WASHINGTON — A brand new 30-foot-long, gray drone quietly arrived at a U.S. Air Force base last fall, with no public announcement until weeks later.
The drone’s arrival was discreet, but represented a key moment for its manufacturer Kratos Defense and Security Solutions — and the potential for a wave of business opportunities.
The service’s fortieth Flight Test Squadron on the Florida base took possession of its first Kratos-made XQ-58A Valkyrie, and a second followed soon thereafter. Contained in the drone’s core was intricate programming to permit it to fly by itself, without humans directly providing instructions or controlling it.
Inside weeks, airmen began flying the brand new Valkyries, using rockets to launch them off rails and, in no less than one case, flying them in tight formation with an F-16 fighter jet.
For nearly 4 years, the Air Force had experimented with the Valkyrie and other drones because it grew increasingly confident the concept of autonomous drone wingmen in combat could work — and grow to be a cornerstone of the way to fight wars.
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Steve Fendley, president of Kratos’ unmanned systems business, said the Air Force’s acquisition and testing of those two Valkyries showed the emerging possibilities for the corporate and other similarly sized firms.
Within the 2023 edition of Defense News’ Top 100 list, which ranks firms world wide based on their defense revenue, Kratos took 88th place — appearing on the list for just the second time in nearly 1 / 4 century.
While the identical group of enormous contractors remained at the highest of this yr’s list, unveiled Aug. 7, experts say there’s growing evidence the defense market could also be evolving to supply higher and more work to mid-tier firms, particularly those specializing in technologies central to the Defense Department’s modernization plans.
For years, Defense Department officials have spoken in regards to the importance of a diversified industrial base, and tried to create opportunities for firms beyond the top-tier firms which have traditionally dominated the market.
Five years ago, Fendley told Defense News in June, the very best shot for an organization like Kratos was to sell the DoD a component for a subsystem. A top-tier defense firm would then put that into a significant system. Today, Fendley said, firms his size have a shot at scoring contracts for the subsystems themselves. And, he noted, greater opportunities could soon start opening up for smaller and mid-tier firms to compete at the main system level.
“That momentum continues to be constructing,” he said. But within the near future, “there will probably be receptiveness toward small and mid-tier firms even providing systems. Definitely in five [years], perhaps one or two.”
Top service officials have repeatedly said that with a purpose to win the following war, the military must deploy greater than traditional fighters, bombers and ships of the past. As an alternative, it should look to autonomous drones, unmanned surface maritime vessels, hypersonic weapons traveling at greater than five times the speed of sound, and waves of small, low cost airborne drones armed with explosives.
To make this a reality, the services try ambitious modernization efforts — a lot of which hinge on technologies akin to autonomous software and advanced rocket engines, often produced by nontraditional firms.
An upstart has little likelihood of becoming one among the top-ranked businesses that typically lead major, multibillion-dollar programs, defense contracting expert Alan Chvotkin told Defense News. But, he added, the underside half of the Top 100 rankings could see a reshuffling in years to come back — and that for a smaller company, just a little growth could go a great distance.
“Should you take into consideration hypersonics and things of that kind, those are tailor-made for the mid-tier and the technology-oriented firms,” Chvotkin said. “I see opportunity there for awards, and for growth. … Ten percent growth in a smaller company may be very different than what a bigger company must sustain the beast.”
Defense industry analyst Byron Callan of Capital Alpha Partners said that while tech-centric firms akin to Shield AI and Anduril haven’t yet cracked the Top 100 list, they’ve a gap to achieve this within the years to come back.
“This isn’t a lot about bending aluminum, or carbon fiber,” he said. “It’s about software. Typically once you see latest entrants within the defense sector, it’s because they ride a wave of latest technology. … It’s going to be things like [collaborative combat aircraft, or drone wingmen], or brand latest software that may drive this forward.”
And there are signs it could be beginning to occur, including at Kratos.
Its unmanned systems division has seen revenues grow 67% since 2018, to almost $222 million. The regular growth on this area has helped Kratos bolster its bottom line, with the corporate landing back on the Top 100 list. That is the second time Kratos has made the list in nearly the last quarter century; in 2021 it notched a spot at 94th before falling back off the list.
Defense News annually ranks the highest defense contractors for its Top 100 list, by collecting and tallying information on firms’ revenues from the businesses, their annual reports, analysts and other research. Defense News tallied defense revenue of $534 billion in fiscal 2022 — a ten% decline from the $595 billion recorded the previous yr. Nearly 56% of the defense revenues in FY22, or $298 billion, went to the ten largest defense firms.
Callan said the decline in revenue in FY22 was likely attributable to quite a lot of aspects — including different firms making the list, international currency fluctuations, merger and acquisition activity, and individual firms’ bottom lines shifting for their very own reasons — and never an indication of overall weakness within the industry.
‘The tide has shifted’
For years, the Top 100 list has been dominated by mega-corporations akin to Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, BAE Systems and Raytheon, now often known as RTX, with only minor fluctuations in rankings.
However the lower half of the list typically shows more churn, with latest firms coming on and others falling off as their fortunes and the defense market shift.
Spirit AeroSystems — a Wichita, Kansas-based airframe manufacturer that supplies top defense firms — returned to the Top 100 list in 86th place this yr. Its defense revenues grew 11% in FY22 to $650 million. Since Boeing spun off the firm in 2005, Spirit has made the list twice, with the opposite instance from 2021 when it eked into 99th place.
In recent times, Spirit has provided structural components utilized in the E-7 Wedgetail, V-280 Valor Future Long Range Assault Aircraft and B-21 Raider to defense giants Boeing, Bell and Northrop Grumman, respectively. Spirit may also construct the struts and nacelles for the B-52 bomber′s major re-engining program.
In earnings calls this yr, Spirit executives sounded bullish on the corporate’s opportunities for future growth, even setting a goal of reaching $1 billion in defense and space revenues by 2025.
In a February call with analysts, an organization executive said Spirit sees five growth areas: hypersonics, unmanned aerial systems, next-generation effects, next-generation aircraft and space.
Meanwhile, AeroVironment, whose Switchblade loitering munition has grow to be a notable weapon in Ukraine’s arsenal against Russia, also recorded an 8% increase in defense revenue to $294 million in FY22. It didn’t make the Top 100 list, but its outstanding role within the Russia-Ukraine war and its growth over the past yr make it emblematic of the shifting landscape for smaller defense firms.
AeroVironment’s chief executive, Wahid Nawabi, said in a June interview that the shift from waging war within the Middle East — which relied heavily on drones — to preparation for a terrific power conflict doesn’t mean the tip of smaller uncrewed systems.
“For greater than a century, the world considered defense and warfare [in terms of] tanks, aircraft carriers, submarines, ships,” Nawabi said. “It doesn’t mean that those things are usually not going to play a job in the long run — they’ll. But this idea of a distributed warfare, where smaller teams, smaller forces [are involved], is what we see in Ukraine. Small drones and loitering munitions have enabled Ukraine to do massively various things that no person thought they may even do.”
The defense market still favors the most important prime contractors with the lobbying power and political influence against which smaller firms can’t compete, Nawabi noted.
Lockheed Martin and RTX led this yr’s Top 100 list, and so they remained unchanged at slots 1 and a pair of respectively. Northrop Grumman — the prime contractor on major programs akin to the B-21 Raider bomber and LGM-35A Sentinel intercontinental ballistic missile — rose one slot to third this yr, and Aviation Industry Corp. of China moved up from sixth to 4th.
Boeing, which had been third last yr, slid to fifth, as its defense revenues dropped 12% to $30.8 billion. In 2022, Boeing’s defense sector struggled with billions of dollars in charges on troubled programs akin to the KC-46 Pegasus tanker, T-7 Red Hawk trainer and VC-25B Air Force One presidential aircraft.
Dan Grazier, a military analyst for the watchdog group Project on Government Oversight, said the so-called revolving door of former Pentagon officials leaving public service for lucrative industry jobs often advantages major firms. This could make it harder for smaller firms to make the most of such relationships, he explained.
Grazier pointed to his organization’s report titled “Brass Parachutes,” which found the highest 20 defense contractors in FY16 had hired 645 former senior government officials, military officers, lawmakers and senior legislative staff as lobbyists, board members or senior executives in 2018. Nearly half of those revolving door hires, 312 of them, went to 5 of the most important U.S. defense firms in FY16: Lockheed Martin, Boeing, Raytheon, General Dynamics and Northrop Grumman.
“Big defense contractors have pretty deep pockets,” Grazier said. “There are probably quite a lot of these smaller firms that need to break into this market, which can be attempting to determine ways in which they’ll attract a few of those high-profile, former Pentagon officials.”
That has began to vary lately, with ex-Trump administration officials, including former Defense Secretary Mark Esper, Army Secretary Ryan McCarthy and Air Force acquisition chief Will Roper, going to nontraditional firms after leaving the federal government.
Nawabi said a movement is underway that’s creating a gap for firms akin to AeroVironment to broaden their share.
“The tide has shifted,” Nawabi said. “The U.S. DoD has been more open to in search of firms like us to be more involved and have a greater shot at these items. But it surely’s still a struggle; it’s nowhere near where it must be.”
Searching for growth
With the Air Force ramping up its effort to develop drone wingmen, the service is working with roughly 35 firms providing each aircraft and autonomous capabilities, service acquisition chief Andrew Hunter said in a May 18 discussion at George Mason University’s Arlington, Virginia, campus. And over time, many more could join the hassle, Hunter said.
Hunter said the Air Force has a “heavy focus” on nontraditional providers because it develops collaborative combat aircraft, or CCA, though traditional firms are also involved. Hunter didn’t discover those firms, and Kratos’ Fendley declined to say what his company is specifically doing for the CCA program, citing its classified status.
But other firms and systems prone to be involved include Boeing, maker of the MQ-28 Ghost Bat drone flown as a part of Australia’s loyal wingman program, and Lockheed Martin, whose Skunk Works division has been working by itself drone wingmen concept.
Asked about Northrop Grumman’s plans for the CCA program, chief executive Kathy Warden said in a July 27 earnings call the corporate is “ it closely.”
Hunter said businesses won’t have to have the option to create a whole CCA to take part in this system. If “an organization has real game” and may produce a particular portion of an autonomous system, he noted, there may be a spot for it on the table.
The Air Force desires to “lower the stakes” and have continuous competition on the CCA program so more firms can participate — and live to fight one other day if one bid doesn’t go their way, Hunter said.
“Should you don’t reach the primary increment of CCA, for those who’re not chosen, that could be a one-year bump in your online business plan, and you possibly can come back strong the following yr and win,” he explained. “Nobody is ever out of the sport in the event that they still have game to supply.”
Since Eglin received its Valkyries, Fendley said, the bottom’s work with the drones has rapidly progressed and focused on key technology areas related to autonomy and the operational effectiveness of manned-unmanned teaming. Kratos has also sold Valkyries to the Navy and Marine Corps to conduct similar tests.
The corporate has expanded its production facilities and staffing to support that work, Fendley noted, and now the Valkyrie is in low-rate production for several customers to accommodate the growing demand for drones.
Fendley said large, comprehensive drones are an example of the sort of complex systems mid-tier and smaller firms might provide inside five years.
“Our biggest discriminator is our ability to take a look at a requirement and develop a really inexpensive solution against that requirement,” Fendley explained. “It’s not going to be the gold standard. We don’t attempt to be the gold standard. We attempt to be the inexpensive solution that may satisfy the necessity.”
A very powerful thing the Pentagon can do to foster this sort of growth, in accordance with Callan of Capital Alpha Partners, is to begin picking winners and awarding those sort of smaller firms significant contracts. That doesn’t mean giving those firms awards simply for the sake of propping them up, he said, however the Pentagon must keep an open mind when considering bids, moderately than reflexively reaching for the big-name primes.
The Defense Department has long talked a very good game about wanting to foster more diversity in the commercial base, Callan noted. But in the event that they don’t put real money behind it — as soon because the FY25 budget proposal — the investors some smaller firms depend on will begin to look elsewhere, he said.
“Frankly, DoD at times goes to must take risk” on firms that don’t have as extensive a track record as traditional firms, Callan said. “It may well’t just be $5 [million] or $10 million contracts. If the contracts aren’t there, the capital goes to dry up and persons are going to seek out other sandboxes to play in.”
Stephen Losey is the air warfare reporter for Defense News. He previously covered leadership and personnel issues at Air Force Times, and the Pentagon, special operations and air warfare at Military.com. He has traveled to the Middle East to cover U.S. Air Force operations.