A Retreat in Spending
Friday, February 6, 2009
After the massive buildup in defense spending during the Bush administration, the defense industry is in the line of fire.
President Obama has vowed to withdraw U.S. forces from Iraq and has hailed the role of America's "soft power." And a bulging federal deficit will force a tough look at pricey weapons systems such as the F-22 fighter jet and a new Navy destroyer.
"The spigot of defense spending that opened on 9/11 is closing," Defense Secretary Robert Gates recently told the Senate Armed Services Committee. "With two major campaigns ongoing, the economic crisis and resulting budget pressures will force hard choices on this department."
Defense contractors are lobbying Congress and taking out advertisements arguing against cutbacks when the economy is already suffering. Some are also angling to secure pieces of the stimulus bill for nondefense portions of their businesses.
Nevertheless, the most vulnerable areas for defense firms are big, costly new weapons systems. Gates is due to make several decisions on weapons programs.
A March 1 deadline looms on whether to order more of Lockheed Martin's F-22 fighter jets or shut down the line. Gates also has to figure out whether to buy the more expensive DDG-1000 Zumwalt class destroyer for the Navy or the less costly DDG-51. An effort to build a fleet of 23 presidential helicopters, at a cost of $500 million each, totaling $11 billion, could be vulnerable because of rising costs, analysts say.
In the Bush administration, Gates delayed awarding a contract to either Northrop Grumman and its partner EADS or Boeing in a $40 billion deal to build an aerial refueling tanker for the Air Force. He also is expected to award a multibillion dollar contract for a search-and-rescue helicopter and to decide whether to order more of Boeing's C-17 transport planes.
"The budget is primarily on ships, planes and tanks," said Jacques Gansler, a Pentagon weapons buyer under former president Bill Clinton who served as an adviser to Obama's campaign. "We'll see reductions because these are so expensive."
For the firms, the stakes are huge. Of the Pentagon's $312 billion in procurement spending in fiscal year 2007, $28 billion went to Lockheed Martin, according to FedSpending.org, an oversight project run by OMB Watch. Boeing ranked second with $23.2 billion; Northrop Grumman took in $17.9 billion; General Dynamics raked in $13.6 billion and Raytheon received $11.1 billion.
For the moment, most defense contractors expect no shortage of work. Even if Obama fulfills his pledge to bring U.S. troops home, the huge task of moving them -- and their equipment -- out of Iraq will require new kinds of logistical support. Equipment worn out in Iraq's harsh climate will need replacing, too. Moreover, the president is planning to add U.S. troops in Afghanistan, which will require equipment, supply caravans and more.
"There will be some shifting of where funds are allocated," said Stan Soloway, head of the Professional Services Council, which represents contractors. "I don't think the total spending is going to decrease dramatically in the next couple of years."
The first hints of where the Obama administration intends to go will come when the president presents a budget to Congress in mid-February. But staff members on the armed services committees say a more realistic defense budget likely won't be ironed out before late March or early April.