Obama faces tough choices on arms programs

By Jim Wolf - Analysis

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.