U.S. arms makers cite strong demand from foreign buyers

FARNBOROUGH, England Mon Jul 9, 2012 4:56pm EDT

FARNBOROUGH, England (Reuters) - Military budgets may be under pressure in the United States and Europe but there is growing demand from the Middle East, Asia and other regions for new fighter jets, helicopters and surveillance equipment, top weapons industry executives say.

"We have probably our busiest air show as of right now," William Swanson, chief executive of Raytheon Co told Reuters in an interview on the opening day of the Farnborough International Airshow, the largest aerospace showcase in the world.

British Prime Minister David Cameron opened the show, where 83 trade and military delegations from over 43 countries got a firsthand look at new commercial and military aircraft, including Boeing Co's 787 Dreamliner, the European four-nation Typhoon and the V-22 Osprey, a tilt-rotor aircraft built by Boeing and Bell Helicopter, a unit of Textron.

Foreign sales account for about 25 percent of Raytheon's $25 billion in annual sales, said Swanson, who comes to the show every year to meet personally with foreign buyers, and can't understand why other defense companies are so focused on their domestic troubles.

"There's opportunities there. Don't sit there and go, 'Oh woe is me.' Look at it and say, 'Okay, where's the opportunity?" Swanson told Reuters in an interview.

Even the U.S. military market remained very rich, despite deep cuts in spending expected in coming years, he said. "They're still spending $500 billion dollars."

Northrop Grumman Corp, maker of the B-2 bomber and the Global Hawk high-altitude surveillance drone, stayed home this year, saying it preferred air shows in the Middle East and Asia, where most of the new demand for weapons is emerging.

The Pentagon's chief weapons buyer, Frank Kendall, and Vice Admiral David Venlet, who runs the F-35 Joint Strike Fighter program, also skipped this year's arms and airplane bonanza, mindful of pressing budget problems at home.

Chris Chadwick, president of Boeing Military Aircraft, said continuing uncertainty about the U.S. budget had dampened the mood at the show, where rain clouds literally darkened the sky all day. Foreign arms buyers were still out in force.

Boeing was offering demonstration flights of its V-22 Osprey, which flies like a plane but takes off and lands like a helicopter. It also reported continued interest in its F-15 and F/A-18 fighter jets, mainly from buyers in the Middle East.

"We don't see any downturn on the defense side in terms of engagement by our customers," said Chris Chadwick, president of Boeing Military Aircraft.

U.S. Marine Corps Colonel Greg Masiello, program manager for the V-22, told reporters that the first foreign order for the V-22 could come within the next year.

Israel, Japan and the United Arab Emirates are among countries looking at possible purchases of the V-22, which captured a great deal of interest at the Dubai Air Show in November 2011, Boeing officials say.

Dennis Muilenburg, head of Boeing's defense division, said international sales accounted for 24 percent of the division's revenues in 2011, and were on track to reach 25 percent to 30 percent as early as next year, a bit ahead of plan.

He said Boeing could accommodate the first international sales of its KC-46A refueling tanker as early as 2018.

Lockheed Martin Corp, maker of the F-16, F-22 and F-35 fighter jets, is aiming to boost its international sales to 20 percent of company revenue from 17 percent now.

The company's radar-evading F-35 Joint Strike Fighter is competing with Boeing's F-15 and Europe's Typhoon, built by Finmeccanica Spa, Britain's BAE Systems Plc, and European defense group EADS, for a huge 60-plane order from South Korea that may be awarded by year's end.

Sikorsky Aircraft, the helicopter maker owned by United Technologies Corp, on Sunday told Reuters that it has a large backlog of international orders and sees opportunities for growth in countries like Brazil, India, Turkey, China and Mexico.

Increased overseas sales and growing demands from buying countries are resulting in increasingly complex offset agreements with foreign countries, but many U.S. companies do not keep a strategic eye on such deals, according to a new study by the Avascent consulting group.

It reported on Monday that by 2016, global aerospace and defense firms will have racked up a cumulative $500 billion of obligations in order to secure weapons sales with foreign countries.

Offsets, which first appeared after World War Two, are incentive contracts that weapons makers sign with procuring governments to facilitate arms sales. They often take the form of investments in the buying country's own defense industry, but they vary widely in form and complexity.

Avascent said offsets posed "unnecessary risks" to some aerospace firms because they lacked a strategic approach to the issue, leaving oversight to lower-level executives and handling of such deals on a case-by-case basis.

Swanson said his company had a deliberate approach and planned offset agreements carefully, often even before concluding new arms sales. He said he viewed such obligations as a way to expand Raytheon's global supply chain.

"If you don't have a plan going in, then you have created a risk," he said, adding his mantra, "Prior planning prevents piss poor performance."

Boeing's Chadwick said the entire market was becoming more global, which created an imperative for U.S. companies to step up their partnerships abroad as Boeing has in India, for example.

"If you want to succeed in the future you need to have a global approach to doing business," he said.

(Reporting by Andrea Shalal-Esa; Editing by Andrew Hay)

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