Rocketing around the world

THE F-35 stealth fighter is designed to be unnoticeable—at least by enemy radar. Nonetheless, it was the showstopper at this week’s Farnborough air show in Britain, impressing crowds in the showground’s terraces with its smooth manoeuvres and party tricks such as flying backwards. Such was the buzz around the new jet that CEOs attending the show to hammer out big deals broke off meetings to watch. But at Farnborough’s trade show, which opened on July 11th, all the talk was of the missiles the F-35 can fire, as well as the new missile-defence systems that could eventually shoot it down.

Missiles excite, for unlike other weapons, demand for them is growing strongly. Global defence spending grew by just 1% last year—after five years of severe budget cuts in many countries—but the global market for missiles and missile-defence systems is racing ahead at around 5% a year. The capabilities of such weapons are increasing, and with that their price and profitability. Missiles are no longer just flying bombs; they now often contain more computer than explosive to help find their target autonomously.

Sales are rising along with the military threats they help address, says Wes Kremer, who runs Raytheon’s integrated missile-defence business. NATO has been upgrading its European ground-missile defences to prepare for Russian aerial attacks since Vladimir Putin annexed the Crimea in 2014; last week an initial version was declared operational. In Asia several countries are spending on systems to defend against China and North Korea. And in the Middle East, the use of targeted air-to-ground missiles has dramatically risen to try and reduce casualties in conflicts against IS and in Yemen.

For defence firms, missile systems are among the most profitable products they can offer (see chart). One reason is that the current generation of weaponry has not faced the same scale of development problems as new plane projects such as the F-35, or Airbus’s A400M military transporter, both of which are billions of dollars over budget.

Executives are putting missiles at the forefront of their efforts to expand abroad and to reduce their reliance on home governments. This week the West’s big three missile-makers (Raytheon, Lockheed Martin and MBDA) showed off their kit to visiting military delegations, festooned with colourful aiguillettes and decorations, from across the world. Small countries can afford the million-dollar-plus price tags for missile systems compared with $80m for a new F-35. The most go-ahead so far has been MBDA, a European joint venture, which last year won more missile orders outside Europe than within its home continent. Others are now catching up on foreign sales. Raytheon hopes soon to sign a $5.6 billion deal with Poland to upgrade its Patriot missile-defence shield, while Lockheed and MBDA plan to ink a deal with Germany for their air-defence systems.

Investors reckon this will surely all translate into fatter profits for the defence industry. The share prices of Lockheed and Raytheon have both risen by a third over the past year. But there also are reasons to be cautious. “We’re unlikely to see returns as good in the sector over the next few years as we have since 9/11 from which point American military spending surged,” says Michael Goldberg, a defence consultant at Bain & Company.

Another reason to be cautious is that defence ministries have become better at procurement and at fostering competition. That means missile divisions at Western firms are facing more competition from Chinese, Israeli and Russian firms in some export markets, where the latter are upping their game. However good the missile, not every target will be hit.