Panetta Lays Out Initial Defense Budget Spending Plans

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.

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Colt May Face World Without M4 Carbine Production

Since the mid-1960′s the United States and many of its allies have been using the M16 and variants as their standard rifle and small arm. Since the start of the Global War on Terror in 2001 the focus has switched to the M4 carbine version of the ubiquitous rifle. This is shorter then the standard M16 and was found more useful in the close encounters that U.S. Soldiers and Marines found themselves facing in Afghanistan and Iraq. The majority of those weapons have been made by Colt but now that may be changing.

Twice in the last twenty years the Army has tried to develop new rifles and both times were not able to proceed into production. The last attempt actually developed a weapon called the XM8 rifle which was made in limited quantities by Heckler & Koch and while the standard infantry weapon was not chosen to replace the M16/M4 the 25mm version has seen limited use in Afghanistan and the Army recently ordered more due to its success.

The M4 has received some criticism for its performance over the last ten years especially in Afghanistan. There have been claims that it jammed easily and did not provide the necessary combat performance. The Special Forces due to some issues went ahead and developed and purchased their own assault weapon, the SCAR. This is a product of FN Herstel and was the winner of a competition for a new rifle firing the standard 5.56mm round as well as a “H” version shooting a 7.62mm one as well.

Now it is being reported that the Army may try a two track approach to fixing some of these issues. First they are exploring having a new competition to develop a different small arm. This would be an open competition against a new set of requirements. It is expected that most of the weapons bid would be existing ones such as the SCAR.

The second track is transferring production of the M4 from Colt to a new company. The Army now owns the data rights to the design and is able to award any company a production contract. This used to be more common in the past but recently in order to save money the Defense Department has not always bought the design or rights to a system. A recent example of such a transfer is the move of the Family of Medium Tactical Vehicles (FMTV) production from BAE Systems (BAE:LSE) to Oshkosh (OSK).

Colt is now facing a similar problem that now confronts BAE: the loss of one of their major products and revenue generators. Colt has reacted to the announced Army plans by ramping up their lobbying efforts to help Congress decide to keep the program with them.

It is an issue faced by many different programs as they reach the end of their lives. Is it cheaper and more effective to keep the existing system in production or better for the Defense Department to develop a new one and transition to a new supplier. One would think that with something as basic as a rifle there would be no need to change. While that is true there have been some incremental improvements in technology that lead to better performance including reliability, damage and rate of fire. The Army may want to look at these.

Certainly there is also a chance, as with the FMTV, where a new supplier might offer the same product at a better price and the Government must explore this option. What does seem sure is that Colt and the other small arms manufacturers across the world are ready for the U.S. to buy a new weapon if they really want one.

Photo from brian.ch’s Flickr photo stream.

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House Begins to Cut Defense Budget

The House Armed Services Committee (HASC) approved by a 60 to 1 vote their version of the 2012 Defense Budget. This is basically similar to what was requested by the Obama Administration and reflects the first real reduction to U.S. defense spending since the attacks of 9/11.

As in previous budgets it was split into three parts: first, the base budget which funds the U.S. military and its investment, production, training and support activities; second, the cost of “Overseas Contingency Operations” (OCO) which used to be called the Global War on Terror (GWOT) which are the costs associated with operations in Iraq and Afghanistan and finally it also includes money for the Department of Energy (DOE) support to the U.S. military which is primarily related to nuclear weapons.

The base budget was about $535 billion which was a slight increase on the $533.8 billion programmed in 2010 for such activities. Due to the fact that no 2011 budget was officially passed by Congress until late in the year the Department of Defense relied on continuing resolution which restricted spending to 2010 levels. When the final budget deal was struck funding the rest of the year total planned spending remained consistent with 2010 levels. The Obama Administration had requested $548 billion with almost $160 billion for OCO. This amount was not approved or provided.

The HASC bill approved amounts to a reduction as the OCO funding was reduced to only $119 billion from the $130 billion in 2010 and the $160 billion proposed in 2011. Total spending in 2012 based on the HASC will be $690 billion including the DOE funding of $18 billion. This is a net increase over 2010 but almost $20 billion less then the planned spending in 2011.

What does this all mean for defense contractors? If the House totals hold, and after the work with the Appropriations Committee and the Senate there may be many changes in what the money is spent on, it will be the first net reduction in U.S. defense spending in 10 years. This will mean that some contracts won’t get funded and some companies will see their revenue and earnings reduced.

The cuts to OCO mean those companies heavily involved in providing support and equipment for Iraq and Afghanistan will see the first cuts. The Army’s LOGCAP IV contract provides much of this support for deployed forces and companies like DynCorp International, Fluor and KBR have received large contracts as part of it. The reduction to OCO may affect LOGCAP and those companies involved in it.

It will also mean less bullets, beans and gas will be bought to support the troops in Iraq especially. Suppliers of basic items may see reductions in the amount of items purchased from them. This includes ATK who make ammunition as well as the various gasoline refiners and providers. As the fighting in Iraq and Afghanistan winds down the DoD will be concentrating on making new weapon systems and repairing and refitting the equipment used by the military in those operations.

If and when all of the U.S. and Allied forces return from the fight there will be no need for OCO funding at all. This seems to indicate that the base U.S. defense budget will sink to about $500 – $600 billion a year. This will provide opportunities for those companies providing new, advanced weapons as well as supporting the U.S. military in its bases in the U.S., Asia and Europe. The next round of cuts though will be to this base budget. That will affect the entire U.S. defense industry and may lead to reductions in the number of contractors either through M&A or just moving to other business lines.

Defense spending has been a major prop to the U.S. economy as a whole as it supports businesses and jobs across all of the states. If the civil market has not recovered sufficiently cuts to this money will have a negative effect on many local economies across the U.S. already being experienced as some contracts are eliminated or reduced.
This HASC vote may be the first step into a period like the Nineties which saw wholesale changes to the U.S. defense industry and the countries’ industrial base as a whole.

Photo from David Paul Ohmer’s Flickr Photostream.

Article first published as House Begins to Cut Defense Budget on Technorati.

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U.S. Lets Contracts To Clean Up Overseas Bases Tetra Tech To Benefit

January 17, 2010 by · Comment
Filed under: BNET 

The United States military over the last nine years has established and operated large bases in Afghanistan and Iraq. The Global War on Terror…

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Army buys a lot of Hellfires

The US Army awarded Lockheed Martin a contract to produce Hellfire missiles. These are normally fired from AH-64 and OH-58D helicopters and some Air Force aircraft. The missile is used by the US and its Allies. In Iraq and Afghanistan the Army has been using these with great effect to strike a variety of targets. The contract is valued at over $350 M and will purchase 1400 missiles. It is estimated that over 6000 have been used to date in the Global War on Terror.

For more see the Orlando Sentinal.

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