WASHINGTON U.S. arms makers and aerospace companies are girding for battle to preserve multibillion-dollar Pentagon programs as President-elect Barack Obama sets new priorities amid mounting economic woes.
Bruising budget battles could flow from a promised review by Obama's team of each major weapons plan in light of what his transition website calls "current needs, gaps in the field and likely future threat scenarios in the post-9/11 world."
The new administration faces early decisions on more than $100 billion of politically sensitive projects, from missile defense to a new U.S. Air Force aerial refueling fleet, to ships, fighter aircraft and satellite systems.
The long-delayed replacement of the jet-refueling fleet pits Boeing Co (BA.N) against a team of Northrop Grumman (NOC.N) and Europe's EADS EAD.PA, parent of Airbus, Boeing's chief airliner-building rival.
Now dragging into its eighth year after a pair of botched procurement plans, the tanker competition -- valued at $35 billion for its 179-plane first phase and perhaps $100 billion over time -- was punted by Republican President George W. Bush's Pentagon to the next administration.
The chief executives of Lockheed Martin Corp (LMT.N), Northrop Grumman and the defense chief of Boeing, will address the industry outlook at the Reuters Aerospace and Defense Summit in Washington that starts Monday.
Also taking part in the summit will be the Pentagon's top foreign arms sales official and the U.S. Air Force Major General heading the F-35 fighter program.
Big weapons programs generate so many jobs that they spawn powerful political backing. Arms makers deliberately spread out their suppliers throughout the country.
"Weapons programs will be fiercely defended," said consultant Loren Thompson, both by the arms makers and by lawmakers protecting jobs in their districts.
To offset some of the uncertainty surrounding their prospects, U.S. arms makers are expanding overseas sales efforts and retooling offerings to position themselves for any changes in approach to the so-called military-industrial complex by Obama, a Democrat.
For instance, the defense side of Boeing, the Pentagon's No. 2 supplier after Lockheed, is aiming to boost exports to 20 percent of its overall revenue in the next five years, compared with 13 percent now. Boeing's Integrated Defense Systems' sales were about $32 billion in 2007.
Similarly, Raytheon Co (RTN.N), the world's biggest missile maker, is hoping to push foreign sales to 25 percent from 20 percent of projected 2008 revenue of about $23 billion, said Anne Marie Squeo, a company spokeswoman.
Arms makers say the Pentagon, constrained by federal spending to shore up the ailing economy, could turn to lower-cost systems that would deliver most if not all of the capabilities sought by U.S. forces.
"For example, we could offer existing platforms enhanced with new technology like networked capabilities," said Dan Beck, a Boeing spokesman.
The top defense appropriator in the U.S. House of Representatives said last week that leaner years lay ahead for the Pentagon after defense funding surged to what he reckoned was $656 billion in 2008. It has risen four or five percentage points above the inflation rate during the Bush administration's eight years in office.
"There's going to be less defense spending," said Democratic Rep. John Murtha from Pennsylvania, chairman of the House Defense Appropriations Subcommittee, in a speech at the Center for American Progress, a research group with ties to Obama's transition team. "Our job will be to manage the current and future threats under a constrained defense budget."
Despite Murtha's warnings, the industry is predicting sales growth through 2012, since the 2009 defense budget has already been approved and the new administration will have scant time to frame a fiscal 2010 plan, due to go to Congress by February 2.
In a preemptive strike aimed at curbing cuts to their programs, the Pentagon's top contractors, through their chief trade group, launched a nearly $2 million advertising blitz and lobbying push this month.
The initiative, chiefly in Washington D.C.-targeted newspapers, on the radio and online, calls on Obama and the incoming Congress to treat the industry as an economic engine that could help turn around the deteriorating economy.
In its ads, the Aerospace Industries Association, the sector's chief trade group, touted its members' $97 billion in exports last year. The AIA says it represents "America's leading manufacturing export industry" with a $61 billion foreign trade surplus.
"Aerospace and Defense: The Strength to lift America," reads one ad, citing more than 2 million "middle class" jobs at more than 30,000 suppliers in all 50 states.
"We are pressing the need for modernization and recapitalization even in these tough economic times," Marion Blakey, AIA's president and chief executive, told an annual year-end review and forecast session on December 10.
AIA member companies contributing to the advertising campaign include Lockheed, Boeing, Northrop Grumman, General Dynamics Corp (GD.N), Raytheon, BAE Systems (BAES.L), L-3 Communications Holdings Inc (LLL.N) and United Technologies Corp (UTX.N).
In a sign of possible changes at Obama's Pentagon, newly reappointed Defense Secretary Robert Gates said December 2, "We need to take a very hard look at the way we go about acquisition and procurement."
"We must not be so preoccupied with preparing for future conventional and strategic conflicts that we neglect to provide all the capabilities necessary to fight and win conflicts such as those the United States is in today," Gates added in an article prepared for the January issue of Foreign Affairs Magazine.
Gates, who says he is the first defense secretary to be retained by a newly elected president, may be uniquely equipped to win battles over defense programs with the Iron Triangle, as the Congress-Pentagon-contractor web is sometimes called.
"Gates has the credibility to move that mountain," said Thomas Wilkerson, a retired Marine Corps major general who heads the U.S. Naval Institute.
(Additional reporting by Andrea Shalal-Esa; editing by Tim Dobbyn)