How will Donald Trump’s administration affect the defense and aerospace industry? It’s hard to say. There are so many uncertainties, particularly when it comes to how he sees the world and how his policies may affect the multi-billion defense industry.
Here are four questions about how he would handle the world’s largest defense industry.
Who does Trump pick as secretary of defense?
If Hillary Clinton won, many in Washington thought that Michele Flournoy, the chief executive of the think tank Center for New American Security, would get the top job. She’s well known inside the beltway, having served as the under secretary of defense for policy from 2009 to 2012, while also serving in the Pentagon in the mid-1990s.
Under Trump, it’s not clear who he’ll appoint. As a businessman who ran against the Washington establishment, some think he could bring an outsider to shake up the world’s largest bureaucracy, with 3 million people on the payroll.
Mackenzie Eaglen, a defense analyst with the American Enterprise Institute who briefed the Trump campaign three times, said she urged against picking an outsider. “It’s much harder to make work given the sheer size of the Defense Department,” she said. “You don’t need someone who has to spend the first 12 months learning the acronyms.”
Trump says he wants to rebuild the military. What will that look like?
Trump has said he wants to increase the size of the Army and the Marine Corps, build new ships for the Navy and add jets to the Air Force’s arsenal and modernize the nuclear arsenal. Defense stocks jumped Wednesday morning with news of his election. BAE System and Raytheon saw their stock prices go up more than 6 percent by 11 a.m. Wednesday. Lockheed Martin was up more than 5 percent.
“Trump’s win is good news for the defense industry, especially when coupled with Republican majorities in the House and Senate,” said Loren Thompson, a defense consultant who advises many of the nation’s top tier contractors.
Increasing the size of the military will favor BAE Systems and General Dynamics, plus helicopter makers Boeing and Lockheed Martin, in particular, he said. Northrop Grumman, which is building the Air Force’s new bomber, could be a winner, he said, as could General Dynamics and Huntington Ingalls, companies that make submarines.
Trump would most likely focus on weapons systems already in development or production, instead of starting new ones, Eaglen said, which would be good news for programs such as the F-35 Joint Strike Fighter, the Joint Light Tactical Vehicle, the Littoral Combat Ship as well as building new aircraft carriers.
All of that sounds costly. Where does he get the money?
Eaglen has calculated that his promises could add up to an additional $55 billion in defense spending—“and that’s conservative,” she said.
Trump has called to eliminate the budget caps that control defense spending, while also rooting out waste in the Pentagon’s budget, as he plans to disrupt Washington’s traditional ways of doing business. Some of the Pentagon’s main programs, many of which have suffered years of cost overruns and schedule delays, could be targeted, as well as the large defense corporations behind them.
In a note to investors, Byron Callan, an analyst with Capital Alpha Partners, “A populist president may be less tolerant of cost overruns on major weapons systems and greater use of fixed-price contracts might entail more risk for the sector.”
Eaglen acknowledged that “the major defense contractors are part of the establishment he’s railing against.” But she said Trump doesn’t really have a choice but to stick with them. “If he wants to show results, he’s got to live with the contractors he has,” she said. “You have to go with the production lines you have open.”
Trump’s ability to work with Congress will also be a huge factor. While the GOP has majorities in the House and Senate, they are narrow. And conservative Republicans may clash with defense hawks over spending—touching off intra-party budget battles, said Todd Harrison an analyst with the Center for Strategic and International Studies.
“Many of those Republicans don’t support Trump or his policies,” he said. “I think it means continued and perhaps even worse gridlock.”
What happens to the Pentagon’s initiatives to reach out beyond its traditional industry base to harness innovation and technology from places like Silicon Valley?
Under Obama, the Pentagon has launched a series of initiatives designed to harness innovation and partner with Silicon Valley firms. Known as the “third offset strategy” the plans would help the U.S. military hold on to its technological advantage over potential adversaries such as Russia and China.
But under Trump those initiatives could be imperiled, Harrison said. Trump would likely bring in “a totally new team of civilian leaders with completely new priorities.”
Eaglen said, though, that those programs are a relatively small portion of the budget, and that it is vital to invest in technology at a time when it is moving so fast.
“We have lost our technological supremacy,” she said. “He would be crazy to abandon that.”