Northrop Set to Dominate Market for Unmanned Flight.

Poised to receive a production contract this fall that could be worth $1.6 billion for its Global Hawk unmanned aircraft, Northrop Grumman Corp. has bolted out of the gate in the race to become a leader of next-generation, unmanned aerial vehicles, or UAVs.

With Air Force officials currently in contract negotiations with Northrop to get delivery of 78 of the $20 million reconnaissance planes by 2020, analysts said Northrop is positioned to dominate a growing defense segment.

The No. 4 defense contractor has for years been positioning itself to become the leader of the UAV market, and is already developing a roster of advanced vehicles for the Air Force and Navy. Among the projects in development are a Vertical Takeoff and Landing Tactical UAV helicopter for the Navy and a Miniature Air Launch Decoy, an Air Force vehicle designed to draw enemy fire away from manned aircraft.

Through recent acquisitions, underscored by its recent $5.1 billion purchase of Woodland Hills-based Litton Industries Inc., Northrop now has in place virtually every facet of the technology base associated with the planes. Other UAV-related operations include systems integration, based in Dallas; information technologies, including mission planning software, in Woodland Hills and Herndon, Va; and radar and infrared sensors manufacturing operations in Baltimore.

"Northrop has the most capable UAV in its class. So they have an early lead in that market," said Christopher Mecray, an analyst for Deutsche Bank Alex Brown Inc. in New York. "They hope down the road that that will lead to addition contracts for unmanned (jet fighter) vehicles. They are in a good position to be a leader."

In fact, Northrop is already developing a Naval Unmanned Combat Air Vehicle at its El Segundo plant. But the models are not expected to go into production until at least 2008, company officials said.

Ever since the U.S. suffered minimal casualties in its defeat of Iraq in the Persian Gulf War, the Pentagon has been under intense pressure to create lines of military hardware that can limit casualties as well as carry out a war.

Military officials have been anxiously tracking the progress of the Global Hawk, which has been in development since 1994.

The Pentagon has invested more than $550 million on the program to date, including orders for seven test models, five of which have been constructed.

So far, Northrop and military officials are largely happy with the results.

"Northrop Grumman has made a significant commitment to the unmanned air vehicle system technology," said Cynthia Curiel, a Northrop spokeswoman. "We see it's where the future of military aviation is heading."

With other defense contractors looking for a piece of the UAV pie, Northrop officials are maintaining a cautiously optimistic attitude about the future of the Global Hawk and other unmanned programs.

Analysts said investors would be well advised to embrace a similar cautious optimism about Northrop's future earnings.

"That's one of the dicey aspects about investing long term in defense contractors," said Robert Friedman, an analyst for Standard & Poor's Equity Group. "You never know whether or not the government will remain committed to a program for long periods of time. Defense contractors often spend enormous amounts of money on plants and equipment for a particular program. However, the government can unexpectedly cut funding... well before the anticipated life of these programs is complete, leaving the defense contractor holding the bag.

"But given the Bush administration and (Defense Secretary Donald) Rurnsfeld's desire to leapfrog into next-generation weapon systems," Friedman continued, "I would imagine that they would champion the Global Hawk program."

Workforce will climb

More predictable than Northrop's future stock performance is the company's production timetable, should the Global Hawk program progress as anticipated. Plans call for the construction of two Global Hawks in 2003, four in 2004, and six in 2005, with a total of 40 to 50 to be assembled by 2010 and the remaining 28 to 38 during the ensuing decade, analysts said.

The contract, which is likely to be funded in increments, would initially add 50 jobs to the 30 currently working on the project at the company's Palmdale plant. A yet-to-be-determined number of additional hires would occur once Northrop ramps up to produce more than seven planes a year.

So far this year, Northrop has received contracts worth $129 million to perform preengineering, engineering, manufacturing and development work on the Global Hawk.

Flying at altitudes as high as 65,000 feet and traveling 350 miles per hour, the Global Hawk's radar and electro-optical system capture images of large geographic areas, downlinking them to ground controls, which then relay those images to field commanders and battleships.

In a joint mission with the Royal Australian Navy, the Global Hawk made a highly publicized 23-hour flight from Edwards Air Force Base to Australia on April 21 to test surveillance capabilities.

The week before, it made aviation history by flying more than 30 consecutive hours - longer and at a higher altitude than any other unmanned flight vehicle - from Edwards to the equator and back.

"You continue to do flight tests well into early production to ensure that the system will perform as designed," said Curiel. "The government may request changes in anything to improve the performance."