Budget fears cast shadow over U.S. Army trade show

Mon Oct 22, 2012 7:27pm EDT

Related Topics

* Army, industry officials urge Congress to stop automatic cuts

* Textron CEO says fix must address revenues, entitlements

* BAE Systems plans for the worst, hopes for the best

By Andrea Shalal-Esa

WASHINGTON, Oct 22 (Reuters) - Continued uncertainty about future U.S. military budgets cast a shadow over this year's big U.S. Army trade show, with industry executives and top Army officials urging U.S. lawmakers to avert further big defense cuts due to start taking effect in January.

Scott Donnelly, chief executive of Textron Inc, said Congress needed to drop ideological positions and craft a solution that considered greater tax revenues and cuts to spending on social programs in addressing the U.S. budget deficit.

He said the presidential election in November would remove one element of uncertainty, but many other issues still needed to be resolved, including $500 billion in further defense budget cuts due to start taking effect in January, expiration of Bush-era tax cuts, and debate over the U.S. debt ceiling.

The automatic spending cuts were mandated by Congress as part of a deal to raise the debt ceiling for federal borrowing last year. Expectations at the time that a more considered plan would be developed have not yet been met.

Across the defense sector, U.S. companies are racing to consolidate facilities, cut payrolls and squeeze lower prices from suppliers so they can continue to generate solid earnings and enough cash to keep investors happy.

"As a business person, the uncertainty is worse than knowing ... where things are going," Donnelly said, adding that it was not "practical" or "pragmatic" to exempt tax revenues or entitlements from efforts to improve the U.S. fiscal situation.

"People are too hung up on ideological issues around all the various pieces that have to be dealt with -- if you're ever going to get back to having balanced budgets and getting the deficits under control," he told Reuters in an interview at the annual Association of the U.S. Army conference.

Donnelly is the latest corporate executive to mention tax revenues in connection with averting defense cuts. David Hess, president of Pratt & Whitney, a unit of United Technologies Corp , and James McNerney, chief executive of Boeing Co , have made similar comments -- which may help soften broad Republican resistance to raising tax receipts.

Army Chief of Staff General Ray Odierno said the "perfect storm" of fiscal issues facing the country made it difficult to plan future budget levels, and the military feared it would have "no flexibility at all" in fiscal year 2013 if Congress did not take action to avert the cuts from taking effect in January.

"This is a multibillion dollar business we're trying to run here and it's very difficult," he told reporters at the show.

Army Secretary John McHugh, who served in Congress for 17 years, said he knew the situation was tough, but he still had "faith and trust" that U.S. lawmakers would come together after the election to work out a deal to stave off the cuts.

SCRAP HALF THE CUTS?

Congressional aides on Monday described one interim solution under consideration that would scrap about half the automatic cuts due to take effect under the first year of sequestration, replacing them with more targeted savings, coupling some revenue increases and some spending cuts.

McHugh said the Army had begun some preliminary planning for what sequestration would entail, but said the service had not made any decisions affecting specific weapons or modernization programs because too many of the variables were not known.

Tom Arsenault, executive vice president for product sectors and chief technology officer of the U.S. unit of Britain's BAE Systems Plc, the current "mild state of paralysis" at the Pentagon was already having a tough effect on prime contractors and hundreds of smaller suppliers.

"It's very difficult to plan in an environment with this much uncertainty. We plan for the worst, and hope for the best," he told Reuters at the conference.

He said BAE was focused on helping the Army and other military services get more mileage out of the weapons they already had, while also working to reduce its own costs by consolidating facilities and laying off workers.

Donnelly said budget uncertainty and Congress' failure to pass a budget for the 2013 fiscal year that began on Oct. 1 were delaying his company's negotiations with the Navy for a second multi-year purchase of V-22 tiltrotor aircraft built by Textron's Bell Helicopter and Boeing.

He told analysts last week that Textron might not sign that deal until the first or second quarter, which meant the orders would not be booked in the fourth quarter, as they had in the past.

Donnelly said on Monday the company was continuing to work for foreign sales of the V-22 Osprey and the process was "moving along well." Those orders, however, would not be sufficient to compensate for the expected decline in U.S. orders, he said.

Bell-Boeing is currently building nearly 40 of the aircraft each year, but military budget cuts will slow that rate to the low-20s, he said, adding that foreign sales could add five to six orders a year once they kicked in after 2014.

He said fiscal cliff concerns were also dampening demand from companies for business jets built by Textron's Cessna unit.

David Liddle, a spokesman for AUSA, the independent, non-profit group that puts on the big show each year, said he did not have exact figures, but attendance on the first full day appeared strong despite predictions of sharply lower turnout.

He said the number of exhibitors was down just over five percent to 671 from 708 last year. The number of government exhibits dropped sharply, to just 17 from 96 a year ago, but industry exhibits rose slightly.

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