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Defense Cuts Beginning to Add Up

August 5, 2010 by
Filed under: Editorial 

The downturn in the global economy has hit countries’ spending hard. Tax revenue is down and the need to spend on stimulus and social programs has put pressure on budgets. Now many different nations are looking at their budget deficits and government debt and are trying to get control over these. One area that many are looking to make adjustments to is defense spending. Nations small and large are looking to make targeted cuts to begin with in a bid to reduce their overall spending.

Bulgaria who is moving to buy more Western equipment to allow itself proper integration into NATO announced yesterday that they want to renegotiate two contracts with major European defense contractors to reduce the quantities of aircraft they are buying. The plan is to ask EADS (EADS:P) to not deliver the last three AS323 Panther helicopters of an order for six along with twelve AS352 Cougars. The money that was used to guarantee the order will be used instead to pay for the three Panther’s Bulgaria has received. Bulgaria also want Italy’s Alenia Aeronautica, part of Finmeccanica (FNC:MI), to not deliver two C-27J transport aircraft of five originally contracted for.

There is no guarantee that the two companies will renegotiate the contracts and there will most likely be termination fees and costs associated with the decisions. The elimination of the five aircraft will save money in the long run by eliminating the cost of upkeep and modifications. Bulgaria’s armed forces though will lose a good chunk of the capability that they were buying.

France has decided that they must cut about $5 billion out of their current defense spending plans. There are no details about what will be removed from the budget but French defense firms have already expressed their concern with the plan. Most of these companies reported good earnings in the latest quarter but decreases in planned defense funds will hurt all of their bottom lines. EADS (EADS:P) is already facing struggles due to the delayed A400M transport program and cuts to their other programs would make the European aerospace giant’s bottom line even worse.

The U.S. industry is also preparing itself for cuts to the defense budget as fighting in Iraq and Afghanistan wind down per the Obama Administration’s troop withdrawal plans. The Pentagon has already asked its suppliers to increase efficiency to save $100 billion dollars over ten years before there have been another round of program cancellations or restructuring.

Further budgetary pressure caused by continued bad economic growth may only exacerbate these plans. While there are still significant programs in development or entering production the overall dollar amount available to the military for new equipment will decline. The first signs of those changes are starting to emerge and the near term trend will not be good.

Photo from BigBlackBox’s flickr photostream.

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