The Modernization Market : Litton Pursues Contracts for Upgrades as Call for New Planes, Ships Fades

In December, an American Army helicopter on a training flight was shot down after inadvertently straying into North Korean airspace, killing one pilot and nearly touching off a major international incident.

Executives at Litton Industries Inc., the Woodland Hills defense concern, say the helicopter lost its way because a blanket of snow obliterated the landmarks pilots use to guide them. And the helicopter was not equipped with an advanced navigation system to keep it from wandering off course.

Litton, which makes navigation systems used in virtually every type of military aircraft, as well as in ships, land vehicles and missiles, is hoping to cash in on a long-term Department of Defense program that arose after pilots encountered similar navigational problems in the desert during the Gulf War. The Pentagon’s program involves putting state-of-the art navigation systems in all existing military aircraft and vehicles--to avoid incidents like that involving the U.S. helicopter in North Korea.

Installing up-to-date navigation gear on existing military aircraft, vehicles and missiles could total more than $1 billion over the next several years--if the funding holds up in future defense budgets--and Litton hopes to capture a big chunk of that market, said Si Tenenberg,vice president of business development at Litton’s guidance and control division, which makes the navigation gear.

Considering that the U.S. defense budget has fallen 34% in the past decade--to $251 billion in fiscal 1995--that’s no small change. So with contracts for new planes, ships and vehicles having slowed to a trickle, Litton--like many other big defense contractors--must increasingly compete for the Pentagon’s business to modernize old planes and vehicles.

“Today, because of affordability, customers have to turn to upgrades rather than new equipment,” said Litton Chairman Alton Brann. “It helps to maintain a reasonable business base.” Or, as Merrill Lynch analyst Byron K. Callan put it, “If you can’t afford a new car, maybe you buy a new stereo or tires.”

Over the next five years, companies that supply high-tech components or replacement parts could do better than contractors that build the planes themselves because modernization projects are less expensive and more likely to receive funding, said Tony Velocci, senior business editor at Aviation Week magazine. For electronics contractors such as Litton and Loral Corp., “the upgrade market looks very strong.”

To be sure, contracts for new planes and ships remain Litton’s mainstay. In its fiscal year ended July 31, Litton’s revenues were $3.45 billion, down 7% from fiscal 1992, but most of those revenues still come from two sources: supplying military electronics for new aircraft, ships and weapons, and building ships for the Navy.

Litton electronics go on everything from Air Force F-15 and F-16 jets and the F-117 stealth fighter to Apache attack helicopters and Tomahawk cruise missiles. It’s also a leading supplier of Aegis missile cruisers and destroyers to the Navy. Lately, Litton has won major contracts to provide navigation equipment for the new F-22 fighter plane, and tactical operation centers for the new anti-missile defense system called Theater High Altitude Area Defense (THAAD).

Litton’s main strategy for stemming a decline in revenues is to buy companies in areas related to its core businesses. One of its first moves after spinning off its commercial business last year was to acquire Teledyne Inc.’s electronic systems division, which specializes in high-tech equipment used to distinguish friendly from hostile aircraft.

Meanwhile, contracts for improving the technology on old military systems now accounts for just 17% of Litton’s total revenues, and Litton executives stress that those contracts are also being pinched by declining defense dollars. “The competition is cutthroat,” noted H. Elliott Rogers Jr., an analyst at Cowen & Co., and rivals such as Honeywell Inc. are chasing after the same business.

But Litton is hoping that its navigation and other electronics technologies will help it corner its share of the Pentagon’s equipment upgrade spending.

Litton’s latest navigation technology combines satellite-based global-positioning systems--which can instantaneously tell pilots their position within meters--with inertial navigation units that can’t be jammed by the enemy. These new navigation systems contain gyroscopes with lasers for detecting changes in motion that Litton says are 10 times more reliable than the mechanical gyroscopes used in older military navigation systems.

Indeed, Litton’s guidance and control systems division, one of the largest business units in Litton’s electronics group, now generates about half its revenues from contracts to modernize old planes and weapons systems, compared to 20% just five years ago, according to Tenenberg.

Rep. Howard “Buck” McKeon (R-Santa Clarita), who sits on the House National Security Committee, predicts that the newly installed, Republican-led Congress will “reshape our defense priorities and add additional money for aircraft and warships.” But many insiders expect that any rebound in defense spending won’t occur until around the year 2000, when the current stock of military planes will begin wearing out.

*

Until then, Litton’s guidance and control business “looks solid,” Tenenberg said, “and the reason . . . is because of the retrofit and modernization market.”

Among Litton’s recent upgrade contracts are:

* Replacing navigation systems on the Air Force’s fleet of about 1,000 F-18 jet fighters. Litton’s contract, worth about $50 million--or about $50,000 per plane--is to provide new, more sophisticated systems that can essentially be plugged in without the need for expensive rewiring.

* Upgrading Air Force command and control systems that are used in the battlefield to track and guide planes, much like a commercial air traffic control system. Litton built the original systems, and is now updating them with more powerful computer hardware and software. Litton has won $163 million in orders for these improvements.

* Navy contracts worth a combined $130 million to enhance threat-warning systems on jet fighters including the F/A-18, A-6 and F-14. These systems alert crews when a plane is targeted by enemy radar.

Litton also hopes to win contracts to:

* Install new navigation devices on Tomahawk cruise missiles and other precision weapons to improve their accuracy. Tenenberg estimates there are about 200,000 such weapons in the U.S. defense arsenal that could be improved with current inertial navigation and global positioning technology--for $6,000 to $10,000 apiece.

* Modernize Navy submarines and surface ships with its latest navigation technology. The company estimates that this work on submarines alone could total $200 million.

* Provide the next generation of hand-held computers, each about the size of a book, used to communicate and analyze data on the battlefield.

Even Litton’s Ingalls shipbuilding division, which provides nearly half the company’s total revenues, gets about 10% to 15% of its revenues from modernizing older ships with new electronics and weapons. It has contracts worth about $100 million a year to put new technology on the Spruance class of destroyers and Ticonderoga class of guided missile cruisers. One recent conversion program involves replacing shipboard weapon-launching systems with systems that are quicker and more efficient because they are situated below deck and can be loaded more quickly and efficiently.

Jerome H. Weissman, vice president of business development for Litton’s electronic warfare systems group, said that Litton has an advantage in the modernization market because it has aggressively sought these types of contracts through good times and bad. “We’ve been doing that for 25 years.”

That business can be as mundane as providing replacement microwave tubes in military aircraft, he said. Over the years, Litton has improved the design and materials for this basic product, which controls the flow of power in electronic equipment. “Everything that’s flying around is a constant source for replacement tubes,” Weissman said.

International markets are another potentially important source of modernization business for Litton. About 30% of the company’s revenues come from sales to nearly 40 foreign countries in Europe, the Middle East and Asia, most of which are facing similar budget constraints as in the United States. Instead of buying new planes, many countries are outfitting older aircraft with new technology. The company is currently putting new navigation equipment on F-16 jet fighters for the Netherlands, Norway, Belgium and Egypt.

One of Litton’s most recent foreign contracts is to help modernize the electronics and avionics on 30-year-old A-4 jet attack planes that Argentina literally bought off the scrap heap from the United States. That contract is worth just $6 million to Litton, but it’s the first time the company has ever done business in Argentina and Litton hopes it marks the beginning of a greater presence in South America.

But aerospace analyst Callan warned, “At some point, you can’t just upgrade, you’re going to need new stuff and there’s going to be a transition. I hope this upgrade stuff will ultimately lead to new contracts.”