Lockheed Martin Corp’s F-22 fighter jet and Boeing Co’s Future Combat Systems are among programmes at risk as the Obama administration begins to close the “spigot of defence spending” that opened with the 2001 terror attacks.
Defence Secretary Robert Gates is scheduled to disclose which programmes get curtailed tomorrow in his effort to rein in defence spending that may reach $654.1 billion in the budget year ending in September, a 72 per cent gain since 2000. Cost increases and the expense of supporting two wars contributed to the run-up, with new weapons now accounting for 37 per cent of Pentagon spending, up from 30 per cent.
“Everything’s different now,” Peter Arment, a Greenwich, Connecticut-based analyst with Broadpoint AmTech, said in an interview. “The normal process is to see the budget come through in the president’s request in early February, and then go through some evolution in Congress. This is a new administration. These are unprecedented budgetary times. They are going to be making long-range defence decisions.”
Gates must decide whether to keep buying Lockheed F-22s while waiting for its F-35 to reach full production, military analysts said. Lockheed’s new VH-71 presidential helicopter, a procurement program President Barack Obama said has “gone amok,” may also be under review, along with the Littoral Combat Ships made by Lockheed and General Dynamics Corp.
Programmes under review also include Boeing’s ground-based and airborne-laser missile defence programs and aircraft carriers built Northrop Grumman Corp.
Boeing’s Future Combat Systems — a fleet of manned and unmanned Army vehicles joined by a wireless network — has a “target on its back” and the presidential helicopter “is in trouble,” James McIlree, a New York-based analyst with Collins Stewart LLC, said in an interview. Both have had cost increases. The F-22 has a “reasonable chance” of more orders, he said.
Turning Off ‘Spigot’
Gates, who was hired by President George W. Bush and kept on the job by Obama, in January said the “spigot of defence spending that opened on 9/11 is closing.” The former director of the Central Intelligence Agency has conducted his weapons review in secrecy in an effort to reduce leaks and lobbying. He’s scheduled to announce his decisions at a Pentagon news conference at 1:30 p.m. tomorrow.
The Standard & Poor’s Aerospace & Defence Index had risen 82 percent by the seventh anniversary of the attacks in 2008. Lockheed shares tripled in that time, making it the biggest gainer among the five largest contractors.
‘Fundamental Shift’
Obama on Feb. 24 called upon the Pentagon to “reform our defense budget so that we are not paying for Cold War-era” weapons. The changes Gates is contemplating “are not changes around the margins,” Pentagon spokesman Geoff Morrell told reporters. “This is a fundamental shift” in how the Pentagon buys major systems and supports combat troops, he said.
Broadpoint’s Arment says many of the rising costs in defence procurement are the fault of the military services for changing requirements after work has begun. Collins Stewart’s McIlree said says companies share the blame.
Contractors “make themselves a target when they underestimate costs and overpromise what they’re going to deliver,” McIlree said.
Among options the Pentagon considered in its review of the 2010 defense budget is a White House suggestion to target $21.7 billion in cuts, including the cancellation of Boeing’s airborne laser and postponing a new competition for the U.S. Air Force’s refueling tanker program, according to a Jan. 29 proposal from the Office of Management and Budget.
Insulating Obama
The defense secretary’s plan to announce his decisions in a news conference before sending details of the 2010 budget to Congress some time in early May could help isolate Obama from a political backlash about cutting weapons, analysts said. Any changes to the weapons budget must be approved by Congress, against the backdrop of a recession that has claimed 5.1 million jobs since it started in December 2007.
The “maneuver could deflect attention from the Obama administration,” Heidi Wood, an analyst at Morgan Stanley in New York, wrote in an April 2 note to clients.
If Gates decides to curtail or cancel major weapons programs, he has “to explain why he’s making those decisions, the strategy for the future, and how it fits in that context,” William Cohen, former U.S. defense secretary in the Clinton administration, said in an interview.
“It’s the beginning of a long process because Congress will ultimately weigh in,” Broadpoint analyst Arment said in an interview.
Intertwined Needs
Cuts in one program may affect the need for others. For example, reducing the number of planned aircraft carriers from 11 by one or two ships may shrink the carrier-based airplane fleet while increasing the need for land-launched planes such as Lockheed’s F-22. The most recent carrier, the USS George H.W. Bush, was built by Northrop and launched Jan. 10 at a cost of $6.2 billion.
Lockheed and Boeing have been campaigning to save major programs by tying them to jobs and highlighting the economic impact of canceling weapons.
Curtailing production of the F-22 beyond the 183 on order would jeopardize 95,000 workers in 1,000 companies across 44 states, according to Lockheed. The aircraft is the most expensive fighter jet at $354 million each in inflation-adjusted dollars that amortize 20 years of research and development.
“We’re looking forward to the release of budget decisions on F-22 and all other national security and defense programs,” Lockheed spokesman Jeff Adams said.
The Future Combat Systems program is managed jointly by Boeing and Science Applications International Corp. It supports 91,000 jobs at about 900 suppliers in 43 states, Boeing spokesman Matthew Billingsley said in an e-mail. At an estimated $159 billion, it is the second most expensive Pentagon program after Lockheed’s $298 billion F-35 program.
“It would be inappropriate to comment on ongoing internal Army or DOD budget deliberations,” Billingsley said.
To contact the reporter on this story: Gopal Ratnam in at gratnam1@bloomberg.net; Edmond Lococo in Boston at elococo@bloomberg.net.
