(FORTUNE Magazine) – So rapidly has the defense industry shrunk in recent years that "consolidation" sometimes seemed a polite way of saying "collapse," as one famous name after another disappeared into a black hole. But for the aerospace sector, the implosion is about over--and what has survived is a surprisingly healthy business. Assuming that a couple of key mergers are approved, three mighty companies and a scrappy fourth will take command.

Even stability would be welcome after years of shriveled Pentagon budgets, but this industry could actually boom. The reason can be summed up in two words: fighter aircraft. Over the next 15 years or so, the Pentagon would like to spend $150 billion on three planes: the Navy's Super Hornet (FA 18 E/F), the Air Force's amazing Raptor (F22), and a plane still being designed, a Joint Strike Fighter that can be used by the Air Force, Navy, and Marines.

The rest of the defense industry still is struggling, to be sure, in particular companies that supply the Navy. A decade ago the Navy was swelling toward President Reagan's goal of 600 ships; today the fleet has shrunk to 330 or so, and because no other navy can challenge U.S. control of the sea-lanes, there is no pressure to make it any larger. There is not enough work to keep all five of the country's major shipbuilding yards busy. "We have twice as much capacity as we need," says Paul Kaminski, until recently the Defense Department's Under Secretary for Acquisition and Technology.

The industry that supplies the Army is stabler but smaller. Less than 10% of the money for the Pentagon's top 20 weapons programs is currently spent on Army artillery, helicopters, tanks, and such. General Dynamics has a $1.3 billion contract to outfit 1,100 existing tanks with better armor and electronics and bigger cannons, but not to make any new ones. Formidable as it is, the U.S. Army has far fewer soldiers than some other countries' land forces--behind China, Russia, India, North Korea, Vietnam, South Korea, and Pakistan.

When it comes to airplanes, however, the Pentagon insists it's time to shop. The military's premier but aging fighters, the F-15 and F-16, need replacing, and to pay for the new planes, the Pentagon wants to increase its procurement budget by $20 billion a year. Total defense spending is likely to be frozen at $250 billion or so for the next few years, so plane money will have to come from somewhere else in the military budget.

Dropping 109,000 military and civilian workers from the payroll and closing 50 bases would do the trick. Congress is not going to allow the Pentagon to eliminate jobs that freely, but the Pentagon has a strong case for getting much of what it wants. The money spent on buying new weapons has plummeted by half during the past ten years, far faster than other segments of the military budget. Congress respects the argument that procurement has been neglected. It can also do another calculation. Military bases employ voters, but so do aerospace companies and their many subcontractors around the country.

The four companies that will rule the aerospace industry are joined in a web of alliances and rivalries that make Renaissance Italy seem uncomplicated. They will fight for leadership, but the battle will probably not be fatal or seriously wounding for any of them. This industry--toughened by those years of consolidation--looks so sturdy at the moment that even the smallest of the four can prosper.

LOCKHEED MARTIN

To call this the company that swallowed half an industry is only a slight exaggeration. Two decades ago what is now Lockheed was 21 separate companies, including the aircraft segments of General Dynamics, creator of the F-16, and the electronics maker Loral, itself a cluster of companies. Lockheed Martin may sound like an unnatural monster, but if so, it seems a very healthy and classy monster--not only the biggest defense company but the one best balanced among making aircraft, electronics, and missiles. "No single culture can dominate the others--a good mindset," maintains Peter Aseritis, an analyst for CS First Boston, "like America at the turn of the last century."

Its grand project is the Raptor, successor to the F-15, a plane that must be able to destroy anything else in the sky. Although Lockheed is the prime contractor, Boeing makes about one-third of the plane, including the wings and aft fuselage. Pratt & Whitney provides the engines. The first test model will be delivered to the Air Force this summer, but it will be another seven years before a substantial number of Raptors are ready for combat. It will be the "wow" plane of the early 21st century--able to fly for a long time at supersonic speed and hard to detect because of its stealthy characteristics; a new stealth skill is the capacity to turn down the volume on radar signals that enemy planes can fix on. The Raptor will collect data from satellites and friendly planes on the positions of everything in the air, sort out ally from foe on its internal electronics system, and suggest to the pilot which targets should get his attention first. The pilot will be able to move his cursor around a display screen and fire air-to-air missiles as he chooses.

Visualize the Raptor as a very fast and deadly computer. The price tag is appropriately awesome. The Pentagon wants 339 of them, certain to cost a minimum of $75 million each. If a pilot is forced to ditch a Raptor, the act will be the economic equivalent of dropping a medium-sized hospital in the ocean. Does the U.S. really need such a superduper new aircraft when McDonnell Douglas' F-15 is still unchallenged? Not urgently. But the Western Europeans have developed prototypes of fighters that can compete with the F-15, and the Russians are capable of building such a plane even if they don't have the will to do so for now.

BOEING/MCDONNELL DOUGLAS

The merger of these two would be air power squared, the world's biggest and most awe-inspiring manufacturer of planes by far, which is why Airbus, their rival in commercial jetliners, wants the U.S. government to kill the deal. Mac has not thrived in the commercial business, but it has been an outstanding success in military planes. The Navy will get the first dozen of Mac's Super Hornets by the end of the year and wants at least 548, at a price of about $45 million each. Mac suffered a major setback, however, in being eliminated from the three-way competition to make the Joint Strike Fighter, losing out to finalists Lockheed and Boeing.

Whichever wins the fly-off between demonstrators--not scheduled until 2000--will have in hand the richest contract in the defense industry. The JSF will be a successor to the F-16, and as such a multipurpose fighter simpler than the Raptor, able to fly at supersonic speed only in short bursts, for example, and with less fancy electronics. It will also be a lot cheaper, maybe a mere $35 million. What makes the contract so desirable is that the Pentagon wants so many of the JSFs--a phenomenal 2,852.

Even though Boeing hasn't created a fighter plane since the P-26 "Peashooter" of the 1930s or a bomber since the B-52 in 1951, it may have an edge on Lockheed. Here's why. The JSF will have to be made in three different versions: a Navy plane that can land on carriers, a Marine model that can take off vertically, and an Air Force plane for longer airfields. Boeing is a master of the complicated manufacturing likely to be required. The discipline of the commercial market, moreover, has taught Boeing how to control costs. "The Defense Department is really serious this time about not overspending," says former Under Secretary Kaminski.

RAYTHEON/HUGHES

These companies don't make planes. They are specialists in defense electronics, less glamorous than building planes but very lucrative. By a rough rule of thumb, two-thirds of the cost of a fighter aircraft is engines and airframe. The remaining third is electronics, including radar, night vision, the avionics gear that flies the plane, the systems that fire the guns and missiles, and the missiles themselves.

If the government approves this merger and Raytheon's purchase of Texas Instruments' military business, the combination would become the most potent force in aerospace electronics, largely because Raytheon and Hughes are the only American manufacturers of air-to-air missiles. That's not a monopoly that would necessarily last for long. Lockheed, dominant in sea-to-air missiles, could certainly learn the business. So could others. But in the short term Raytheon/Hughes would be in such a powerful position that Cai Von Rumohr, an analyst at Cowen & Co., would make the stock one of his investment favorites. If the Air Force buys Raptors, Raytheon fits them with missiles. If the Air Force buys cheaper planes instead, Raytheon fits them with missiles.

NORTHROP GRUMMAN

This company is so much smaller than the others that there is constant speculation that it cannot go on alone. Northrop is making the 21st and possibly the last of its B2s, a stealth bomber that was designed to penetrate deeply into the Soviet Union and no longer has a clear and central role. Nor is the company a contender for an enormous prime contract to make a new airplane. Does that make Northrop an orphan in search of a buyer? "We're not for sale," says CEO Kent Kresa.

Kresa would not be the first chief executive to proclaim independence and then seek a purchaser. But there's good reason to take him at his word. Think of Northrop not as a failed prime contractor but as the supreme subcontractor, linked in important ways to the industry's larger powers. Northrop supplies the aft fuselage for Mac's Super Hornet, and tail assembly and surface controls for the C-17 cargo jet. Northrop is also the largest single subcontractor to Boeing's commercial business, supplying half the fuselage of the 747 and the doors for the 747 and most other Boeing aircraft. "Northrop has done a very good job of proving that being No. 4 is not a liability," says CS First Boston's Aseritis.

What may be most remarkable about the consolidation of the industry is that the customer--the Pentagon--kept its hands off. Instead of urging particular companies to join with one another, which it might have justified as essential for national security, the Pentagon said, in effect, "You guys sort it out." They did, and it worked.

REPORTER ASSOCIATE Patty de Llosa