Filed under: AM General, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, General Dynamics, Lockheed Martin, Oshkosh Truck Corp, production program, Services, U.S. Army
The U.S. military is facing a struggle with its budget over the next 5 year based on current plans. It is winding down its commitment in Afghanistan and facing the effects of debt ceiling limitations and sequestration. At the same time it needs to reset itself after 12 years of commitment in South West Asia and the Middle East. This means force structures will be changed and equipment repaired and rebuilt. There will also need to be investment in certain new programs and capability to continue technical improvement to the forces overall.
Sequestration was implemented for 2013 but had minimal affect on the actual execution of the budge and mission. People were furloughed; some programs didn’t do all their planned development but generally plans were accomplished. The Congress has yet to pass a 2014 budget but the versions that passed the whole House and voted out of Senate Committee assume there will be no sequestration in 2014 and fully fund the President’s request. That assumes some deal being made where either sequestration is cancelled or cuts are made to other parts of the budget.
There are several core modernization programs in the U.S. that should continue. These include the biggest of them all, the F-35 Joint Strike Fighter, the Navy’s Littoral Combat Ship (LCS) and for the Army, the Ground Combat Vehicle (GCV) and the Joint Light Tactical Vehicle (JLTV).
The GCV will replace the M2 Infantry Fighting Vehicle and the JLTV the ubiquitous HUMVEE. Both programs are following similar paths where they will pay to develop prototypes from vendors to test and then choose one or more for production and entry into service. This was the successful concept used to buy the Mine Resistant Ambush Protected (MRAP)-ATV used in Afghanistan. That concept was won by Oshkosh (OSK) with their MRAP-AT vehicle.
The JLTV is reaching a point where the 3 teams vying for the contract have sent in their prototypes for testing. These are Lockheed Martin (LMT), AM General and Oshkosh. The GCV is still earlier in the program and is working to reach that stage with 2 competitors, General Dynamics (GD) and BAE Systems (BAE), one are working to meet their solutions. Both programs have substantial budgets supporting these development efforts in FY13 and planned for 2014.
The two programs biggest struggle, like many Americans, is with weight. To meet the protection requirements demanded of fending off mines and IED’s while facing a variety of direct and indirect fire threats lead to all discussed designs being very heavy. Both the JLTV and GCV had programs before them that had to be ended and reevaluated due to the total weight of the proposed solutions. The initial JLTV concepts were weighing 18-20 tons and the GCV over 80, or in the class of Main Battle Tanks (MBT).
The solution discussed for both programs are to use add on armor depending on the level of threat. This means in most situations not all of it would be carried improving weight and performance. In high threat areas more would be bolted on with affects on capabilities. In all situations the maximum armament would still be carried while protection would vary. This does though increase the overall cost of the vehicle and the programs at a time when budget dollars are going to be scrutinized and spread very thin.
In the past when the Pentagon faced a similar budget crunch programs in development would see delays as their annual budgets will be decreased. Production quantities will be reduced and spread over more years shifting cost to the “out year” budget and delaying full entry into service. In extreme cases outright cancellation of the project has occurred.
These two systems are critical to the overall upgrade of the U.S. military ground forces. The HUMVEE and M2 are both originally 30 year designs. They have received constant upgrades especially in the last 10 years due to the changed threat in Iraq and Afghanistan. The HUMVEE, especially, has seen more and more armor added and improved weapon and tactical communication systems added.
Their fates are also tied to the removal of the MRAP from service. The MRAP’s were a quick reaction to a specific threat and public outcry over casualties from the IED and mines. They were never meant to be battlefield vehicles and the armor protection requirements for these programs show why. The U.S. is resetting their MRAP force of several different designs and models and trying to fit them into their standard organization and doctrine. Most likely they will be eliminated from these and used only in extreme depending on the threat.
These programs are expected to continue with the possibility of seeing delays and lengthening of schedules. They are critical to the continuing U.S. armored vehicle capability as there are few other systems coming. The Army has proposed shutting down their M1 production facility for several years due to overcapacity and demand. Congress has fought that and will most likely not allow it but it indicates the budgetary situation. If the JLTV and GCV are cancelled or extremely delayed the U.S. could lose industrial base and capability that would affect future modernization efforts down the road.
Photos of the M2 and HUMVEES courtesy of DVIDSHUB flickr photostream.
Filed under: Business Line, Companies, Contract Awards, Countries, Cubic, Events, FMS, IT, L-3, Lockheed Martin, logistics, Saudi Arabia, training
With Sequestration affecting the U.S. defense budget that still does not mean contracts for new programs are not being awarded. In fact with the extension of the Continuing Resolution and the passing of a full year’s funding — not budget — the Services may now award some work that was on hold pending a decision in that matter.
Lockheed Martin (LMT) in the last 30 days received contracts for 2 new training systems. One from the U.S. Army and the other from an international customer, the Royal Saudi Air Force. Foreign Military Sales (FMS) and Direct Commercial Sales (DCS) are not affected by sequestration.
The first, Saudi, contract is worth up to $253 million and is for systems to support the Kingdom’s Boeing (BA) F-15SA fighters. The contract will provide maintenance and pilot training support by 2020. In the current day services are investing millions in computer and simulation based training devices to aid in operating and maintaining complex weapon systems.
The second one for the U.S. Army is for a command and control simulator to aid in training U.S. and allied country leadership in the conduct of military operations. That could be worth up to $146 million. The Joint Land Component Constructive Training Capability (JLCCTC) system builds off of an earlier simulator, WARSIM, that has been successfully used since 2012 for group leader training.
The advantages of computer based training is that it reduces overall costs and personnel required. They also collect data that may be reviewed and analyzed to support teaching and further training. Lockheed’s Orlando unit does a great deal of work in this area as do several other contractors like Cubic and L-3 Communications.
Filed under: Alliant Techsystems, atk, Business Line, Companies, Contract Additions, Contract Awards, Events, logistics, production program, Services, U.S. Army
Alliant Techsystems (ATK) is a mid-sized defense contractor. It primarily manufactures ammunition, pyrotechnics and rocket motors. The company is experiencing some struggles due to the ending of the fighting in Iraq and Afghanistan and the potential defense budget cuts. It has made several changes recently to adjust to these new market conditions but key to the company’s near term success was retention of the contract from the U.S. Army to manage the Lake City ammunition plant operations.
Last year the company lost the contract for the Radford Plant in Virginia to BAE Systems (BAE:LSE). BAE was also aggressively targeting the Lake City contract as well. ATK had run these plants responsible for large amounts of ammunition and explosives for the U.S. military for several years and they were a core part of their revenue and earnings. Short term the loss of the Lake City contract would have been a blow to the company.
Yesterday it as announced that the Army had decided to award the contract to ATK again. The initial contract is for seven years but it has options for a further three. No value has been reported yet.
To indicate the size of the production at Lake City in September the company and Army celebrated the delivery of 2 billion 7.62mm rounds from the plant. Due to the demands of the last ten years of combat ATK had expanded the plant to produce over 1.5 billion rounds annually of 5.56mm as well as other sizes.
The winning of this contract gives ATK more time to continue its adjustments and reorganization to address the changing market it finds itself in and establish a good foundation for future performance.
Filed under: Boeing, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, logistics, medicine, Military Aviation, production program, Proposal, Restructuring, Services, U.S. Air Force
As part of the Budget Control Act last year that emerged after a failed consensus between President Obama and Congress to deal with the U.S. government’s budget issues a plan was put in place for automatic cuts to spending. This sequestration of funds requires about $1 Trillion in cuts over the next 10 years. In FY13 this would amount to just under $100 billion with half coming out of the defense budget.
The way the Pentagon is approaching this is to apply the cuts evenly across all appropriations and spending which amounts to a 9.4% reduction in spending. This may be adjusted as they get closer to the actual implementation to fully fund some critical items such as personnel and medical costs which would mean some investment programs may see bigger cuts.
For some programs a 9.4% reduction would not be that significant. You buy less of an item, you maybe drive, fly or sail it less, you don’t have as much training supplies as in the past. For others it might be much worse. A 10% cut in R&D for a program could cause multi-year delays in completing development or testing meaning the system wouldn’t get into service as soon. It may be that a program would be cancelled as it wouldn’t be executable without that level of funding.
There are concerns with some of the big acquisition programs that utilize multi-year production contracts. These rely on a 5 year deal with the OEM providing for a specific number of items to be delivered each year. If the 9.4% cut happens and this number is reduced below the minimum the contract may have to be renegotiated leading to cost increases. The KC-46A tanker contract also faces some issues as it is a Firm Fixed Price (FFP) contract and the cut may reduce its funding below what was negotiated with Boeing (BA) when the contract was awarded which also could lead to a need to renegotiate.
As expected pretty much every one is against sequestration and have lately spoken up about dealing with it. Primarily by transferring the spending reductions from the Pentagon to other parts of the Federal government. This includes legislators, Pentagon officials, industry, local governments and employees. All would expect to see some hardship as the spending cuts are implemented.
The media is full of articles such as this, Sequestration threatens Portsmouth Naval Shipyard jobs, workload, from Seacoastonline.com.
Congressman Connelly (D-VA), who has a lot of defense contractors and civil servants in his district, wants Congress to stop campaigning and stay in DC to work out a resolution.
Studies are being done to calculate how many jobs will be lost due to the budget cuts and what industries will be affected the most.
There is also discussion of the effect beyond defense as the rest of the government would lose $50 billion in funding which would cause programs to be cut, eliminated and people laid off.
Overall the issue will continue to be there through the November elections. Most likely no attempt will be made to deal with this until after that when the lame duck Congress will have to also deal with the expiration of the Bush tax cuts and other budget issues. There probably will be a big omnibus bill that addresses all of this.
Will sequestration actually happen for defense? It is hard to say right now. Everyone should be planning for it and calculating how to implement it. This includes the Services, acquisition program managers, and contractors. The U.s. should be expecting reduced defense spending as the fighting in Afghanistan and Iraq winds down and wartime requirements are eliminated. It would be better if it was done in a more planned fashion.
Filed under: AM General, Business Line, Companies, Contract Awards, Department of Defense, development program, Events, General Dynamics, Lockheed Martin, Navistar, Oshkosh Truck Corp, production program, Protest, Services, U.S. Army
Two weeks ago the Army awarded 3 contracts for further efforts on the HUMVEE replacement, the Joint Light Tactical Vehicle (JLTV). The proposals from Lockheed Martin (LMT), Oshkosh (OSK) and AM General were selected. The Navistar and General Dynamic (GD) ones were not. The value of these contracts were between $55-65 million and are for the first year of a two to three year process to build and test prototypes. At the end of this one will be chosen to go into production.
The JLTV program has the potential to be quite large as the estimated quantities are in the tens of thousands. The current cost estimate for production is about $13 billion. This does not take into account future support and parts contracts as well as the potential for foreign and direct military sales to U.S. allies.
It has now come out that Navistar filed a protest late Friday near the end of the ten day period. The losers were supposedly briefed on Thursday as to why their proposals were not chosen.
The filing of the protest means the contracts cannot be executed until it is resolved. The General Accountability Office (GAO) has 100 days to do this. The result could be an overturning of the awards and direction to do a new contest or directing the Army to review its selection process. In some cases the GAO has awarded the protester the contract over the winner.
As the defense budget shrinks and contracts become more valuable to the different defense contractors protests should increase. This was the trend in the Nineties when there was the last major contraction in U.S. spending.
Filed under: Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, logistics, Military Aviation, production program, Services
The House of Representatives passed their version of the FY13 defense appropriations act last night. In a surprise to leadership of both sides a group of Republican and Democratic members joined to pass a bill that kept funding at 2012 levels. This means the Pentagon will receive just over $608 billion. Now the House must wait for the Senate to pass their bill and a Conference Committee will come up with the final version.
It wouldn’t be Congress without some specific marks and disagreements with the proposed plans of the Obama Administration. These include language preventing the Air Force from retiring their C-23, C-27 and Global Hawk aircraft. It also reduced spending on biofuels and provided for no pay raise for civilian workers. It also keeps shipbuilding plans at a higher rate then requested.
The defense budget like all of Federal spending is facing the possibility of large cuts due to the failure of a budget deal last year leading to planned sequestration of funding. This could see upwards of $50 billion or more automatically cut from the defense budget. Industry, some in Congress and others are fighting those plans. If the defense budget is not cut this way then other parts of the budget would have to be to make up for it.
Filed under: Boeing, Business Line, Companies, development program, Events, General Dynamics, HII, Lockheed Martin, Military Aviation, Northrop Grumman Corp., production program, Raytheon, Seeking Alpha
Here is an exclusive article I wrote for Seeking Alpha on Congressional changes to the defense budget and how they will aid contractors.
Filed under: Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, logistics, Military Aviation, Northrop Grumman Corp., production program, Proposal, Services, U.S. Air Force
The House Armed Services Committee (HASC) continues their mark up of the 2013 defense budget proposed by the Obama administration and continues their push back on proposed cuts to programs. As part of a plan to reduce defense spending by almost $500 billion over the next 5 year defense plan certain programs were ended or reduced. Congress as it often is does not like some of these reductions and is adding them back into the budget.
The HASC is just one of four different committees in both parts of Congress that can rewrite the budget. After the markups are complete the House and Senate vote their own versions of the bill and a Conference Committee irons out the final version that goes to the President. There is no guarantee that any changes made by any of the committees will stick but it is clear that there are a lot in Congress not willing to reduce spending the way that is being proposed.
Earlier we wrote of how they added back in a submarine the Navy had delayed until 2018. Now the committee is changing some proposals with other systems.
These include the retirement of several Northrop Grumman (NOC) Global Hawk strategic Unmanned Aerial Vehicles (UAV). The Air Force had proposed mothballing the Block 30 version of the system and continuing to use the manned U-2/TR-1 aircraft instead. They also would not buy more of that block. The bill the HASC is writing would prevent the retirement before 2014.
The committee has also reduced or eliminated some of the troop cuts and increased co-pays and fee for TRICARE, the military medical plan. Another area they are exploring is increasing funding for some of the Army’s vehicle programs which was cut.
These reductions and the troop cuts are based on the fact that the U.S. is withdrawing from Afghanistan and the Obama administration is predicting less deployments and action in the near future.
This is just the first round of mark ups and the ending bill will be some sort of compromise where some cuts are kept and others aren’t. It does show though that there are many in Congress not ready for large reductions in defense spending and investment.
Filed under: Alabama, Austal, Business Line, Companies, Contract Additions, Contract Awards, Department of Defense, Events, Lockheed Martin, Marinette Marine, production program, Services, States, U.S. Navy, Wisconsin
The U.S. Navy in late 2010 awarded contracts to the two teams building the new Littoral Combat Ships (LCS) for ten platforms each. These were Lockheed Martin (LMT) whose mono-hull design will be built at the Marinette Marine yard in Wisconsin and Austal America in Mobile, AL. Austal America is the U.S. subsidy of Austal (ASB) the Australian manufacturer of fast ferries. The Austal design utilizes a catamaran hull.
Prior to these contracts each team was building two of the small warships. They have received orders under the new contract for two more and last week the Navy issued Lockheed a contract worth about $700 million for two more. This brings the total of LCS under order from Lockheed to six.
The Navy ultimately plans to operate 30 or more of the ships. They are designed to be equipped with different mission packages depending on the requirements. This includes anti-air, anti-ship and mind warfare among others. Like their name implies they are optimized for in-shore activities such as anti-piracy operations in the Indian Ocean and special warfare.
Even though the defense budget is being cut the Navy remains committed to building substantial numbers of the ship. The fact that it is built in smaller yards allows such construction.
Filed under: Business Line, Companies, Congress, development program, Events, Military Aviation, missile defense, Press Releases, production program, Services, States
New Report Expands on Vital Role of Aerospace and Defense Industry to U.S. Economy
Industry and Labor Join to “Stop the Clock” – Avoid Sequestration
ARLINGTON, Va., March 7, 2012 /PRNewswire-USNewswire/ — A new report commissioned by AIA demonstrates the irreplaceable impact the aerospace and defense (A/D) industry has on America’s economic and national security. Addressing the current economic crisis, the report emphasizes the industry’s support of more than three million American workers. With federal budget sequestration looming and DOD, FAA and NASA budgets facing severe cuts, the International Association of Machinists and Aerospace Workers and Aerospace Industries Association have escalated efforts to educate the public and elected officials on the need for alternatives to budget sequestration.
“The data speaks for itself, America’s aerospace and defense industry is a sector that punches far above its weight,” said AIA President and CEO Marion C. Blakey. “And it’s not just the numbers, which are impressive by themselves— it’s how this industry makes a difference in the lives of all Americans.”
The aerospace and defense industry booked $324 billion in sales in 2010 in every state of the union. The report by Deloitte details state-by-state A/D industry employment, revenues, taxes paid and more. And, following recent White House efforts to promote increased export opportunities for American business, the report details the industry’s position as the number one contributor to the country’s positive trade balance, at a net $42 billion.
A study conducted by Dr. Stephen Fuller of George Mason University in October, 2011, projects that more than one million American jobs could be lost as a result of defense budget cuts if the sequestration trigger is pulled. Unemployment would go up .6 percent and GDP projected growth would be cut by 25 percent.
“Sequestration threatens to devastate our industry’s contributions to America’s bottom line,” Blakey said. “This report sends the clear reminder that sequestration is a local, community issue, the jobs at stake are not here in Washington, D.C. Over 1 million American jobs and the security of our nation are at stake.
“The American aerospace worker is counting on voters and elected officials to take notice of what sequestration will do to our country,” said R. Thomas Buffenbarger, International President of the International Association of Machinists and Aerospace Workers. “As this new report highlights, sequestration will result in two indisputable outcomes – more unemployment and a country that is less secure.”
“Although the aerospace and defense industry will never stop defending this country, it’s capabilities to do so will surely be reduced if sequestration is not stopped,” said Blakey. “The countdown has begun and it is now up to us to stop the clock.”
The Budget Control Act of 2011 requires Congress to identify one trillion in savings. Failure to do so by the end of the year will result in a $600 billion cut to the defense budget on top of $487 billion in reductions it is already planning. In addition, cuts will impact FAA’s Next Generation Air Transportation Program and NASA funding to develop a new vehicle to go to the International Space Station.
The complete study, The Aerospace and Defense Industry in the U.S: A financial and economic impact study, is available at http://www.aia-aerospace.org/assets/deloitte_study_2012.pdf
(1) The Aerospace & Defense Industry in the U.S.: A Financial and Economic Impact Study – Copyright 2012 Deloitte
(2) Private sector job losses projected from $1 trillion sequestration level defense budget cut, $45.01 billion per year in defense spending on investment accounts (only) – The U.S. Economic Impact of Approved and Projected DOD Spending Reductions in Equipment in 2013 by Stephen S. Fuller, Ph.D., George Mason University (NOTE: Fuller study did not account for private sector job losses resulting from NASA and FAA budget cuts.)
SOURCE Aerospace Industries Association
Filed under: Boeing, Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, Events, Federal Budget Process, L-3, Lockheed Martin, Military Aviation, production program, Services, U.S. Air Force, U.S. Marine Corps, USCG
Even though as part of the FY13 budget the Defense Department is proposing to restructure the existing C-130 fleet and cancelling the Aviation Modernization Program (AMP) production of the C-130J continues. With this the Air Force place a contract with Lockheed Martin (LMT) for 7 more of the capable transport for use by itself and the Marine Corps.
The $70 million option will procure 4 MC-130J tankers, 2 AC-130J gunships and a HC-130J for the Coast Guard. This is under the current production contract.
The next five year budget, though, due to the desire to cut several hundred billion in spending over the next five years is not so kind to the program. It sees a forty-one percent cut to the planned spending for production while also ending the AMP.
The AMP had been developed by Boeing (BA) but the plan was to have another contest to award the production and retrofit contract. Boeing under the development contract would have done some of the upgrades but the bulk would have been done by the winner of the new effort.
The budget also ends the C-27J Joint Cargo Aircraft (JCA) program which was buying twin engined transports from L-3 Communications (LLL) for use by the USAF Guard. This capability will be replaced by C-130 performing that mission. With the ending of fighting in Iraq and Afghanistan the planned use of the C-27J would have been much less then intended.
There is no guarantee that any of these budget proposals are final until Congress votes on the 2013 defense budget this year. They are the final say on what is cut and what is kept but generally they follow the Pentagon’s proposals.
Photo from kingair42′s flickr photostream.
Filed under: Business Line, Companies, Department of Defense, Events, Federal Budget Process, logistics, Navistar, Oshkosh Truck Corp, production program, Proposal, Restructuring, Services, U.S. Army
This is an exclusive post I made for Seeking Alpha about cuts to the FMTV program in the FY13 budget and its effect on Oshkosh’s bottom line.
Filed under: Boeing, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, Military Aviation, production program, Proposal, Restructuring, Services, Textron, U.S. Air Force, U.S. Marine Corps
The Obama Administration submitted its FY13 budget to the Congress today and as expected the defense budget took some hits. Trying to keep spending flat compared to the 2012 budget the Administration has proposed some cuts to investment, personnel programs and benefits. Chief among these were cuts to the most expensive program in the budget: the F-35 Joint Strike Fighter (JSF) as well as some other aircraft and Unmanned Aerial Vehicle (UAV) programs.
Even though the F-35 saw production reduced from only 31 to 29 this saved an estimated $1.6 billion. Over the next five year budget plan 179 less F-35 would be purchased then planned. Lockheed Martin (LMT) is the prime contractor on the advanced aircraft.
The V-22 which has gone into use with the U.S.M.C. and Air Force as a transport and search-and-resuce aircraft saw its planned production cut to 21 from 27. This should save about $500 million. The V-22 made by Boeing (BA) and Bell Helicopter, part of Textron (TXT), was on the downslope of the current multi-year production contract with the second in negotiation. This possibly could see reduced quantities.
All of this adds up to reduced revenues for Lockheed, Boeing and Textron although Congress does not need to accept the proposed cuts. It is expected though that a great deal of them will make it through the budget cycle as the need to reduce the deficit and government spending as a whole will require some reductions in defense spending.
Photo from Secretary of Defense’s flickr photostream.
Filed under: BAE Systems, Business Line, Companies, Contract Additions, Contract Awards, Department of Defense, development program, Events, Lockheed Martin, Military Aviation, missile defense, northrop grumman, Northrop Grumman Corp., Raytheon, Services, U.S. Army
The U.S. Army’s rotary winged force has made great contributions to the fighting in Iraq and Afghanistan and has suffered some losses in these missions. The primary threat in those actions were small arms and machine gun fire but there was some use of surface-to-air missiles. The aircraft are fitted out with threat detection and jamming equipment and the Army plans to continue its investment in new systems for this mission.
With that two contracts were awarded last week to begin development of a new system that will jam or misdirect infra-red guided missiles which home in on the heat signal of the helicopter. The Common Infrared Countermeasure (CIRCM) program once it goes into production could be worth several billion dollars due to the number of Army, Navy, Marine Corps and Air Force helicopters that could have the system installed.
The two contracts to Northrop Grumman (NOC) and BAE Systems (BAE:LSE) will allow the company’s to develop their proposed solution to the CIRCM requirements. They both have a value of around $38 million. Once these contracts are complete the Army will evaluate the proposed solutions and then choose one to go into Engineering & Manufacturing Development (EMD) to begin production and installation.
The CIRCM program was considered so valuable that proposals were received from ITT Exelis, Lockheed Martin (LMT) and Raytheon (RTN) as well. All of the companies that bid have experience with airborne jammers and protection systems.
Even though the U.S. defense budget is facing large cuts over the next five to ten years programs like this still need to be developed and introduced. There exists a large fleet of aircraft that will remain and they need to be updated to face improved threats from around the globe. If CIRCM is cut in the future it might be to stretch out the development or production so that the annual program cost is lower but eventually the desired result is achieved.
Photo from The U.S. Army flickr photostream.
Filed under: Bell, Boeing, Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, Events, Federal Budget Process, Military Aviation, production program, Restructuring, Services, Textron, U.S. Air Force, U.S. Marine Corps
The V-22 Osprey tilt rotor aircraft is a unique capability to the U.S. armed forces. Built by Boeing (BA) and Bell, part of Textron (TXT), in a joint venture the twin engined aircraft have seen a great deal of use in Iraq and Afghanistan since entering service in 2006 with the U.S. Air Force and Marine Corps. The system had a lengthy development timeline being cancelled more then once and then revived.
The first five year production contract saw 174 aircraft ordered and late last summer the government and contractor began entering into negotiations for the second one. That would be for a further 122 Ospreys at an estimated cost of close to $8 billion.
Now there is word that as part of the planned reductions to the defense budget over the next five years the U.S. Defense Department will cut 24 of the next batch of V-22. This would reduce the next five year contract to 98 aircraft at a cost of roughly $6.5 billion. The reports indicate that the hope is to save $1.75 billion but if 122 cost $8 billion the back of the envelope calculation would show only about $1.5 billion in savings.
Normally reducing the quantity bought over the same time period would lead to higher unit costs as there would be the loss of savings reduced with buying larger numbers of parts but it seems the Pentagon is hoping to not only cut aircraft but to negotiate a better price with Boeing-Bell. If that is possible remains to be seen. The delay in retiring the CH-46 and other aircraft the V-22 is replacing may also lead to higher operational costs for those as some will have to remain in service for a longer then originally planned timeline.
At least for the companies the program is not being eliminated or delayed. That means there will still be some revenue and earnings off of the program.
The cut will also illustrate how hard it is to reduce the budget just by slicing programs. There are enough sunk and recurring costs that savings are not directly tied to the amount of items being purchased. It is easier to eliminate whole programs which is reportedly being done with the Joint Air-to-Ground Missile (JAGM, C-27 JCA transport and the C-130 Avionics Modernization Program.
Photo from Beige Alert’s flickr photostream.
Filed under: Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, General Dynamics, Lockheed Martin, logistics, Military Aviation, Northrop Grumman Corp., production program, Proposal, Raytheon, Restructuring, S&T, Services, U.S. Air Force, U.S. Army, U.S. Marine Corps, U.S. Navy
Yesterday the Pentagon made a series of presentations and media events to lay out the initial numbers for future spending. The goal of the Secretary Leon Panetta’s Defense Department is to cut $487 billion in ten years with the current Five Year Defense Plan (FYDP) containing over half the reductions. As part of this DoD released a 15 page document and a one page budget summary that provides top level guidance on the plans.
Many of the planned cut backs are based on the idea that with the disengagement of forces in Iraq and Afghanistan cuts may be made in those areas. This means that money for the “Global War on Terror (GWOT)” or “Overseas Contingency Operations (OCO)” as that support was called will see significant cuts. In FY10 it was $163 billion, in FY11 $159 billion with $115 billion planned for FY12 and only $88 billion in FY13. This adds up to a 54 percent reduction and saves $75 billion in those three years.
Since personnel costs both for the current Active members, their dependents,the reserve force and retirees make up about thirty percent of the defense budget there will be reductions and adjustments to their size and benefits. 100,000 Soldiers and Marines will be eliminated from the active military with the Army losing approximately 8 brigades of troops. Even though the Marine Corps has grown substantially since 9/11 it maintains the same force structure of 3 active divisions and 1 reserve so there will be cuts to the size of individual units and support forces. The Pentagon states that even with these cuts the size of the ground forces will be bigger then on 9/11. There will also be increases in medical costs to the individuals and a commission to revamp military retirement benefits.
The Air Force and Navy will too see reductions in their force structure. The Navy will retire some ships early while delaying the construction of others. This means that it won’t grow as fast as currently planned. The Air Force will lose some tactical aircraft, cut transports and reduce planned buys of some F-35 Joint Strike Fighter.
Only a few programs are targeted for elimination so far. These include the C-27 Joint Cargo Aircraft used primarily by the Air National Guard. It is planned the C-130 will provide needed capability there. The new Joint Air-to-Ground Missile (JAGM) which is to replace the Maverick and Hellfire missiles will be scaled back. It was about to select its prime contractor. The Global Hawk Block 30 will finish production and there will be some other nibbling around the edges.
All of this ads up to some significant reduction in business for defense contractors. The JAGM was a large contract that either Raytheon (RTN) or Lockheed Martin (LMT) were hoping to win. The cuts in ship production will affect Huntington Ingalls Industries (HII) and General Dynamics (GD). Reduction in JSF will certainly affect Lockheed and its support contractors.
The contractors who provide support in Afghanistan and at bases across the U.S. will see cuts as there are smaller, less troops to support. Logistics needs will also be cut back so those making things like battle armor, uniforms, and small arms will also be affected.
Overall it will will remove about 9% of planned spending in FY13-17 from the defense budget. That will cause some companies severe pain depending on how broad their product line and customer base is.
Of course Congress is the final say and they could easily keep some of the funding for some of the programs cushioning the cuts and blows to the defense industry. The elections this year will also have a key affect.
A lot more to come as yesterday was just a starting point.
Photo is from U.S. Navy Imagery’s Flickr photostream.