The National Commission on the Future of the Army proposed an aviation restructure solution that keeps AH-64 Apache helicopters in the Army National Guard, but it would cost an extra $165 million per year, in addition to a $420 million upfront cost.

The commission, in its report released Jan. 28, offered its own solution, a mix of the Army’s Aviation Restructure Initiative (ARI), as proposed in its fiscal year 2016 budget request, and the Army National Guard’s solution, formed in response. The commission also considered the Army’s ARI, which is currently being implemented, and the Army National Guard’s alternative proposed in response.

The commission’s solution maintains 24 manned Apache battalions, of which 20 would be in the active Army (same as under ARI) and four would be in the Army National Guard (compared to zero under ARI). All the active Army battalions would be equipped with 24 aircraft.

The four Army National Guard battalions would be equipped with 18 aircraft and, thus, would have to cross-level helicopters before deploying. Cross-leveling is where a battalion called to active duty would acquire aircraft from an Army National Guard battalion. The commission said this strategy is commonly employed today.

To hold down costs, the commission’s solution assumes that only two UH-60 Black Hawk helicopter battalions are added to the Army National Guard (compared to four under ARI). This approach, which is also used by the Army National Guard’s preferred solution, would result in a reduction in operational Black Hawk aircraft by about three percent.

Operating costs, under the commission’s solution, would increase by a net of about $165 million per year due to the added costs of four Army National Guard Apache battalions, including costs to deploy them on a regular basis, and costs to forward station a combat aviation brigade in South Korea. These additional operating costs are partially offset by savings from foregoing the operation of two Army National Guard Black Hawk battalions.

The commission’s solution would result in one-time costs of about $420 million to remanufacture 24 Apache helicopters from D models to E models. These remanufactures would likely occur at some time beyond the next five years. The commission said the E model provides greater capability to work with unmanned reconnaissance assets and has a new drive train and rotors for improved aircraft performance. This, the commission said, would significantly enhance safety and combat performance.

The commission proposes an “illustrative” approach to offsetting the added costs of its solution from within aviation funds. A portion of the added costs could be offset by maintaining two fewer Black Hawk battalions in the Army National Guard. Another offset could be savings from personnel cuts designed to leave Army National Guard personnel at the level of 335,000 planned in President Barack Obama’s fiscal year 2016 budget request.

The remaining offsets, the commission proposed, could be achieved through a modest slowdown in the Black Hawk procurement program. The commission’s solution makes no change in the L-to-V conversion program for Black Hawks, a program that produces a fully digitized Black Hawk. To offset its proposed additional costs, the commission said the Army would probably have to buy five to 10 fewer new Black Hawks per year.

The commission said reductions in buys of Black Hawks would need to continue beyond the next five years to offset operating costs and provide funds needed to remanufacture the 24 Apaches. The commission believes the Army should be able to adjust its annual Black Hawk buys so as to not undermine its multiyear contract.

The commission believes its solution offers the Army significant advantages. It says its solution provides greater wartime capacity than ARI or the Army National Guard alternative. Peacetime operating tempo would also improve compared to ARI and the Army National Guard alternative. Wartime surge capacity, measured by trained pilots in units, would be higher than under ARI. The commission believes its solution would also improve aviation capabilities in South Korea.

The commission also believes the Army needs additional funding overall. The commission believes significant threats to national security may eventually lead to defense funding that substantially exceeds the $147 billion the Army requested for FY ’16. The recommendation regarding Apache transfers is intended to be generally consistent with the funding proposed in the budget request. The commission also identified other high-priority aviation initiatives that would require significant funding.

Under ARI, the Army receives Apaches from the Army National Guard, in exchange for its Black Hawks. The Army also retires all OH-58D Kiowa Warrior armed reconnaissance helicopters and UH-72A Lakotas become the primary training aircraft for initial rotary wing training. The commission focused on the issue of Apache transfers and did not make recommendations regarding other aspects of ARI, including retirement of all Kiowa Warriors and use of Lakota for initial training.

Both Congress and the Defense Department are set to consider the commission’s recommendations. The Apache is developed by Boeing [BA]; the Black Hawk is built by Sikorsky, a division of Lockheed Martin [LMT] and the Lakota is made by Eurocopter, a division of Airbus.

MDHI is expected to deliver the helicopters to Malaysia’s Army Aviation (Pasukan Udara Tentera Darat, PUTD) beginning in the fourth quarter of 2016, with the full fleet set to be delivered by the end of Q1 of 2017, the company said.

After years of stagnant Pentagon budgets, the next presidential administration will face a defense acquisition bow wave in the early 2020s and will need an influx of funding to pay for the various weapon systems in development or production, a new report by the Center for Strategic and International Studies said.

Funding needed for major defense acquisition programs is slated to peak in fiscal year 2022—just a year beyond the upcoming 2017 future years defense plan that will project spending over the next five years, and within the first term of the next president, according to “Defense Modernization Plans Through the 2020s: Addressing the Bow Wave.” The report, written by CSIS director of budget analysis Todd Harrison and released on Jan. 27, uses the president’s fiscal 2016 defense budget and other documents to estimate the cost of major acquisition programs through 2030.

The modernization bow wave presents an interesting opportunity to the next president, but also some risks, Harrison said during a rollout of the report. To fund all major weapons programs as currently planned, the Pentagon will need to grow its acquisition spending from 23 percent between fiscal years 2015 and 2022. Harrison estimates that the majority of that increase will occur in two years: 2016 and 2022, with flat spending in the years between.

That leaves the next administration with three options: Find a way to increase the Defense Department’s budget as a whole, cut other areas of the defense budget—such as force structure or research and development—or look inside the defense acquisition portfolio and rebalance it to reflect the new president’s national security strategy.

“They’re going to have some challenges to deal with, but really the opportunity here is that in trying to reshuffle programs to smooth out the acquisition bow wave and make it more executable, they also have a chance to make sure those programs are in alignment with their defense strategy,” Harrison said. “That’s what really important here, is to make sure that our major acquisition program funding accurately reflects our strategic priorities.”

More than half of the funding going to major weapon systems from 2015 to 2030 will be spent on 10 Air Force, Marine Corps and Navy programs: the F-35 Joint Strike Fighter (JSF), ballistic missile defense systems, Ohio replacement and Virginia-class submarines, Long Range Strike Bomber (LRSB), DDG-51 destroyer, KC-46A tanker, Ford-class aircraft carrier, Evolved Expendable Launch Vehicle and Ground Based Strategic Deterrent (GBSD).

Rebalancing those programs, either by cuts or delays, would have strategic consequences, but could give the services some relief, Harrison said. For instance, the Pentagon would save up to $4.5 billion per year during the peak years of the bow wave by delaying the Ohio replacement submarine by five years. Another option, cutting F-35 procurement from 120 to 80 aircraft a year, would save about $40 billion annually.

Of all the services, the Air Force will be the major driver of the bow wave as a handful of major aircraft programs will need to be funded simultaneously, including the service’s top three acquisition priorities: the F-35, LRBS and KC-46A tanker. Aircraft programs will almost double in cost from $12 billion in 2015 to $22 billion in 2023, Harrison said.

Space and communications systems could be a wildcard, as the Air Force has not announced plans for follow-on systems for many of its satellite constellations. At the very least, it will have to buy new satellites, Harrison said, but if the service decides to develop entirely new systems, it would further drive up planned acquisition costs.

The GBSD, which will replace the Minuteman III, is planned to start in the 2020s and represents another big addition to the Air Force acquisition portfolio. If the next administration is looking for “low hanging fruit,” the GBSD is an “early-top-need” capability that could be pushed back by five or so years to lower the Air Force acquisition budget, he said.

The Navy and Marine Corps, on the other hand, are coming down from a bow wave as many aircraft and shipbuilding programs begin declining in 2022. The Navy’s biggest acquisition priority, the Ohio-class replacement submarine, will be partially offset as production of the Virginia-class submarine and other ships slows down.

Aviation purchases are also set to decline “precipitously” in the next decade, in part because the services have already modernized its fleet, Harrison said. Only acquisitions of the F-35B and C and the Marine Corps’ CH-53K helicopter are planned to ramp up production throughout the decade.

“For several years now, the Navy has been buying more aircraft than the Air Force. That is going to come to an end in the near future,” he said. By the end of the 2020s, the services’ will have procured for the P-8A Poseidon, V-22 Osprey and E2-D Advanced Hawkeye.

The Army will have a small bow wave in the area of ground vehicles, as it plans to ramp up buys of the Joint Light Tactical Vehicle and Armored Multi Purpose Vehicle, M1 Abrams tank upgrades, modernization of the Paladin and Bradley fighting vehicle. However, the scale of the bowwave – from about about $1 billion to $3.5– is small compared with the more massive costs of Air Force aircraft and Navy ships.

“That is pocket change” in D.C. speak, Harrison said. 

Lockheed Martin [LMT] on Jan. 26 reported higher fourth quarter sales and earnings, which beat consensus estimates, and announced it is separating its realigned information technology and services segment and combining it with Leidos [LDOS] in a transaction valued at $5 billion.

Sales increased 3 percent to $12.9 billion from $12.5 billion a year ago due to the $9 billion acquisition in November 2015 of Sikorsky Aircraft from United Technologies Corp. [UTX]. Net income also rose 3 percent to $933 million, $3.01 earnings per share (EPS), from $904 million ($2.82 EPS), topping analysts’ expectations by a nickel per share.

The earnings results included severance charge and non-recoverable acquisition costs related to Sikorsky that wiped $44 million and $28 million from the bottom line, which was offset by a $71 million gain related to reinstatement of the federal research and development tax credit for all of 2015.

The divestiture of Lockheed Martin’s Maryland-based Information Systems & Global Solutions (IS&GS) segment is structured as a Reverse Morris Trust for tax efficiencies. Lockheed Martin will receive a $1.8 billion cash payment and $3.2 billion in stock, which will give it a 50.5 percent ownership stake in Leidos.

The cash payment will be used to repay debt, pay dividends, and or repurchase stock, Lockheed Martin said.

Leidos will remain headquartered in Northern Virginia and will continue to be led by Roger Krone, the company’s chairman and CEO, and Jim Reagan, chief financial officer. Lockheed Martin will be entitled to designate three new directors to service on the Leidos board, which currently numbers 10 directors.

The divestiture of IS&GS is expected to be completed during the third or fourth quarter of 2016 and is subject to approval by Leidos shareholders and government regulators. Leidos said that IS&GS senior managers are expected to join the company’s leadership.

Lockheed Martin said that until the transaction closes, IS&GS will continue to operate as a business segment within continuing operations. As part of its strategic review of IS&GS, Lockheed Martin has realigned some programs into other business segments. Mission IT and services programs that support the company’s platforms are now in the Mission Systems and Training (MST) segment, energy solutions programs have been moved to the Missiles and Fire Control (MFC) segment, and space services program are now within Space Systems. Technical services program have been moved to IS&GS from MFC.

Excluding the Sikorsky deal, sales in the quarter were essentially flat, with increases at Aeronautics and MFC offset by declines at IS&GS and MST. Aeronautics benefited from higher production and sustainment on the F-35 Joint Strike Fighter and higher deliveries of C-5 transport planes.

The company delivered 45 F-35s in 2015, a 25 percent jump over 2014, and plans to deliver 53 in 2016, ramping up to 59 or 60 in 2017, and around 100 aircraft in 2018, Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on the Jan. 26 earnings call. She said the F-35 is “getting much more stable” as production ramps up.

Operating earnings at the segment level were essentially flat in the quarter versus a year ago at $1.4 billion as increases at MFC, IS&GS and Aeronautics were wiped out by a decline at MST. Profit at Space Systems was flat.

Orders in the quarter were $26 billion and backlog, with a big boost from Sikorsky, soared to a record $99.6 billion from $80.5 billion at the end of 2014. Excluding Sikorsky, backlog was still a robust $84 billion.

With the benefit of Sikorsky, Lockheed Martin increased its sales guidance for 2016 to between $49.5 billion and $51 billion versus a prior outlook that was flattish with 2015. That forecast includes around $5 billion from IS&GS, which eventually will become part of Leidos once the divestiture is complete. Sales in 2015 were $46.1 billion, up a percent from $45.6 billion in 2014.

International revenue accounted for 21 percent of the company’s total sales in 2015, up 6 percent from a year ago, Hewson said.

Bruce Tanner, Lockheed Martin’s chief financial officer, said that the outlook for Sikorsky has changed since the company announced in July 2015 its offer for the helicopter manufacturer. Sikorsky’s commercial helicopter sales peaked in 2014 at around $1.5 billion and Lockheed Martin expected 2016 sales to be about half of that, he said, but now the forecast is about one-quarter or around $375 million due to the continued collapse of global oil and gas markets.

Per share earnings are expected to range between $11.45 and $11.75 this year, an increase over the $11.21 posted in 2015. Net income in 2015 was $3.6 billion, in line with 2014.

Free cash flow in 2015 was $4.2 billion and the company returned $5 billion to shareholders, a record, with $1.9 billion spent on dividends and the rest through share repurchases. Operating cash flow is expected to increase in 2016.

Raytheon [RTN] is providing its Coyote Unmanned Air System (UAV) to the National Oceanic and Atmospheric Administration (NOAA) for hurricane tracking and modeling, the company said Jan. 20.

The Coyote is a small, expendable UAS that can be launched from an air or ground-based A-size sonobuoy tube or common launch tube for intelligence, surveillance, and reconnaissance (ISR) missions. The aircraft can be used for targeting assistance, perimeter security, and research missions, Raytheon said.

NOAA and Raytheon scientists intend to use the latest version of the Coyote to monitor the track and intensity of storms. The team recently completed a successful calibration flight over Avon Park, Fla., where the UAS was launched from a P-3 hurricane hunter aircraft in preparation for deployment during the next storm season, Raytheon sad.

“This successful flight gives us additional confidence that we will be able to use this unique platform to collect critical continuous observations at altitudes in the storm environment that would otherwise be impossible,” Joe Cione, a hurricane researcher at NOAA’s Atlantic Oceanographic and Meteorological Laboratory and chief scientist of the Coyote program, said in a statement.

“We’ve made significant improvements to Coyote. It can now fly for up to one hour and 50 miles away from the launch aircraft. Raytheon technology is playing a key role in enhancing safety for hurricane researchers, and helping to deliver vital information about potentially deadly storms to the American people.” Thomas Bussing, vice president of the advanced missile systems product line at Raytheon, added.

Raytheon highlighted NOAA successfully deployed a Coyote from a P-3 into the eye of Hurricane Edouard in 2014. The agency plans to expand use of the UAS in the 2016 hurricane season.