NOC Northrop Grumman Corp Holding Co

By Doug Cameron 

Controversy surrounding the suspected killing of journalist Jamal Khashoggi is unlikely to derail the multibillion-dollar relationship that makes Saudi Arabia a top customer of U.S. defense firms, said industry executives and analysts.

The U.S. and Saudi Arabian governments have a long record of negotiating contracts that can take years to reach fruition. President Trump last year heralded nearly $110 billion in potential deals during a trip to Saudi Arabia in May 2017. Many defense analysts said that figure includes existing commitments and contracts that could last as long as 30 years.

Mr. Trump has resisted calls to curb U.S. arms sales to Saudi Arabia after Turkish officials alleged the kingdom killed Mr. Khashoggi, a Saudi government critic, in its Istanbul consulate on Oct. 2. Mr Trump said the planned deals are vital for American companies and jobs.

The big five U.S. defense companies -- Lockheed Martin Corp., Raytheon Co., Boeing Co., Northrop Grumman Corp. and General Dynamics Corp. -- all report earnings next week. Analysts are expected to ask executives how the circumstances of Mr. Khashoggi's disappearance might affect their business. Few expect them to address the matter directly. All of the companies declined comment for this story.

"We continue to believe that the death of Jamal Khashoggi will not lead to a major break in U.S. or European defense sales to Saudi Arabia," said Byron Callan at Capital Alpha LLC. Mr. Callan estimated that Saudi Arabia accounts for about 5% of sales at the big U.S. defense companies.

The specialized nature of weapons and defense systems from companies such as Boeing, Lockheed Martin and Raytheon make them a preferred supplier to the oil-rich monarchy, industry executives and analysts said.

The U.S. and Saudi defense industries are becoming increasingly intertwined, with American companies establishing joint ventures in the Kingdom to make parts or providing repair services.

Saudi Arabia is the world's third-largest defense market after the U.S. and China and the biggest export destination for U.S. contractors, which made more than $3 billion in sales to the kingdom last year, according to U.S. government data.

The biggest signed deal is a $10 billion purchase agreed in 2014 of hundreds of armored vehicles by a Canadian subsidiary of General Dynamics, which is continuing to make shipments.

Canadian Foreign Affairs Minister Chrystia Freeland on Monday said her country has no plans to cancel the deal, which was approved by the previous Conservative government. The government has proposed legislation that would toughen rules on future arms sales, she said.

"When it comes to existing contracts, our government believes strongly that Canada's word has to matter," Ms. Freeland said. "Having said that, we believe in a tough arms export regime and that is the approach we're taking going forward."

U.S. defense companies have fostered close relations with Saudi leaders for decades. The kingdom's wealth and longstanding tensions with Iran led it to plan to purchase best-in-class capabilities such as Lockheed's Thaad missile-defense system. Lockheed has previously said it hopes to close that deal by the end of the year.

Saudi Arabia has also bought precision bombs and missiles, though some U.S. lawmakers are seeking to block further shipments because of their use in Yemen, which has resulted in thousands of civilian casualties. Congress has required the Pentagon to assess whether U.S. allies fighting in Yemen have violated human rights.

Ties between the U.S. and Saudi Arabia have withstood previous challenges, including the steep fall in oil prices in 2014 that has strained Saudi Arabia's budget. Oil revenue is the overwhelming driver of Saudi Arabia's economy and public spending.

Defense executives were among prominent attendees lined up for the Future Investment Initiative conference in capital Riyadh next week. A number of executives from finance and industry have pulled out of the conference.

Raytheon Chief Executive Tom Kennedy is still listed as a speaker on the official event website. Raytheon declined comment.

Marc Allen, head of Boeing International, was a speaker at the Saudi event last year and is also on the board of the U.S.-Saudi Business Council, a business lobby group, alongside executives from other big Pentagon contractors, such as Jacob Engineering Inc.

Lockheed Martin CEO Marillyn Hewson in April hosted a tour of a U.S. satellite and missile facility by Crown Prince Mohammed bin Salman, heir to the Saudi throne and the kingdom's day-to-day ruler.

Boeing CEO Dennis Muilenburg in March hosted the prince at the plane maker's plant in Seattle. Other executives, including Mr. Kennedy at Raytheon, have talked of frequent trips to the kingdom.

Saudi Arabia's huge arms bill has led the country to push for a greater share of the economic benefits, especially jobs. The kingdom has said it wants to become less reliant on imports and spend half its weapons budget in domestic facilities -- compared to just 2% at present -- part of a plan to diversify its economy beyond the oil industry by 2030.

That has led U.S. companies to open Saudi subsidiaries and to agree to shift assembly and other production processes to the kingdom. Boeing announced a joint venture in March that would place more than half the repair work for Saudi helicopters in the country, creating 6,000 jobs.

BAE Systems plc, Europe's largest weapons maker with deep ties to Saudi Arabia, is expected to have representatives at the business conclave in Saudi next week, a person familiar with the company's plans said. Saudi Arabia this year agreed to buy 48 more Eurofighter Typhoons from BAE Systems, though the contract still has to be finalized. It could see assembly of the planes in Saudi Arabia.

Robert Stallard, an analyst at Vertical Research, said the signing of the multibillion-dollar combat jet deal could be delayed. He said, though, long-term BAE's business would not be dented. "We think the Saudi situation will blow over," he said in a note.

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

October 18, 2018 14:40 ET (18:40 GMT)

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