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Raytheon sees 'never-ending opportunity' in Patriot missile system

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Raytheon Co is poised to book billions of dollars' worth of orders for its Patriot air and missile defense system in the coming months, underscoring the resurgence of a weapon first developed to defend Europe against a possible Soviet attack.

Three decades later, the system has been upgraded multiple times and more than 200 fire units are in use in a dozen countries, with additional customers in talks to buy into a system that just a few years ago looked ready to wind down.

Raytheon Chief Executive William Swanson last month called the system "a never-ending opportunity" after a major redesign as part of a $3.3 billion order from the United Arab Emirates in 2008 that has spawned multiple new orders and launched a new chapter in the program's history.

"Once you upgrade it you can go back to all your other customers and offer them the upgraded hardware to reduce their costs, reduce the spare content and so forth. So it's a never-ending opportunity for us here at Raytheon," Swanson told analysts on an earnings call.

Raytheon builds Patriot - a long-range, high-altitude, all-weather system - and acts as the systems integrator for the PAC-3 missile, which is built by Lockheed Martin Corp .

Raytheon officials say they expect several large orders for Patriot systems in the second half of the year, including a deal for 11 fire units from Qatar valued at around $2 billion. They also expect an order exceeding $500 million from Kuwait that could expand further in coming years through related contracts for modernization, spares and services.

Turkey is also weighing a large order that could be worth around $2 billion, Swanson told investors in April.

The Patriot system is already used by 12 countries - United States, Netherlands, Germany, Japan, Israel, Saudi Arabia, Kuwait, Taiwan, Greece, Spain, South Korea and UAE. Raytheon is in active talks to enlarge that group and upgrade existing systems, according to Tim Glaeser, a vice president with Raytheon's Integrated Defense Systems (IDS) division.

Poland had considered buying used Patriot equipment from Germany, but is now weighing the purchase of new fire units, and India has expressed an interest, Glaeser said. Singapore and Malaysia are also considering air and missile defense systems.

The company says more than $400 million has been invested into making the Patriot system faster, smarter and tougher. Components have gotten smaller, computer chips are an eighth of the size they were in 2006, and new units are built in an upgraded facility that uses computer-controlled tools.

Glaeser said the company has streamlined production significantly, making it cheaper to build the Patriot system.

For instance, he said the company had driven the cost of the system's complex antenna down 300 percent, making it possible to swap the whole antenna out if it was not working, rather than having to waste time and money troubleshooting its 5,800 parts.

Raytheon doesn't just earn by building the systems. It also makes money through constant software and other upgrades and maintenance. In June, the company won a $116 million contract from the U.S. Army to provide engineering services, which company officials say will allow them to work on enhancements funded jointly by the U.S. military and international customers.

All Patriot users participate in a special council that meets yearly to consider engineering changes.

MORE USERS, LOWER COSTS

Will Lovell, director of production in the Army's Patriot project office, said the international partnership helped push down the cost of owning and operating the system for all users.

The addition of each new user helped reduce the cost per unit for participating country since the program's baseline costs remained the same, Lovell told Reuters.

"It ... benefits everyone when more countries select Patriot as their missile defense system," he said.

Loren Thompson with the Virginia-based Lexington Institute said Raytheon's Patriot system was riding a major military modernization wave in the Middle East, but also benefited from the U.S. Army's decision to pull out of the next-generation MEADS system that was initially meant to replace Patriot.

A Lockheed-led international consortium is developing the Medium Extended Air and Missile Defense System with funding from the United States, Germany and Italy. Washington plans to end funding this year, after the development program is completed.

"With the waning of MEADS, Patriot is likely to remain the pre-eminent air defense system in the world for the next 20 years," he said. "The reason it's a never-ending opportunity for Raytheon is because its successor was killed."

One of MEADS's key attributes was a 360-degree radar that allows the system to spot threats coming from any direction, something Patriot cannot do.

Glaeser said Raytheon is "exploring options for a 360-degree sensor to meet the requests of our international parties." The Army has said it hopes to harvest some technologies from the MEADS program and reuse them, but it has not released details.

(This Aug. 4 story corrects 9th paragraph to show that Poland is considering buying new Patriot fire units, instead of Patriot equipment from Germany, and adds that Singapore and Malaysia are considering other air and missile defense capabilities.)

(Editing by Maureen Bavdek)

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