Plant's sale puzzles experts Wall St. questions how Middle River deal could help Lockheed

November 04, 1997|By Greg Schneider | Greg Schneider,SUN STAFF

Workers weren't the only ones feeling anxious about Lockheed Martin's decision to sell its Middle River Aerostructures plant to General Electric. Several industry experts also had a hard time figuring why the Bethesda-based aerospace giant would jettison a growing business.

"It's all very baffling," said Richard Aboulafia, a defense analyst with the Teal Group consulting firm. "They could have had critical mass in a crucial segment of the commercial aviation market. It would have really pleased the Wall Street types."

That market segment is aircraft maintenance and modification, which a senior Lockheed Martin executive said earlier this year could be even more lucrative than the multibillion-dollar market for building military airplanes.

On the other hand, no one seemed to question why the Connecticut-based GE would want Middle River.

The new owners "have to be very pleased. I can't imagine they would do anything to stem the development of technology" at Middle River, said Brett Lambert, a defense analyst with DFI International. "If anything, GE may be more interested in encouraging it, because it makes their systems more effective."

GE is already the world's leading maker of jet aircraft engines, and the Baltimore plant now adds capabilities for making engine housings -- called nacelles -- and thrust reversers, which help an airplane slow down after landing.

The acquisition may help GE become "an integrated producer of aircraft propulsion systems rather than just a producer of aircraft engines," said Stuart McCutchan, publisher of the industry newsletter Defense Mergers & Acquisitions.

But with profit margins on new aircraft engines running very slim, McCutchan said, the real value of Middle River may be the strength it brings GE in the aftermarket -- upkeep and overhaul.

Earlier this year, GE bought the nation's two largest independent jet engine overhaul companies -- Greenwich Air Services of Florida and UNC Inc. of Annapolis. The maintenance market is so fragmented that even those additions only give GE a 16 percent share, McCutchan said.

Middle River has its own expanding overhaul business -- the Center for Aircraft Maintenance -- and offers great manufacturing capability.

One irony of the sale is that GE sold its thrust reverser business to Middle River in 1993, and now is buying it back. Analyst Paul Nisbet of JSA Research said he wasn't particularly surprised that the company had changed its mind and sought to regain the business.

"They might be able to make much more use of it now than they could before. When they sold that to Lockheed Martin they weren't thinking in terms of aggressively going after the maintenance market. It's a more lucrative market now than it used to be," he said.

On the other hand, that same logic makes it all the more surprising that Lockheed Martin would let the facility go.

Middle River "is not a minor facility," Aboulafia said. "It's close to the jewel in the crown for Lockheed Martin right now" in the aircraft maintenance and modification field.

Grouped with a facility in Greenville, S.C., Middle River was part of a Lockheed Martin unit called Aircraft and Logistics Centers, or ALC. Greenville would go out and do maintenance work, and Middle River would supply the parts.

This was the field that Lockheed Martin Aeronautics Sector President James A. "Micky" Blackwell said would one day be on a par with the company's big aircraft manufacturing centers in California, Texas and Georgia.

"That's the great avenue of expansion that is left for Lockheed Martin," McCutchan said.

The company has gotten so big that "everywhere they turn now in terms of the business they already have, they're going to confront antitrust issues. But the after-market business is so fragmented that anybody can pretty much do anything in it and it's going to be seen as OK," McCutchan said.

Pub Date: 11/04/97

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