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A Retreat in Spending
As Obama's White House Shifts U.S. Priorities, The Defense Industry Prepares to Retrench

By Dana A. Hedgpeth and Steven Mufson
Washington Post Staff Writers
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.

Some analysts doubt that Obama would shoot down weapons programs and close their production lines in a recession. The downturn is already taking its toll. Earlier this week, Northrop Grumman posted its first quarterly loss in seven years. The company said it lost $2.5 billion in the fourth quarter in part because it had to write down the value of two acquisitions. Last week, Boeing said it planned to lay off 10,000 employees, or about 6 percent of its workforce, in its military and commercial aircraft businesses.

"This White House does not believe in stimulating the economy by buying more weapons. But it understands that if you cut weapons programs it could eliminate tens of thousands of jobs, causing further damage to the economy," said Loren Thompson, a consultant to companies in the defense industry and the Air Force.

The defense contractors are trying to drive home that point.

Marion C. Blakey, president of the Aerospace Industries Association -- one of the nation's biggest trade groups -- said the industry is meeting with Obama officials and Congress to emphasize that the industry is "fundamental to national security."

"The defense industry has a genuine stimulus on the economy," she said. "Anything that undercuts that position involves very serious economic trade-offs. . . . If you start shutting down production lines and taking people off lines, that means a loss of jobs when those people are really contributing to the economy. Those are good, middle-class jobs."

In recent weeks, Lockheed Martin has run newspaper ads promoting its F-22 fighter jet, saying that the company employs about 25,000 people at 1,000 suppliers in 44 states to produce it. The Aerospace Industries Association has raised $2 million from 17 of its members for an ad and lobbying campaign to promote what it says are 2 million jobs that its members' weapons programs create.

"We're now talking about trying to cut billions of dollars out of the defense budget at a time when there's a push to keep and stimulate the economy with jobs," said Lawrence J. Korb, a senior fellow at the Center for American Progress in Washington who advised Obama on defense issues during his campaign. "When you've got a $1 trillion debt and you have an $840 billion stimulus package to pay for and you're trying to boost your economy, people will say, 'Do you really want to have this big fight to cut something like the F-22 now?' You would find it difficult to make those cuts."

But the F-22 program's fate remains uncertain. The top defense budget expert at the Office of Management and Budget, Steven M. Kosiak, last year wrote a paper suggesting that it might make sense to order the manufacture of fewer F-22 fighter jets than the less advanced planes they are replacing.

The Pentagon might also delay or pare back orders for Lockheed's F-35 Joint Strike Fighter aircraft, analysts say.

Gates told congressional leaders that new weapons systems should be able to address a "hybrid" threat from enemies that combine high technology with insurgent tactics. Some analysts point out that he has noted that the F-22 has not been flown in combat operations in Iraq and Afghanistan.

"I want us to look for systems that have the maximum possible flexibility across the broadest possible range of conflict," he said in testimony to the House Armed Services Committee. Strategic decisions combined with technical difficulties could also reduce spending on missile defense.

During the campaign, Obama said he didn't want to spend money on unproven missile defense programs, according to Travis Sharp, a military policy analyst at the Center for Arms Control & Non-Proliferation. Defense contractors have some prospects. Most of the biggest companies have built up nondefense areas of business such as health-care services and retrofitting federal buildings for greater energy efficiency, many of which stand to gain from the big stimulus bill moving through Congress.

Lockheed Martin is preparing to expand its fast-growing information technology division as the government moves to computerize health-care records. It also expects to bid on work related to cyber security and renewable energy projects, both priorities for the new administration.

Northrop Grumman plans to use its Newport News shipyard to manufacture heavy components for nuclear plants in a joint venture with the French firm Areva, which is banking on new federal support for nuclear power construction.

Although sharp cuts in defense spending might not be imminent, defense industry executives say the boom times that began under Bush are over. Boeing's chief executive Jim McNerney said in a recent earnings call with Wall Street analysts that he's "expecting pressure on defense budgets in light of the economic recovery and financial rescue packages."

Lockheed Martin's chief executive Bob Stevens said he expects spending to be curtailed. Defense analysts said the Bush administration had been looking to increase defense spending by as much as 13 percent to $581 billion.

"I think it's just fair game to ask and permit the incoming administration to take a look at that and see what they want to do in sculpting that top line," Stevens said. "It may not be $581 billion. It may well be something less than that."

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