At Farnborough, Brexit Fears Dampen F-35’s UK Debut

LONDON — The F-35 Lightning II feel-good tour has collided with the uncertainty left by Great Britain’s vote to leave the European Union.

While the program’s four biggest contractors celebrated the jet’s long-awaited debut at this week’s Royal International Air Tattoo and next week’s Farnborough Air Show, executives couldn’t help but wonder what a Brexit would mean for their bottom lines.

“I think much of this lies ahead of us as to actually what the impact will be,” Jeff Babione, executive vice president and general manager of the F-35 program for Lockheed Martin, said Thursday at RIAT, an all-military air show that precedes the defense-and-commercial Farnborough.

“The near-term, I don’t see any significant impact, but clearly anything that would affect the affordability of the airplane, whether it be to the U.K. or the affordability of the products externally, could potentially have an impact,” Babione said. “I think it’s too early to estimate not really knowing exactly, other than the obvious effect on the pound, what the long-term impact would be of the decision.”

Experts have said a Brexit could have a similarly dampening effect on European defense spending as the Congressional defense-budget caps commonly called sequestration have impacted the Pentagon. While a weaker pound and Euro could make European arms cheaper and more attractive to the Pentagon, they could prompt European countries to reduce buys of weapons and equipment.

A softening of demand for the F-35 would hit the British defense industrial base hard. BAE Systems makes 10 percent of each jet, including the aft fuselage, vertical stabilizers, and horizontal stabilizers. Other UK firms, like ejection seat builder Martin-Baker, make another 5 percent.

But for now, the program is riding high. Production is set to quadruple at Lockheed’s assembly plant in Fort Worth, Texas, where parts from Britain and around the globe come to be fitted together. Late Thursday, the Pentagon awarded F-35 engine-maker Pratt & Whitney a $1.5 billion contract for 99 new engines, another signal of the program’s growth.

And so, more than two decades after the JSF program got off the ground, the jet is making its awaited debuts at RIAT and Farnborough, the most hotly anticipated stops on the summer air show circuit.

Right now, there’s a “bushel of uncertainties around the UK and other European states”  for 2016 through 2018, Byron Callan, an analyst with Capital Alpha Partners, wrote in a recent note to investors, alluding to Brexit and other macroeconomic issues in Europe.

“We don’t have high conviction that investors will come away from Farnborough incrementally more positive on defense,” Callan wrote.

Still, the Ministry of Defence appears to have taken steps to soften Brexit's blow. Philip Dunne, the U.K.'s defense procurement minister, told the Wall Street Journal Friday that the government purchased currency hedges to protect its arms imports from market volatility.

Yet that F-35 feel-good feeling was alive and well Thursday at the Royal International Air Tattoo, a military airshow at RAF Fairford in central England. Lockheed Martin gave out silver F-35 pins, stickers and posters, all draped in the Union Jack.

Company executives and U.S. and international military officials touted progress the program has made in recent months, including a mock-deployment by a U.S. fighter squadron expected to be deemed battle-ready later this year.

The F-35 was supposed to have its big U.K. debut in 2014, but an engine fire on a jet in the U.S. grounded the entire fleet. Now its arrival in Europe could help build more momentum for the project, Lockheed’s Babione said.

“This is a great opportunity for [the U.S. Marine Corps] to show the world what the F-35B can do,” he said.

People seeing the jump jet maneuver while hovering typically respond like this: “[A]irplanes aren’t supposed to be able to do that,” he said.

“Whether or not that translates into other sales, I don’t know,” Babione said. “I would speculate that other countries that see what the F-35B can do and they need that unique capability to work off of shorter runways, where they don’t have aircraft carriers and so they use smaller ships, I think that’s a real possibility.”

But that outlook could be a bit bullish.

“We expect an update on progress of the program to be positive, but we are not expecting incremental customers/prospects to emerge,” Callan wrote.

While the air tattoo features more flying than meetings, Farnborough, like most air shows, will likely spur more commercial aircraft sales than military.

There’s potential for the U.K. to announce buys of Boeing P-8 submarine-hunting planes and AH-64 Apache attack helicopters, Jim McAleese, who runs the Virginia-based McAleese and Associates consulting firm, wrote in a recent note to investors. Collectively, the deals could be worth more than $6 billion.

Some commercial deals could have defense implications. Boeing is expected to announce a $4 billion deal with Russia-based Volga-Dnepr for 10 cargo jetliners, which would extend production of the 747. Matters because the end of 747 production has been in sight as the Pentagon buys a new Air Force One, which will be based on the iconic jetliner.

Even though fewer sales are expected, numerous senior Pentagon, State and Commerce officials are expected to lead the U.S. delegation. Among them are Commerce Secretary Penny Pritzker, Deputy Defense Secretary Robert Work, Pentagon acquisition chief Frank Kendall, Gen. David Goldfein, the new U.S. Air Force Chief of Staff, and Amb. Tina Kaidanow, principal deputy assistant secretary of state for political-military affairs. Several other high-ranking generals are expected to participate as well.

The high-level delegation follows through on a pledge by Kendall in 2015 to step up participation at these types of arms shows.

“The Department is ready to leverage our network of more than 200 embassies and consulates in support of U.S. industry, and the PM Bureau is actively engaged in a manner that furthers our broader mission of strengthening allies and partners globally,” Kaidanow said in a statement.