Chinese Construction Drives Submarine Revival

By Stuart Slade, Forecast International

Over the next 10 years, at least 133 new submarines are projected to enter service worldwide, according to Forecast International’s 2015 edition of “The Market for Submarines.” This is the fifth year in succession that the projected number of new submarines has increased following the low point reached in the early 2000s. There are a number of reasons for this revival of construction, including a bow wave of delayed construction programs held over from the late 1990s onward and increasing international tensions expressed as disputes over territorial waters. However, the most significant factor is the intense effort made by the Chinese Navy to modernize and strengthen its submarine arm. More than a quarter of all the new submarines to be built over the next 10 years will enter service with the Chinese Navy.

 

Project 041 Diesel-Electric Submarine

Project 041 Diesel-Electric Submarine

The Chinese submarine fleet is now a very different force from its ancestor of a decade ago. The submarines based on old Russian designs from the 1950s have been withdrawn from service, and the last few examples of Chinese developments from that basic design are being decommissioned. They are being replaced on a one-for-one basis by new classes of diesel-electric attack submarines that draw heavily on modern Russian, German and Japanese influences. The Project 041 may not be quite as capable as the latest products of European and Japanese shipyards, but it has closed the gap greatly and is regarded as being a serious contender on the high seas. More importantly, almost 30 percent of the new diesel-electric submarines entering service during the next 10 years will be Chinese.

Another significant change has been the reappearance of a Chinese nuclear-powered submarine construction program. While construction of nuclear-powered attack submarines has been much slower than expected, with only 7.5 percent of new SSNs projected over the next decade coming from Chinese yards, China’s nuclear-powered ballistic missile submarine program has picked up serious momentum. More than half the SSBNs built over the next decade will be Chinese.

Project 094 SSBN

Project 094 SSBN

There is no doubt that the Chinese submarine fleet is much more formidable than its equivalent of 20 years ago. The question is, why have the Chinese invested so heavily in this arm of their Navy? Attempts to answer this question have led to a fever of speculation about the Chinese trying to establish a worldwide power projection capability or challenge the U.S. Navy for dominance of the Pacific Ocean. Other, less extreme suggestions include establishing an entry-denial capability that would stop the U.S. Navy from interfering with Chinese naval operations. Yet, what all these assessments neglect is the fundamental fact that countries build navies to serve their own national interests. The converse of this is that the national interests of China, as determined by the Chinese themselves, can be assessed by looking at its fleet and how it is deployed.

The answer to that question is particularly clear with the Chinese submarine fleet. While the Chinese have indeed invested heavily in their SSBNs, the priority in deployment is not to Qingdao on the eastern coast, where they might reasonably be expected to deploy against the United States. Instead, all the new SSBNs have been deployed to a new, southern SSBN base on Hainan, where they are better-placed to operate against Chinese regional enemies. The lack of emphasis on and slow construction of SSNs suggest that the Chinese Navy does not anticipate any serious threat to its SSBNs – certainly not a reasonable assumption if the perceived enemy is the United States, but a very reasonable one if said enemies are regional powers with limited ASW capability. Deploying SSKs against the U.S. Navy requires something much better than the existing Chinese designs, but those submarines are entirely adequate to operate in the face of the limited regional ASW capability.

Thus, evidence from Chinese naval construction and deployment strongly suggests that China’s naval buildup is purely in support of existing Chinese regional interests. Assuming that Chinese interests remain regional in nature and do not envision any kind of real confrontation with the United States, then we can expect to see continued construction of China’s SSKs and SSBNs while SSNs take a back seat. Thus, Chinese submarine construction will continue to drive production forecasts for this sector.

Challenges Await Saudi Arabia’s King Salman in the Wake of King Abdullah’s Death

By Nicole Auger, Forecast International

As Saudi Arabia and the international community mourn the death of Saudi Arabian King Abdullah bin Abdulaziz, we are reminded of his reign and what it meant for Saudi Arabia.

The Kingdom of Saudi Arabia is a hereditary monarchy ruled by a single royal family: the House of Saud. The Saud family, which controls the political and administrative functions of the country, comprises about 40,000 members, of whom 8,000 are designated princes. The family members holding key positions of power include the first deputy prime minister, the crown prince, the second deputy prime minister, the defense and aviation minister, the interior minister, and the commander of the National Guard. Presiding over an absolute monarchical government, the king makes all final decisions on matters of state and government.

King Abdullah

King Abdullah

King Abdullah served as Saudi Arabia’s de facto leader for 10 years prior to officially being crowned after King Fahd bin Abdulaziz suffered a debilitating stroke in late 1995. After Fahd died in August 2005, the 82-year-old Abdullah was quickly designated king.

King Abdullah has been acknowledged for a number of forward-thinking initiatives, which made him stand out from his predecessors. Notably, his government was praised by the international community during the 2011 Arab Spring protests for taking a more responsive approach to citizens’ demands for improvement in economic opportunities, political rights, and social conditions. Instead of employing an aggressive stance toward public protestors as other Middle Eastern and Northern African leaders did, King Abdullah launched $36 billion worth of programs that would bring new jobless benefits, education and housing subsidies, and debt write-offs in order to satisfy citizens’ demands. Furthermore, in terms of women’s rights, during King Abdullah’s reign women were granted the right to vote, to run in municipal elections, to be appointed to the consultative Shura Council – the most influential political body in the kingdom, and to compete in the Olympics.

Despite these positive factors, however, King Abdullah did fail to implement other major changes. Most importantly, perhaps, Saudi citizens still lack fundamental rights such as freedom of speech. This subject has come more to light recently, after Raif Badawi, a Saudi Arabian writer and activist, was sentenced in 2014 to 1,000 lashes, 10 years in prison, and a fine for running a liberal website dedicated to freedom of speech. The incident was a reminder of Saudi Arabia’s use of outdated and over-the-top punishments, which also include public beheadings and floggings, against those accused of unlawful behavior.

Salman bin Abdulaziz

Salman bin Abdulaziz

Salman bin Abdulaziz Al Saud, King Abdullah’s half-brother, will now be in charge of the largest and wealthiest country in the tumultuous region. Looking forward, King Salman is expected to face some major challenges and security concerns – concerns that have spurred defense investment to the point that the country now represents one of the largest arms markets in the world. Saudi defense spending is easily the highest in the Middle East in nominal terms.

The major threats to security include internal al-Qaeda sleeper cells, the minority Shiite population in the oil-rich eastern part of the country, regional rival Iran, and the rapidly growing Islamic State movement. However, King Salman, who prior to being crowned served as defense minister, seems well suited for the job. He indirectly addressed the threat of rising violence and regional instability on January 23 in his first speech since becoming king, saying that “the Arab and Islamic nation is in dire need today to be united and maintain solidarity.”

Overall, the kingdom has come a long way under King Abdullah and is now a modern state by most standards. It is unlikely that this shift in leadership will lead to serious instability or to changes in Saudi Arabia’s defense and other initiatives.

Brazil Plans Extensive Modernization for São Paulo Aircraft Carrier

By Rebecca Edwards, Forecast International

The Brazilian Navy is planning an extensive modernization program for its aircraft carrier, the São Paulo (A 12). The program is intended to extend the ship’s life through the 2030s.

São Paulo Aircraft Carrier

São Paulo Aircraft Carrier

The upgrade is expected to take about four years to complete. Studies into the scope of the program are now underway.

The vessel, originally named the Foch, was acquired from the French Navy and recommissioned in Brazilian service in November 2000.

In May 2005, the vessel suffered a fire in its system of steam pipes. Three years later, the ship finally returned to service in April 2008, but modernization and repair work continued. Back in service, the first stage of inspection, which involved the operation of helicopters from the flight deck, was conducted in November 2011. Modernization work continues to this day.

Meanwhile, in March 2014, the Navy began considering replacement options for the vessel. The Ministry of Defense plans to replace the Navy’s sole aircraft carrier with one built domestically. According to Defense Minister Celso Amorim, construction would take place in Brazil, but the ship would be based on a foreign design acquired through a technology transfer agreement. These are long-term plans, however. Construction is at least another 15 years down the road, Amorim said.

Innovative New Features Drive Boeing 702 Orders

By William Ostrove, Forecast International

At one point, the U.S. government accounted for about 90 percent of total Boeing communications satellite sales. Government contracts will continue to be a major source of revenue for Boeing. However, with U.S. federal budget pressures mounting, the company is balancing its order book with both government and commercial contracts. Government orders now make up about 70 percent of sales at Boeing.

Boeing 702

Boeing 702

Commercial contracts are becoming increasingly important to Boeing. Companies such as Intelsat, Asia Broadcast Satellite (ABS), Satmex, and SES have all awarded Boeing contracts for the 702. The contracts from ABS and Satmex are significant because they introduce new technology into the 702 line. The satellites, designated 702SP, feature all-electric propulsion. This will save on weight and cost for the satellite operators.

The Intelsat order represented the first sale of a modified version of the 702, called the 702MP. Although the 702MP will provide less power than the older version of the 702 (now dubbed the 702HP), it will weigh and cost less than its larger cousin. The Intelsat order also demonstrated Boeing’s ability to implement hosted payloads on commercial satellites. Governments and commercial satellite operators are both attempting to increase the use of hosted payloads. Boeing is hoping to leverage its expertise in commercial and government satellite building to expand the sale of hosted payloads.

Boeing’s 702 will continue to be popular in the satellite market, serving both government and commercial users. Boeing continues to demonstrate innovative new features on its satellites, such as electric propulsion. While sales of electric-propulsion satellites have been lower than expected, Boeing expects sales to pick up as the technology is proven.

Oshkosh Deals with Declining Defense

By Richard Pettibone, Forecast International

As economies slowly improve, Oshkosh’s commercial operations are showing signs of growth, while defense continues its slide.

oshkosh-truck-logo

For the fiscal year ended September 30, 2014, Oshkosh reported sales of $6.8 billion, down 11 percent from 2013 sales of $7.7 billion. The company posted a net income of $308.1 million, compared to $316.0 million in 2013.

Defense segment net sales decreased $1.33 billion, or 43.5 percent, to $1.72 billion in fiscal 2014 compared to fiscal 2013. The decrease in defense segment sales was primarily due to an expected decline in sales to the Department of Defense (down $1.08 billion) and lower international sales of MRAP All Terrain Vehicles (M-ATVs).

Under its MOVE strategy, Oshkosh has put in place a plan to deliver long-term growth and meet its long-term financial goals. Under this effort, the company will focus on capturing and improving its historical share in the market recovery; optimizing its cost and capital structure; continuing new product development; and expanding more into international markets.

Although the MOVE program will not be able to counter the downward momentum of defense spending, it will allow the firm to take advantage of recovering commercial markets.

Over four years, Defense sales at Oshkosh have plunged more than $2.5 billion. The slide mirrors the reductions in defense spending brought on by the end of two wars in the Middle East and a desire to broadly cut government spending.

The spike in sales the company enjoyed in 2010 ($9.8 billion) was due to the award of contracts for two major programs. The first was the Family of Medium Tactical Vehicles, which the firm captured from 17-year incumbent BAE Systems. The second was the program to produce M-ATVs for the war in Afghanistan.

Oshkosh's FMTV

Oshkosh’s FMTV

The award of the U.S. Army’s FMTV rebuy over BAE Systems was a potential $3 billion coup for Oshkosh. However, reports indicate that Oshkosh’s profit margin on the program is razor thin. After some hiccups, the program reached full-rate production in the third quarter of 2012.

While the program has since moved ahead smoothly, it did hit a road block in the current budget. According to U.S. Army FY15 budget request documentation (March), the Army Acquisition Objective for the FMTV program remains at 83,185 trucks – 38,095 LMTVs and 45,090 MTVs. However, the same budget request reflects no funding for the FMTV program during FY15-FY16. In response to the Army’s intention to temporarily shut down the FMTV production line for two years, the Senate Appropriations Committee has recommended adding $250 million to the FY15 budget specifically to sustain FMTV production and avoid “expensive restart costs.” Production is forecast to resume at a normal rate in 2016.

Oshkosh's Joint Light Tactical Vehicle

Oshkosh’s Joint Light Tactical Vehicle

Looking ahead, Oshkosh is facing another major competition – for the Joint Light Tactical Vehicle. A win here would provide a much-needed boost to the defense operation’s declining revenues. The Army released the final JLTV Request for Proposals (RFP) in December 2014, clearing the way for AM General, Lockheed Martin, and Oshkosh Defense to submit their vehicle proposals. A firm-fixed-price contract is expected to be awarded in late 2015. The award will cover 17,000 vehicles for the Army and Marines during three years of low-rate production and five years of full-rate production.

The unit may find itself on the auction block following Oshkosh’s reorganization into a holding company. The new corporate structure would make it easier for the firm to sell or spin off units. Defense would be an obvious choice now due to the drag it has on the company’s overall performance.

Bizjet Recovery Slow But Steady

By Raymond Jaworowski, Forecast International

The business jet market is currently in the early stages of recovery. This recovery got underway in 2013, when annual business jet production registered a slight increase after having declined for four consecutive years from 2009 through 2012.

The recovery appears poised to strengthen in the next few years. Most market indicators are positive. Economic growth is continuing, however sluggishly. Corporate profits are strong. Orders for new business jets are rising, and order backlogs at manufacturers have stabilized. The inventory of used aircraft for sale is declining. Flight activity is increasing.

Cessna Mustang

Cessna Mustang

To some extent, though, the business jet sector continues to be a tale of two markets. Demand is quite strong in the upper tiers of the sector, from the super mid-size class up through the long-range segment. In the medium jet class, the picture is a bit mixed but is nevertheless improving. However, in the lighter categories, demand is still somewhat weak.

The market for lighter jets is largely concentrated in North America, the biggest geographic market for business jets but a heavily saturated market as well. While economic improvement in the U.S. has been slow, corporate profits have been robust, allowing businesses to accumulate large reserves of cash. Uncertainty over economic and political conditions, though, has made many of these businesses hesitant to make large capital acquisitions such as aircraft purchases.

The key to unlocking this latent demand in the North American market is continued economic improvement. This should serve to strengthen business confidence and unlock corporate coffers. Greater transparency concerning government intentions regarding taxation and regulations would further boost business confidence.

 

Gulfstream G650

Gulfstream G650

The business jet market is strong in most other regions of the world, with Europe being a significant exception. But even in Europe, the outlook is improving, as the worst of the region’s recent sovereign debt crisis appears to be over.

Meanwhile, as they have traditionally done, business jet manufacturers used the recent market downturn (and the immediate aftermath) to launch several new models. Each of the Big Five established players has at least one new model in design and development.

The recovery in the business jet market is likely to be gradual and measured in its pace: a solid, if unspectacular, recovery. We do not expect the 2008 production level of 1,314 business jets to be reached in any year of the 2014-2023 forecast period.

Dassault Falcon 8X

Dassault Falcon 8X

Forecast International projects that a total of 9,634 business jets will be produced in the 20-year period from 2014 through 2023. The value of this production is estimated at $255 billion in constant 2014 U.S. dollars.

Production is forecast to total 719 units in 2014, and to steadily increase to 1,136 units by 2020. A two-year cyclical downturn in production is anticipated for the 2021-2022 timeframe, before build rates rebound in 2023.

During the forecast period, the top three manufacturers in unit production are projected to be Cessna, Bombardier, and Embraer. Cessna is forecast to produce 2,363 business jets, representing 24.5 percent of the market.

Bombardier Challenger 650

Bombardier Challenger 650

Bombardier is expected to build 2,075 business jets during the forecast period, for a market share of 21.5 percent. Embraer is third, with production of 1,732 aircraft and a share of 18 percent.

Fourth, fifth, and sixth places are taken by Gulfstream, Dassault, and Honda, respectively.

When the market is calculated in terms of monetary value, the manufacturers of the larger, high-value business jet types rise to the top of the rankings. In production value, Gulfstream takes the top spot with $74.7 billion worth of production, a share of 29.3 percent. In second place is Bombardier, with $69.7 billion worth of production and a 27.3 percent share. Dassault is third with a 17.4 percent market share on production worth $44.5 billion. Cessna, Embraer, and Boeing take the next three spots.