Defense industry bracing for further budget cuts

U.S. Army troops are reflected in the window of a doubledecker bus during the Army's 237th anniversary celebrations at Times Square in New York June 14, 2012.

WASHINGTON (Reuters) - U.S. defense companies are bracing for additional cuts in Pentagon spending, even if Congress reaches a deal to avert a controversial $500 billion across-the-board budget cut due to go into effect in January, industry officials said on Tuesday.

Dennis Muilenburg, head of Boeing Co's defense and security unit, said in an interview with Reuters reporters and editors that his firm anticipated the Pentagon would face more spending reductions even if Congress acts to avert the cuts looming in January under the process known as sequestration.

"We know that there's still a gap to close in terms of the overall budget deficit," Muilenburg said. "Certainly the defense budget, being one of the large components of the overall federal budget, will have to be considered in that process."

Linda Hudson, the top U.S. executive at Britain's BAE Systems Plc, also predicted a further decline in U.S. defense spending, given the depth of the economic challenges facing the country. But she said continued threats to U.S. national security would prevent a precipitous drop.

"Defense has to be part of the solution to the fiscal challenges that the country has," Hudson told Reuters. "However, I have never seen a downturn in this industry where the country was at war and the world in general was as uncertain and perhaps as unsafe as it is today."

The Pentagon is facing $500 billion in across-the-board cuts to defense spending over 10 years beginning in January, after Congress failed to reach a compromise deal to reduce federal spending by an equivalent amount. A similar amount will be cut from non-defense government programs.

Marion Blakey, president of the Aerospace Industries Association, said defense spending would inevitably be part of the debate over fixing the U.S. debt crisis. But she said the industry had already paid a big price and further automatic cuts under sequestration were not the solution.

"Yes, there's going to have to be that debate, and defense is going to have to be a part of it. But it should be a reasoned, intelligent debate and that really goes to how do you address the fundamentals of the problem," she said.

Blakey, who displayed 1950s-style editorial cartoons warning lawmakers that defense cuts cost jobs, said the United States needed a bipartisan answer to the U.S. debt problem that would deal with entitlement programs such as Social Security and tax reform, the two issues that have blocked a solution in Congress.

"Let's be honest. The trillion dollar hit that is sequestration barely puts a dent in our debt," she said.

SLIMMING DOWN

The defense cuts under sequestration have been widely condemned by lawmakers, industry executives and Pentagon officials because they would affect all sections of the defense budget equally without allowing leaders to set strategic priorities.

Defense Secretary Leon Panetta has said the cuts would be devastating to the Pentagon's new military strategy, following on the heels of $487 billion in cuts already planned over the next decade. Industry officials and lawmakers have campaigned for Congress to take action to avert them.

AIA is preparing an eleventh-hour lobbying blitz opposing sequestration, including a rally at BAE Systems' Nashua, New Hampshire, facility on September 10 and orchestrated visits to Congress by hundreds of defense industry suppliers.

Many analysts have noted that the cuts follow a decade-long military buildup and are smaller than those during similar military drawdowns after periods of warfare over the past 60 years.

Boeing's Muilenburg said his firm expected further Pentagon spending cuts as the government tries to resolve its fiscal crisis, but hoped they would be less than the $500 billion required by sequestration.

He said the critical issue was to avoid across-the-board cuts and enable the Pentagon to "make decisions aligned with the national strategy."

Muilenburg said Boeing's defense division had already taken aggressive steps to prepare for the cuts under sequestration by slimming down in recent years, cutting workers, closing facilities and increasing its focus on foreign sales.

He said the firm would probably have to lay off additional employees if sequestration forced another $500 billion in defense cuts over a decade. He said the size of the reduction was difficult to project until the Pentagon announced how it would implement the cuts and which programs would be affected.

Hudson has already guided BAE Systems through a big restructuring to prepare for the defense cuts since she became CEO of BAE Systems Inc in 2009, streamlining management, consolidating facilities and reshaping its portfolio.

"Those of us who have spent the last couple of years downsizing our businesses, focusing on efficiencies ... dealing with the highly competitive environment ... are actually now in better shape than we were two to three years ago," she said. "The companies are leaner and more competitive."

(Additional reporting by Jim Wolf and Andrea Shalal-Esa; Editing by Edmund Klamann)