Pentagon cuts to hit defense industry
By Marjorie Censer,
The budget cuts the Pentagon proposed Thursday stand to hit nearly every part of the defense industry, from makers of fighter jets and warships to providers of services such as information technology support.
Facing rising political pressure to trim spending, Defense Secretary Leon E. Panetta proposed cutting the budget by $487 billion over the next decade. He detailed the first five years of that plan, worth $259 billion in savings, in a Pentagon briefing Thursday afternoon.
If approved, the cuts would result in slower production of the F-35 Joint Strike Fighter and fewer purchases of the new Littoral Combat Ship and the Joint High Speed Vessel. An Army combat vehicle initiative also would move more slowly than originally envisioned, in part because of contracting issues.
There were notable exceptions to the austerity. The Pentagon is seeking to protect spending for building unmanned systems and for developing new ones. Funding for an unmanned Army system known as Gray Eagle would be spared, and the Pentagon vowed to invest in sea-based intelligence systems like Fire Scout, a Northrop Grumman-made drone, and in space systems.
The Pentagon also is seeking to improve cyberwar capability, both defensive and offensive, which should help boost an industry growing near Fort Meade, Md., where U.S. Cyber Command and the National Security Agency are based.
But the overall impact on the defense industry from Thursday’s proposed cuts would be substantial, even for contractors that have expected shrinking budgets, said Loren Thompson, a defense industry consultant.
“If an administration is willing to make these kinds of cuts during an election year, imagine what kind of cuts might occur in the years following the election,” he said.
David F. Melcher, president and chief executive of McLean-based defense contractor ITT Exelis, said the plan is a mixed bag. While Exelis would benefit from increased spending on electronic warfare and cybersecurity, the company is part of the Joint Strike Fighter program and would be hurt by its slowed production.
“It would be unfair to say these kinds of cuts don’t hurt. Obviously, they do,” Melcher said. “We won’t be immune to it, but I like the way our portfolio lines up with the stated priorities.”
The plan calls for retiring 27 aging planes known as C-5As, large aircraft used for moving troops and supplies, and for retiring 65 of the oldest C-130s, used for dropping troops and equipment by air.
The Pentagon said it found more than $60 billion in savings through an effort to spend its money more carefully, including increasing contractor competition, making better use of information technology systems and reducing contracted services.
The plan, however, provided limited dollar figures, and a full budget is not slated for release until next month.
“The devil is still in the details,” said Roman Schweizer, an aerospace and defense policy analyst at Guggenheim Securities. The plan “doesn’t really lay out the pure winners and losers.”
In earnings calls this week, defense contractors General Dynamics of Falls Church and Lockheed Martin of Bethesda both reported that 2011 profit declined from 2010 levels. But they said their companies have long been adjusting to the anticipated cuts.
“The changes have been here for us — not just now,” Robert J. Stevens, Lockheed’s chairman and chief executive, said Thursday in response to a reporter’s question about whether budget changes are starting to hit home. “It’s been very real for us for a while.”