bring_it_on
I really should change my personal text
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There are several reasons why a company will chose to take that risk. But these are very different program structures and risk profiles so lumping them into one 'fixed price' category is not a good way to look at them.
- Boeing bid aggressively on fixed price development contracts. In some of those contracts (T-X for example), the fixed price development terms essentially led one of the primes to walk away and not bid at all. While Boeing and Lockheed decided to bid, Boeing pursued a strategy of underbidding with their ultimate bid running several billion dollars below even the DOD's cost estimates for the program. Lockheed did not do that and their CEO then walked away from that program claiming that they would have lost their shirt had they matched Boeing's bid even though LM had a mature design and less risky program. Boeing's rationale on the KC-46 was similar. They were willing to assume huge risk on fixed price development contracts and hoped to offset losses on the front end with cash flows form commercial sales in an effort to grow the overall portfolio. They find themselves in this situation because their commercial cash flows collapsed, and all their nightmares on these fixed price development programs actually came true. Boeing did not make a huge mistake bidding on a fixed priced development program (others were willing to do this too on the same programs). Their mistake was that they bid extremely aggressively (almost recklessly in hindsight) and then followed that up with poor execution.
- Lockheed and Northrop Grumman on the other hand are involved in other programs where they have cost plus development contracts (B-21, F-35 etc) with fixed price production contracts. In this case, there were several factors that could lead them to making less money than anticipate on those early production contracts (for example B-21, JATM etc). For one, these were pre--covid contracts and the spike in inflation has impacted several programs to include the B-21. Secondly, as you work through early production issues and move into production, you could run into issues that require additional investments to work through. But it is generally not as severe as fixed priced development where the risks are significantly higher given the uncertainty involved, and the cost of getting back to meeting specifications agreed upon in the contract.
Either way, if you have identified a franchise program that you think you are competitively positioned to do well in, pursuing a fixed price production contract for it is not a bad strategy at all. Especially if you've determined that you have a competitive advantage on the program, and that it is something that the service will want to acquire in the long run. Doing the same on a fixed price development contract is not as wise an investment, unless you have priced in that risk or truly have no other viable investment track to generate cash flows and business within the DOD. Boeing not only did not price in the added risk of pursuing fixed price development, they deliberately (as a strategy) underbid on these in order to win.
While Northrop Grumman may lose a Billion + dollars on the first 21 B-21 aircraft, it will be able to re-negotiate later contracts and will not accept similar terms on the remaining 80+ aircraft that are likely to be produced. Long run, this will be a good program for it. Lockheed is on a similar position on JATM. Its a franchise program for AIM-120 AMRAAM replacement where they upset the incumbent that has produced or will end up producing over 30 production lots leading to 30,000+ missiles delivered over the years. As a replacement for that weapon, LM is likewise well postponed to do very well on the program once its goes into the high volume phase of the contract.
Now back to the actual matter being discussed. What you've pointed to (Lockheed's full year 2024 recognition of loss on production lots of JATM) should be viewed as something that essentially assures that this thing is moving along into production with enough certainty that LM is telling its investors of losses incurred in future production lots that are probably being contracted for right about now.
We know that in mid/late 2023, Frank Kendall testified that he hoped for the JATM to enter production soon. Then in Q1 of 2024, Lockheed recognized a reach forward loss of $100 Million on the 'classified missile' program, on top of the $50 Million loss it had recognized the previous quarter for adv. procurement activities on the same program. Now to end 2024, they've updated and said that through current and future phases of this program they expect another $1+ Bn in losses. Given the timing and magnitude, looks like JATM entered production sometime in late 2023/early 2024 and they are now well into the initial low rate production phase. I view this to be a similar issue to the B-21 both of which were production contracts that were awarded pre covid (perhaps a year or two apart) when fixed price low rate production contracts were all the rage in the DOD. In fact, LM CEO/CFO's explanation on future projections of the program reads very similar to that of Northrop's.
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