Paris 2011: Squeeze on services sector prompts L-3 to keep its eyes on high-tech export prizes
Prompted in part by the prospect of squeezed Pentagon budgets, U.S. defense groups have been consolidating operations in pursuit of higher value, higher technology pursuits. At L-3 Communications, as at both Lockheed Martin and Northrop Grumman previously, this means shifting out of service activities where margins are tighter and there is less scope for differentiation in a tight market, according to the New York-based group’s chairman, president and CEO Michael Strianese.
“The services segment can be a great performer, but it may not make sense to make more investments here, and there could be others who can take this further,” Strianese told AIN. Pricing pressure in defense services has come from smaller second- and third-tier providers.
In Strianese’s view, it is no surprise in this respect that it has been private equity companies that have been the main buyers of service operations formally owned by defense prime contractors. Generally, these deals have been heavily leveraged, putting further pressure on the companies concerned to achieve more fruitful profit margins in order to clear the debt. Strianese indicated that L-3 could have more to say about further consolidation of its own operations when it gives its next earnings update in July.
At L-3, the consolidation process has already seen the merging of its sensors and simulation divisions to form an Electronic Systems group. The same process has happened in what L-3 now calls Warrior Systems, combining products such as Insight night-vision equipment for soldiers with other electro-optical and battlefield intelligence systems. “This consolidation reduces overhead and concentrates research-and-development spending,” said Strianese. “For the customer it does mean that we present one face to them with a much broader range of products.”
Despite the inevitable pressure to contain costs, L-3’s strategy remains heavily tipped toward strong research-and-development spending. “We are investing in areas where we will see further growth, such as ISR [intelligence, surveillance and reconnaissance] for smaller aircraft, night-vision systems and innovative ways to upgrade and maintain existing aircraft,” said Strianese.
Here at the Paris Air Show, L-3 is eager to advance its ambitions to take the delivery of added value through technology to key emerging markets, such as those in Asia and the Middle East. It has had success in the UK through programs such as the new Integrated Broadcast Service and the RC-135-based Rivet Joint program to replace the Nimrod signals intelligence platforms. But with the UK’s defense budget facing similar constraints to that of its close ally the U.S., it is new military requirements in markets further east where some of L-3’s more exciting prospects are now to be found.
The package it put together for the U.S. Project Liberty requirement, converting Hawker Beechcraft King Air 350s into MC-12 ISR platforms is a prime example of the approach L-3 is looking to advance even further. It has built more advanced King Air-based ISR platform that will be ready to display at Britain’s RIAT show next month.
The requirements of export clients are not always as well defined as those of Project Liberty, which was conceived by the Pentagon specifically with the Afghanistan campaign in mind. But to L-3 this, in itself, presents an opportunity for early engagement with prospective clients to help them define the system requirements.
“We can offer ISR systems for smaller aircraft at a very attractive price point compared to other systems they have seen so far,” said Strianese. “And we’re platform agnostic, so that as long as the aircraft they have in mind is suitable for our payload, we are happy to adopt to it.”
Outside the U.S., Canada and the UK, L-3 does already have some presence in the Middle East, with new offices in Abu Dhabi and in the Saudi capital Riyadh, from where it is looking to exploit demand for border security infrastructure. It has been active in South Korea, mainly in terms of base support and training activity. In Australia it has been improving the sonar capabilities of the P-3 Orion aircraft–another exportable fleet life extension possibility, along with upgrade options for aging combat aircraft such as Boeing F/A-18s.
“There aren’t so many new program starts in the international markets but all countries have an installed base to work with, and when you get to the higher end of the overhaul work, that’s where we come in,” said Strianese, arguing that L-3 has the required flexibility and agility to match its expertise to the actual needs and realities of a foreign military, rather than seeking to impose predetermined solutions.
One highlight of L-3’s exhibit here at Le Bourget this week is a new application that can bring real-time video from its Video Scout system into the battlefield via Droid smart phones. “The technology has been moving very fast and young service people are very up-to-date,” commented Strianese. “This puts full-motion video from aircraft into the hands of the warfighter through a commercial, off-the-shelf product, as well as giving them geo-location mapping. They can see exactly what the overhead platform is seeing.”
Also being demonstrated here this week is L-3’s main offering in the still-growing airport security market. Its ProVision full-body screening machine uses millimeter-wave scanning to generate a clear picture of anything concealed on a passenger rather than X-rays, over which there are still safety concerns in some circles.
But what further sets ProVision apart, according to L-3, is its new automated target detection capability. The system has been programmed to be able to pick up on objects that “don’t belong” in the standard image of a passenger passing through security. This means that the human security screeners can focus their attention on more closely scrutinizing the “exceptions” rather than wasting time and attention span to the same degree on each passenger.
ProVision is already in extensive use at airports in the U.S., where the Transportation Security Administration is upgrading them to have automatic detection capability. Strianese said there are very significant export opportunities for the system in the fast-expanding airports of Asia and the Middle East. The system has already been supplied to or ordered by airports in Australia, New Zealand, Italy, Germany, the UK and Indonesia.