Northrop Grumman CEO Sugar Sees Opportunities In Space; TRW Buy Is Key

Northrop Grumman Corp. [NOC] faces an array of rich opportunities in space, including the future Crew Exploration Vehicle (CEV) contract, which Northrop seeks in a team with The Boeing Co. [BA], Ronald Sugar, Northrop Grumman chairman and CEO, said.

Sugar said he expects NASA to move on awarding this program in the fall, and “we’re hopeful that we would be able to pull that one off.” He spoke before a Bear Stearns aerospace and defense forum that Northrop Grumman later Webcast.

This is but one example of how Northrop is gaining contracts outside the Pentgon, Sugar noted. His comments indicate that the company is lessening its heavy reliance on the military in an era of tight defense procurement budgets imperiling some acquisition programs.

The Boeing-Northrop team faces competition for the CEV contract from Lockheed Martin Corp. [LMT] in a race to see which team will provide the replacement for the troubled Space Shuttle.

This opportunity, Sugar said, is just one more example of why Northrop Grumman was wise to buy TRW Inc. more than two years ago.

Northrop Grumman was formed in a score of takeovers covering two decades, beginning with Northrop buying Grumman. In the process, a company that never built a Navy ship became the main supplier of vessels for the sea service.

That long series of takeovers was capped with buying TRW, which gave Northrop Grumman a space capability that it never had possessed, opening the door to a shot at the CEV contract and other possibilities, Sugar said.

“Had we not acquired TRW, we would not have been in a position to make such an offering,” he said.

Northrop to that point “had very little space experience,” he noted. But TRW “was one of the world’s premier space companies.”

KEI, ABL

In another space and missile effort, Sugar noted that the anti-ballistic-missile (ABM) asset, the Kinetic Energy Interceptor (KEI) “continues to make significant technical progress, and in my judgment will be a very, very important program for the future, not only for ourselves but for our allies.”

Raytheon Co. [RTN] is a partner with Northrop in the KEI program.

The United States is moving rapidly to create a multi-layered shield against ballistic missiles that might be deployed against North American targets or U.S. troops or allies.

This initiative comes as North Korea says it is producing nuclear weapons, and as the isolated communist regime is developing a Taepo Dong-2 missile capable of reaching North America.

The beauty of KEI is that “it can be deployed closer to the area of concern,” Sugar said.

He also assessed another ABM program, the Airborne Laser (ABL). This involves a steer-able Northrop laser mounted in the nose of a Boeing 747, a laser beam that someday would be able to fry an enemy ballistic missile as it rose from a launch pad or silo. Generally, it is better to kill an eemy missile early in its flight trajectory, so that a miss can be followed up with a successful hit in the midcourse or terminal phases of the trajectory.

The ABL “is continuing to make progress,” Sugar said.

KEI and ABL are examples of a happy fact for the company: 80 percent to 90 percent of Northrop Grumman sales next year are based upon programs the company already has under contract, according to Sugar.

Tanker Planes

He also said he sees a “huge” opportunity for Northrop Grumman in supplying the Air Force with new tanker planes. But this is a prize that Sugar said Northrop may have to share with Boeing.

Two years ago, Boeng almost had nailed down a deal to supply the Air Force with 100 of the KC-767 tanker planes for $23.5 billion, but the deal unraveled because of a conflict of interest by a senior Air Force procurement policymaker.

Delays ensued, including multiple studies of the tanker issue. But the Air Force moved back toward a position of deciding that, yes, it did need to acquire a new fleet of tankers to replace corroding old planes, some of them more than 40 years old.

When the Air Force awards a contract this time, however, Boeing will face competition from Northrop Grumman offering a KC-30 tanker plane made by Airbus Industrie, a unit of European Aeronautic Defence and Space Co. [EAD.PA].

The Air Force delay lasted long enough that Airbus had time enough to develop a refueling boom for its plane, after Boeing for decades provided booms in its tankers. The Chicago-based firm in recent years had developed a new remote-control boom operated by joysticks and 3-D screens.

But there may not be a single award of a tanker contract to just Boeing or Northrop-Airbus, he said. Even split between the two of them, however, there would be an enormous amount of work for each, since the buy might total an eventual 500 planes.

With that many aircraft, “there are significant quantities in this program that would justify” a split award, Sugar said. “And frankly, there are significant economics that would enable either company to be able to operate on a split-buy basis.”

After all, Sugar observed, the United States military already operates more than one type of aerial refueling tanker planes.

Bringing in multiple types of new tanker aircraft “is something the Air Force would be able to deal with,” he said.

Sugar also said he thinks there will be “a fair and open competition” held by the Air Force in the contract award, which might come next year.

Some House members have objected to any possibility that Airbus, a European firm, might supply the tankers, noting that some European nations failed to support the United States in its move to invade Iraq.

Boeing, an American company, should receive the contract, they say.

But Sugar said tht if Northrop and Airbus win the contract, they would assemble the KC-30s (based on the Airbus A330 commercial airliner) in Alabama, and “we’re hoping for 50 to 60 percent of the airplanes being U.S. content.” He alleged that the Boeing KC-767 aircraft “have significant foreign content as well.”