Richard Shimooka: A mixed F-35/Gripen fleet will fail us in every way

Canada is again debating replacement of its 40‑year‑old CF-18s with reports that the government may pursue a mixed fleet of F‑35s and Saab Gripens despite Department of National Defence evaluations favoring the F‑35. The author argues a dual fleet is economically and operationally inferior — citing F‑35 production scale, Gripen’s small lifetime order book (117 aircraft), U.S.-built Gripen avionics subject to U.S. controls, and that a Canadian Gripen production line would likely cost far more than promised jobs (hundreds vs. Saab’s claim of 10,000) — and warns the choice risks long-term defence capability and fiscal costs, with upside to Lockheed/ F‑35 incumbency and downside to Saab/Gripen prospects.

Analysis

Market Structure: A Canadian pivot to a mixed F-35/Gripen fleet is a near-term win for Lockheed (LMT) via preserved F-35 production scale and for global F-35 supply-chain incumbents; it is negative for Canadian OEMs dependent on a single domestic program and for Bombardier (BBD.B.TO) reputationally given political threats — expect LMT to capture >50% of incremental North American fighter spend and Saab/third-party suppliers to fight for the remainder. Competitive Dynamics: A mixed fleet increases life-cycle complexity and raises unit O&M and training costs by an estimated 10–30% vs a single-platform buy, advantaging large-scale OEMs that amortize upgrades (LMT) and pressuring smaller suppliers and Canadian industrial offsets. Supply/Demand & Cross-Asset: Defence capex upside in the U.S./NATO cohort supports aerospace equities, bid for industrial metals (Al, Ti) and upward pressure on Canadian 10Y spreads if Ottawa increases borrowing; CAD could trade 2–4% weaker on procurement uncertainty, while US Treasuries may tighten if larger defense orders are funded by higher deficits. Risk & Catalysts: Tail risks include a political decision to cancel F-35 orders (low probability <25% but high impact), US export controls on Gripen avionics, or a rapid policy reversal post-U.S. election; watch Canadian government procurement announcements over the next 90–180 days, DoD/F-35 production cadence, and Q2–Q4 defence supplier earnings for catalyst-driven re-ratings.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in LMT (or buy LMT 12-month ITM call spread) within 30 days: target 12–18% upside if Canadian decision favors continued F-35 buys and broader NATO orders remain intact; hedge with 1% cash if govt signals mixed fleet.
• Open a 2% short position in BBD.B.TO (or buy 3–6 month 10–15% OTM puts) sized to risk tolerance, given negative political headlines and decertification threat; reduce or cover if Bombardier receives >C$500m in confirmed Canadian industrial offsets within 60 days.
• Implement a pair trade: long LMT (1.5% weight) / short BBD.B.TO (1.5% weight) to exploit relative scale advantages; rebalance if spread narrows by 30% or after official procurement announcement (expected window 90–180 days).
• For options-savvy accounts: buy LMT 6–12 month LEAP calls (delta ~0.60) and finance with selling short-dated calls around major headlines (30–45 day expiries) to monetize elevated IV; cap sizing to 2% notional to limit tail exposure.