Obama faces tough choices on arms programs

WASHINGTON Thu Nov 6, 2008 11:36am EST

WASHINGTON (Reuters) - Hard choices involving U.S. fighter aircraft, missile defense, aerial refueling tankers and other costly arms programs await President-elect Barack Obama, amid wartime strains heightened by a yawning budget deficit.

Within two weeks of his January 20 inauguration, Obama's fledgling administration is scheduled to send the new Congress his spending and tax plans for the 2010 to 2015 budget years.

One of Obama's first arms-related headaches is what to do about the Air Force's desire to buy more Lockheed Martin Corp (LMT.N) F-22 Raptor fighters than the 183 currently planned, a big bone of contention at President George W. Bush's Pentagon.

The issue is urgent because Lockheed's production of the top-of-the-line, radar-evading aircraft must start shutting down in 2009 unless Obama decides to buy another batch.

In June, Defense Secretary Robert Gates ousted the Air Force's top military and civilian leaders amid a tug-of-war over funds for the F-22, which is designed to dominate enemy airspace from the start of any fight and clear the way for other aircraft.

At $142 million apiece, Gates has argued that the F-22 is ill-suited for post-Cold War conflicts like Iraq and Afghanistan. Other priorities, notably Lockheed's less pricey, next-generation F-35 Joint Strike Fighter, could be undercut by spending on the Raptor, he has said.

The F-35 is "a little over half of the cost of an F-22," Gates told reporters on October 21. "So you can buy more, and (still) have a lot of capability."

CHINA, RUSSIA

The question for Obama boils down to how to equip for, and otherwise hedge against, foes like Iran and North Korea on the one hand, and powerful potential adversaries like Russia and China on the other.

"If the incoming administration is focused on China and Russia, that will require fundamentally different investments than counterinsurgencies," including more F-22s and steady investment in the Army's Future Combat Systems managed by Boeing Co (BA.N) and SAIC SAI.N, said Philip Finnegan, an analyst at Teal Group, a Virginia aerospace consultancy.

Obama's new Pentagon team also must decide soon whether to fund accelerated production of the radar-evading F-35. The fighter jet is an emblem of international cooperation developed with eight foreign partners: Britain, Italy, the Netherlands, Turkey, Canada, Australia, Denmark and Norway.

At a projected cost of nearly $300 billion for a total of 2,443 aircraft over coming decades, the F-35 is the Pentagon's costliest arms acquisition plan over coming decades.

Under a draft 2010 defense budget being prepared by the Pentagon for the new administration's consideration, the Air Force is seeking to speed its planned purchases of 1,763 F-35s starting as soon as 2011 to capture early economies of scale.

Missile defense likewise poses tough choices. It is the Pentagon's single biggest current annual weapons outlay at more than $10 billion this year.

As one of the Pentagon's largest "discretionary" programs subject to annual Congressional review, it is widely viewed as bait for Obama's budget scalpel given the record federal deficit, deteriorating economy and $700 billion package to shore up financial institutions approved last month.

Systems that are already in or near production are likely to be favored by Congress at the expense of those in earlier stages of development, according to Robert Soofer, a Senate Armed Services strategic forces subcommittee aide.

"My short answer is, buy stock in Aegis and sell your stock in Airborne Laser," Soofer told a forum on East Asia missile defense at the Heritage Foundation on October 16. Aegis is a Lockheed ship-based ballistic missile defense system. Airborne Laser is a Boeing-led effort that would use a modified jumbo jet to zap ballistic missiles with a laser.

Obama also must decide whether to press ahead with costly Bush administration plans to put 10 interceptor missiles in silos in Poland and install a related radar system in the Czech Republic over Russian objections.

AERIAL TANKER

Another nagging headache for Obama's Pentagon: a resumed $35 billion transatlantic tussle to build new aerial tankers. Boeing Co (BA.N) wants the contract to build 179 mid-air refueling aircraft and so does Northrop Grumman Corp (NOC.N), which teamed with Europe's EADS EAD.PA.

After repeated delays, Gates canceled the contest on September 10 and declared a "cooling off" period that leaves the decision to the next administration.

The tanker is not the only tough decision deferred by the Bush Pentagon. Last month, the Air Force postponed plans to resolve a dispute for a combat rescue helicopter program valued at up to $15 billion and to award a contract for a potential $16 billion "transformational" satellite communications system that moves data over laser beams rather than radio waves.

Boeing won the initial competition to supply 141 combat rescue helicopters in November 2006. The Government Accountability Office, Congress' referee of contested federal contract awards, upheld two subsequent protests by rivals Lockheed and United Technologies Corp's (UTX.N) Sikorsky unit.

U.S. defense spending has climbed more than 60 percent during the eight years of the Bush administration, and will total at least $612.5 billion in fiscal 2009. That includes $542.5 billion for the core defense budget and an allowance of $70 billion for the wars in Iraq and Afghanistan.

Gordon Adams, President Bill Clinton's top national security and foreign policy budget official from 1993 to 1997, predicted the Obama administration would scrutinize defense spending from the size of ground forces to the hardware mix.

"There's going to be more balance among the tools in the tool kit," including diplomacy, intelligence, foreign aid and military solutions, said Adams, now at American University.

The Aerospace Industries Association, the chief lobbying group for U.S. arms makers, said in an August report for the new administration that the United States was at a crossroads.

"Without the continuing development and procurement of advanced military material to counter the evolution of threats, America will lose its technological superiority as potential adversaries pursue new means to defeat our forces, weapons systems and tactics."

Consequently, the industry group said, it believes that "now is the time to address" U.S. defense and aerospace modernization needs.

(Editing by Matthew Lewis)

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