GlobalSecurity.org In the News

Business Week April 6, 2009

Winners and Losers in the Defense Plan

By Christopher Palmeri

Defense Secretary Robert M. Gates took the unusual step on Apr. 6 of announcing the Pentagon's spending priorities—and weapons program cuts—before the White House had actually submitted its proposed 2010 budget to Congress.

Wall Street had been expecting much worse for what had been categorized as "bloody Monday" for the defense industry. Instead, defense stocks rallied, with the Spade index, composed of 55 defense-related stocks, rising 3.6% even as the Secretary spoke. "For everything they took away, they added something else," says Scott Sacknoff, director of the index.

While the cuts were many, overall spending would still rise. Many defense shares had already fallen in anticipation of bad news. "I think they're all hit a bit," said Paul Nesbit, a defense industry analyst at JSA Research, of the big companies he follows. "But not as much as some people thought. Once that uncertainty was removed, they all took off."

More Federal Jobs

The announced 2010 budget would be $533.7 billion, up by $20.4 billion from 2009, not including an additional $130 billion for the wars in Iraq and Afghanistan. Gates said he would increase the budget to complete "the growth in the Army and Marines while halting reductions in the Air Force and the Navy. "

That means more federal jobs. Gates announced the Pentagon would be hiring 20,000 people, converting 11,000 contractors into government employees and hiring 9,000 new acquisition professionals by 2015. Much of the systems integration work, language translation, and technical support services that had been down by outsiders would be done in-house by the Pentagon. One loser there is Lockheed Martin (LTM), a big government services contractor.

Lockheed also took a direct hit to one of its fighter jet programs, the F-22 Raptor, which will stop at 187 planes at the end of this year. Another Lockheed jet, the F-35 joint strike fighter, got a boost, however, with Gates increasing the buy from the 14 aircraft bought in 2009 to 30 in 2010, with funding increases from $6.8 billion to $11.2 billion. The Pentagon will buy 513 F-35s over the next five years and, ultimately, 2,443 of the $80 million planes.

The surprises, says John Pike, a defense industry analyst with GlobalSecurity.org, were the cancellations of the F-22 and the indication by Gates that he would go ahead with the controversial airborne fuel tanker program, a battle won by Northrop Grumman (NOC) and its overseas partner EADS (EAD), but under protest by Boeing. Pike said he expected a continued fight to keep the F-22 by the many states involved in its production. Meanwhile, he notes, the Office of Management & Budget had recommended not continuing with the new tanker program. "The [existing] KC-135 was positioned as an Eisenhower-era plane—the struts need to be replaced, that's all," Pike says. "The only thing we get from a new tanker is new car smell in the cockpit."

Bummer for Boeing?

Missile defense was a big loser, with spending cut by $1.4 billion. Gates said the Pentagon was focusing more on intercepting missiles from rogue states and in the combat theater and less on long-range missile intercepts. The agency is cutting back sharply on a new ground-based missile unit being built up in Fort Greely, Alaska. The Pentagon once hoped to have as many as 100 of the interceptors, but now will stop well short of that. That's bad news for Raytheon (RTN), which makes the warheads; Orbital Sciences (ORB), which makes the missile bodies; and Alliant Techsystems (ATK), which makes the booster rockets. Gates also canceled a second airborne laser aircraft, a Boeing program that has been going in fits and starts for two decades.

Indeed, Boeing may emerge as one of the biggest losers in the day. That's because the company's massive $160 billion Future Combat Systems is under attack. The Pentagon is cutting all vehicle development for the program. Gates said the Future Combat System vehicles, designed nine years ago to be low-weight, fuel-efficient vehicles with less armor, "do not adequately reflect the lessons of counterinsurgency and close quarters combat in Iraq and Afghanistan."

Out at sea, General Dynamics' (GD) Bath Iron Works in Maine seems to be a winner, picking up two new destroyer awards. Gates said Northrop Grumman's Ingalls shipbuilding unit in Mississippi, on the other hand, still has negotiations for its destroyer contracts. Gates said both yards may see less work in the future if contracts aren't renegotiated.

The controversial VH-71 Presidential helicopter, Marine One, led by Lockheed but built with parts by Bell Helicopter (TXT), GE (GE), and more than 200 American companies across 41 states, is getting axed. The program was originally designed to provide 23 helicopters to support the President at a cost of $6.5 billion. Today, the program is estimated to cost over $13 billion, has fallen six years behind schedule, and runs the risk of not delivering the requested capability, Gates said. He's also shooting down the Air Force Combat Search & Rescue X (CSAR-X) helicopter program, which Boeing had initially won but was being challenged by rivals Lockheed and Sikorsky (UTX).

Tiny General Atomics is once again a winner thanks to its Predator unmanned aerial vehicles. Gates said he wanted 50 more of those, a 62% increase over the current level.