Defense firms prep for fight beyond super committee

YORK, Pennsylvania Mon Nov 21, 2011 7:58pm EST

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YORK, Pennsylvania (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.

Their weapon of choice: jobs.

Marion Blakey, chief executive of the Aerospace Industries Association trade group, kicked off the effort on Monday, hours before the "super committee" officially declared defeat.

The decision would have "tremendous adverse effects" on factories around the country unless the automatic cuts would be reversed, Blakey told hundreds of workers at a BAE Systems Plc plant in York, Pennsylvania.

"We are staring sequestration in the face. We are going to have to pull together like we've never pulled together before," Blakey said, referring to the automatic spending cuts due to begin in 2013.

She warned that the cuts in defense spending would trigger factory closings and layoffs of hundreds of thousands of high-paying jobs.

Lockheed Martin, Boeing, Northrop Grumman and other big weapons manufacturers will likely operate on two tracks.

They plan to present a unified front to push for the reversal of the automatic cuts, which they say would put 1 million jobs on the line.

But behind the scenes, these companies have been sharpening their knives to fight each other, and the Pentagon's drive to shift more risk to defense companies, as each struggles to maintain its share of a shrinking defense budget.

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 super committee's failure to agree on $1.2 trillion in deficit-cutting measures triggers up to $600 billion in defense cuts over 10 years beginning in 2013, raising the already high stakes for the companies that build fighter planes, warships, submarines and other key weapons.

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

RALLIES PLANNED FOR OTHER CITIES

The rally in York was the first of several planned by Aerospace Industries Association in other key states as it tries to underscore the importance of weapons manufacturing to the overall U.S. economy.

"We're going to work this real hard ... to prevent these cuts from being implemented," Bob Murphy, executive vice president of BAE's U.S. unit, told Reuters after the rally.

Top Republicans have said they will pursue legislation to do just that. President Barack Obama said he would veto any effort to do so.

Republican Representative Buck McKeon, who chairs the House Armed Services Committee, announced on Monday that he would introduce legislation to prevent the military cuts from taking 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

BAE's Murphy said he expected U.S. companies to maintain a unified front, given the enormity of the challenge. But he conceded there would be tough competition for the few programs that survived.

Other industry players see a dogfight.

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

A second lobbyist, who asked not to be named given the sensitivity of the issue, said: "There's no doubt in my mind that it's going to get ugly.

"There's just too much at stake."

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.

(Editing by Mohammad Zargham)

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