Canada discreetly puts money down on 14 additional F-35s

Ottawa has quietly started making payments for long‑lead components for 14 additional U.S.-built F‑35s—on top of a contracted initial batch of 16—to hold delivery slots while the Carney government reviews future fighter procurement amid U.S. tariffs and trade tensions. The Department of National Defence reported an extra $476 million spent on the CF‑18 replacement program to end‑2025 but would not confirm allocations; options under consideration include completing an 88‑jet F‑35 fleet or a mixed buy with Sweden’s Saab that could see domestic assembly and job creation.

Analysis

Market structure: Lockheed Martin (LMT), engine supplier RTX (RTX) and Tier‑1 F‑35 subcontractors (e.g., NOC, BAES.L) are direct beneficiaries because Canada’s long‑lead payments keep their production schedules and backlog utilization intact; Canadian Tier‑2 suppliers and training providers (CAE.TO) are second‑order winners if local assembly/mix is chosen. A decision to cap F‑35 buys in favour of a mixed fleet (Saab) would reallocate a meaningful share of ~88-aircraft long‑run revenue (tens of $billions globally across primes) toward European suppliers, pressuring LMT’s Canada‑specific revenue but not its global program economics.

Risk assessment: Immediate market impact is small (days) but political tail risks are asymmetric—cancellation after long‑lead orders could trigger supplier contract disputes and writeoffs (impact in Q4–Q8 post‑decision), while escalation with the U.S. risks broader tariff/defence cooperation consequences over 6–24 months. Hidden dependencies: delivery‑queue position, contract cancellation clauses, and US diplomatic leverage; catalysts include Ottawa’s budget release, Saab assembly commitment, or a US diplomatic push in the next 30–90 days.

Trade implications: Tactical longs: LMT (2–3% position, 6–12 month horizon) and RTX (1.5–2%) to capture secured production revenue; tactical reflationary hedge: XAR (ETF) for 3–12 months. Pair trades: long SAAB‑B.ST (small 1–1.5% position via European listing) vs short LMT (1–1.5%) if mixed‑fleet probability >30% over next 3–6 months. FX/commodities: a Canada→US capital outflow risk implies a USD/CAD long via 3‑month call spreads if CAD weakens >2%.

Contrarian angles: Consensus assumes either full F‑35 or full swap to Gripen; markets underprice a hybrid outcome that boosts Canadian assembly winners (CAE, Magellan) while only modestly denting LMT globally. Historical parallels: Australia/Norway procurement debates led to supplier compensation clauses—expect negotiated settlements rather than outright cancellations. Unintended consequence: prolonged review increases defence‑spend carry for suppliers and creates optionality — favorable for suppliers with flexible production slots.

Key Decisions for Investors

• Establish a 2–3% long position in Lockheed Martin (LMT) with a 6–12 month horizon to capture continued F‑35 program cashflows; set a tactical stop‑loss at 8% and trim 50% of position on a 12–15% gain.
• Add a 1.5–2% long in RTX (RTX) to play engine/long‑lead supplier exposure for 6–12 months; use a protective 10% stop and consider selling 3‑month OTM calls to finance carry if volatility remains elevated.
• If Canadian procurement signals a mixed‑fleet within 90 days, initiate a 3% long position in CAE (CAE.TO) to capture training/assembly work (target 20% upside in 12–18 months), stop‑loss 12%.
• Execute a pair trade: long 1–1.5% Saab B‑shares (SAAB‑B.ST) vs short 1–1.5% LMT if public indication (Saab proposal acceptance or announced Canadian assembly talks) raises mixed‑fleet probability above 30%; close both legs within 6–9 months.
• Buy a 3‑month USD/CAD call spread sized to 1–2% portfolio exposure (strike differential to cost fund) if USD/CAD moves +2% from today, as payments to US primes and trade tensions raise CAD depreciation risk over the next 3–6 months.