Defense firms prep for fight beyond super committee

WASHINGTON Mon Nov 21, 2011 2:29pm EST

Related Topics

WASHINGTON (Reuters) - Failure of a special congressional committee to strike a deficit-reduction deal is expected to unleash desperate lobbying by U.S. arms makers to get lawmakers to block $600 billion in automatic cuts.

It would also likely erode the unified front that Lockheed Martin, Boeing, Northrop Grumman and other big weapons manufacturers have tried to present as they fought for months to stave off further cuts to the Pentagon budget.

Behind the scenes, these companies have been sharpening their knives to fight each other as each struggles to maintain its share of a shrinking defense budget.

"We'll do whatever it takes to make sure we get a bigger slice of a smaller pie," said one lobbyist for one of the big U.S. defense companies, which hopes to hold on to its contracts upgrading existing weapons even as new programs falter.

"There's no doubt in my mind that it's going to get ugly," agreed a second lobbyist, who asked not to be named, given the sensitivity of the issue. "There's just too much at stake."

The Pentagon is already agonizing about how to slash $489 billion from its budget over the next decade, more than half of which will come from spending on new weapons, upgrades to older ones, and research and development.

The failure of the super committee to agree on $1.2 trillion in deficit-cutting measures would trigger up to $600 billion in further defense cuts over ten years beginning in 2013, raising the already high stakes for the companies that build fighter planes, warships, submarines and other key weapons.

For months now, the defense industry has warned that those cuts would trigger factory closings and layoffs of hundreds of thousands of high-paying jobs across the country.

The U.S. defense budget for the 2011 fiscal year was $513 billion, not including the cost of the wars in Iraq and Afghanistan.

PANETTA "BETTER THAN ANY LOBBYIST WE COULD HIRE"

Defense Secretary Leon Panetta and Chairman of the Joint Chiefs of Staff General Martin Dempsey have joined in that chorus, warning lawmakers that a combined $1 trillion of cuts would decimate the military and jeopardize national security.

"Panetta's better than any lobbyist we could hire," said the first of the two lobbyists cited.

His voice will be critical if the super committee officially fails, and the defense industry turns to lawmakers to undo the automatic cuts known as "sequestration."

Top Republicans, including Senator John McCain, have already said they will pursue legislation to do just that, although President Barack Obama has said he would not support such a move.

Defense contractors will also rely on grassroots efforts.

Marion Blakey, chief executive of the Aerospace Industries Association trade group, will highlight the dire consequences of sequestration when she meets with workers at a BAE Systems Plc plant in York, Pennsylvania, on Monday.

"There is already the anticipation of a downturn in investment in defense and this just accelerates that and makes the uncertainty worse," Blakey told Reuters before the event.

She said defense firms were already laying off workers, closing facilities and slowing investments. "Any way you look at it, our companies are going to be under even greater pressure now."

AIA has met with over 100 lawmakers, hired outside experts to research the effect of cuts, and recently warned that 1 million jobs were at stake if further cuts go into effect.

Ultimately, writes Byron Callan of Capital Alpha Partners LLC, defense industry experts expect "sequestration will be avoided or side-stepped in 2012-2013 because automatic cuts are simply too disruptive to national security."

But Loren Thompson, analyst with the Lexington Institute, says defense stocks will still likely be in limbo for the coming year, torn between reassurances from legislators and "a budgetary sword of Damocles" hanging over the sector. On balance, he forecasts "a depressive effect on share prices."

MY WEAPONS PROGRAM IS BETTER THAN YOURS

The fight pits new weapons programs against upgrades that would keep old equipment in service longer.

Lockheed, for example, is fighting hard to maintain funding for its F-35 fighter program, arguing that delays will drive up the price of early models and prevent the Pentagon from reaping the benefit of much lower operating and maintenance costs.

Boeing, on the other hand, is eager to sell the Navy more of its less stealthy and less expensive F/A-18 fighter jets to cover any delivery gaps caused by F-35 delays.

In the ground vehicle market, companies like Navistar International have spent their own money to develop a new truck that could meet at least some of the Army's needs if it is has to cancel a more ambitious Humvee-replacement plan.

(Reporting by Andrea Shalal-Esa; Editing by Jackie Frank)

FILED UNDER:
Photo

After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.