Why Is the U.S. Army Buying $54 Billion Worth of Patriot Missiles From Lockheed Martin?
The Iran war has done a number on U.S. weapons stockpiles — and finances.
A Center for Strategic and International Studies report released last week estimates that 65% of the 2,330 Patriot missiles the U.S. possessed before the Iran war began have been used up already. Fewer than 800 Patriots remain in U.S. inventories — four years’ worth of production at current rates, but a number we can apparently expend easily in less than three months of fighting.
Damage to U.S. bases in the Mideast was last estimated to have cost taxpayers $25 billion through late April, with a further $25 billion needed to replace lost and expended military hardware. U.S. allies in the region are spending billions of dollars replacing Patriot air defense missiles used to defend themselves from Iranian missile attacks.
And we are, too.
Image source: Getty Images.
$54 billion for Lockheed Martin
Last month, the U.S. Army announced it plans to order $53.9 billion worth of new Patriot Advanced Capability-3 Missile Segment Enhancement (PAC-3 MSE) air defense missiles from Lockheed Martin (LMT +2.59%). That’s more money than the entire cost of the rest of the war at last report.
And here’s the really surprising thing: At $4 million per missile, simply replacing the 1,500 or so Patriots used so far would cost “only” $6.3 billion. But the military is looking to spend much more than that — enough to buy perhaps 13,475 missiles. That would replenish all munitions already expended… and add 12,000 more Patriots to the stockpile.
Not all at once, certainly. The Army’s contract notes that the $53.9 billion would pay for Patriot production over seven years. Still, this marks a dramatic expansion in Patriot buying, and Patriot production as well, as it implies an annual production rate roughly nine times faster than the current rate.
Better missiles cost more
Another curiosity about this announcement is that Lockheed Martin announced last month that it plans to introduce a new version of the Patriot missile that’s cheaper and faster to produce.
Dubbed the PAC-3 Adapted Capability Effector (PAC-3 ACE), the new missile would cost as little as $2.5 million. When Lockheed first announced the ACE, investors sold off the stock — possibly fearing ACE sales would cannibalize MSE sales and hurt the company’s profit margin. But here’s the thing: Lockheed describes the ACE as “complementary” to the MSE — not replacing it.
Designed for mass production at affordable prices, ACE will be able to handle a “wide range” of slower, lower-level threats, such as from cruise missiles and short-range ballistic missiles. This will free up MSEs to deal with more serious threats from faster medium- and long-range ballistic missiles — but the military still needs to buy those MSEs, too.
Long story short, ACE sales will add to Lockheed’s revenue and profits — not hurt MSE sales and subtract from revenue and profits. And last month’s $54 billion PAC-3 MSE sale proves it.
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