although we are not producing the aircraft ourselves, the program’s benefits are spread so widely that we have been able to make an important contribution.”

 

Composites Atlantic Limited: solid Eastern Canada benefits

While Canada’s aerospace industry is widely recognized to be concentrated in Quebec, the F-35’s proponents appear to be surprisingly geographically diverse. This provides a clear signal of how widely disbursed the program’s benefits are spread, no doubt a reflection of the influence of Canada’s industrial and regional benefits objectives. For example Composites Atlantic Limited, which will be supplying outer moldline skins (panels that will be on the upper center fuselage section) to Northrop Grumman, a higher tier player, will be doing a lot of the work in the Maritime provinces.  

 

According to Claude Baril, its president, Composites Atlantic, which is owned by EADS, employs 380 people who design, develop and produce advanced composites for the aeronautic, space and defence industries. The company, which will also be producing complex composite inserts for the weapons bay doors, operates out of three locales, including a design facility in Mirabel Quebec. However the bulk of the 60 people who will be working on F-35 related business will be housed at Composites Atlantic’s Nova Scotia facilities, notably its Lunenburg site (the other site is a simulation lab located in Dartmouth).

 

That said, according to Baril competition to get work on the program is fierce and Canadian companies that want in will have to work for it. “It’s not easy,” says Baril. “You have to be highly qualified and you have to be able to demonstrate that. Quality is also a major factor as are delivery times. You have to respond to demands quickly. Then of course comes price. F-35 value-chain players are trying hard to keep costs down. So if you want to participate you have top sharpen your pencil.”

 

CMC Electronics: redefining niche markets

Another interesting observation regarding Canadian participation in the F-35 Lighting II supply chain relates to how varied the contributions are. For example while many suppliers are building entire new plants to accommodate the work, others are making smaller (in dollar amounts), though high-value niche contributions.

 

Montreal-based CMC Electronics for example is producing an optical transceiver for Harris Corporation that will be used in up to 57 different locations on the F-35. The company also provides a laser range module used in the electro-optical targeting system. According to Janka Dvornik, a company spokesperson, these contributions are nevertheless highly specialized and will lead to the creation of eight new jobs.

 

That said, although the contributions are modest, relative to the dollar value of the aircraft that does not mean they are not advanced. “The products designed and produced by CMC have pushed the leading edge of technology,” says Dvornik. “(Furthermore), CMC has been able to use the core expertise accumulated, to capture four other programs, and we believe it positions us well to bid for more aerospace work down the line.”

 

CAE: involvement only certain if a final deal is inked

The big challenge right now for many exiting and potential F-35 Lightning II supply chain partners relates to the latest uncertainties surrounding the program. One potentially major player is CAE, which in June signed a memorandum of understanding to provide training and support service in Canada for the aircraft. According to Gene Colabatistto, CAE’s group president (military), the deal potentially provides CAE with exceptional opportunities. For one it gives the company the chance to demonstrate the value its 8,000 employees, deployed at more than 100 sites around the world, can bring to a project that also has global reach.

 

The fit is good for the Government of Canada too, which recently recognized training systems and solutions as one of the country’s defence sector’s key industrial capabilities. As is that were not enough, the markets CAE is active in will almost certainly be entering a rapid growth phase in coming years as defence departments look to stretch resources says Colabatistto. Like many militaries, the Royal Canadian Air Force has said it intends to increase and optimize the use of synthetic training as a means of enhancing safety, reducing stress environmental impacts and cost effectively achieving targeted readiness levels.

 

However as CAE’s top defence official points out, this is all contingent on a positive result stemming from the Harper Government’s review of the country’s participation in the F-35 Lighting II program. “CAE will only be involved if Canada buys the aircraft,” says Colabatistto. “Suffice to say that the support, integration, operations and maintenance of F-35 training systems would represent a significant opportunity for CAE.”

 

Will it be enough?

Another big question underlying the recent industry efforts to boost the F-35 Lightning II is that while they are no doubt impressive, it is far from clear in the current Canadian financial environment whether they will be sufficient to keep the program on track. No one really knows the effect that recent sequestration-related budget cuts initiated by the US Congress earlier this year will impact the program, particularly unit costs, a highly-sensitive data point here in Canada.

 

“So far everything appears on track,” says the Lockheed Martin spokesperson. “Flight testing is proceeding as scheduled, and we came in 9% ahead of the 2012 plan. Firm orders continue to accumulate and we now have 75 aircraft air ready. Our first operational aircraft is also flying and we have made our first international delivery.”

 

“Right now we are focusing on things that we control,” the Lockheed Martin spokesperson continued. “That includes developing the best and most advanced fifth generation fighter on the planet. Here in Canada that also means making the case for the significant benefits that will accrue as a result of our participation. If we do our jobs right we believe that all else will fall into place.”  

 

peter@peterdiekmeyer.com

 

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