JAGM to Follow JCM in Obama’s Latest Budget
Filed under: Boeing, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, Military Aviation, Raytheon, Services, U.S. Air Force, U.S. Army, U.S. Marine Corps
The Joint Air-to-Ground Missile (JAGM) program is an Army run one to develop a replacement for the air launched Hellfire and Maverick missiles. The Hellfire is fired from helicopters and started life as a laser guided anti-tank missile. It now has a variety of warhead options and has seen heavy use in Iraq and Afghanistan from AH-64 and AH-1W attack helicopters. The Maverick is fired from fixed wing aircraft primarily by the U.S. Air Force and too was initially an anti-tank system.
Several years ago there was a similar program in development called the Joint Common Missile (JCM). This was cancelled around 2005. The JAGM program began a few years later. Originally it was planned to have two teams compete for designs and then take one into production. Raytheon (RTN) and Boeing (BA) formed a team and Lockheed Martin (LMT), who had been the prime contractor for the JCM, also competed. One of the requirements for JAGM is the use of a 3 mode seeker utilizing radar, infrared and laser guidance.
In 2012 the Army rather then continuing the contest decided to delay final development and production of the system. Rather the two teams would be given contracts to continue their work and this could then support a later production decision if it was decided to finish out the program. Both contenders were given about $60 million contracts for this work.
Now in the latest budget submitted by the Obama administration last week it looks like a final decision has been made to cancel JAGM. Only the costs of the current development plan are considered which would save a little over $200 million in the 5 years the budget plan covers. It is of course up to Congress to decide whether to remove the funding and end this program.
The Hellfire has a successful history but the JAGM, and JCM, would have offered improvements in size, range and guidance capability. If sequestration continues then the U.S. military will be faced with more choices of deferring new development, using existing equipment or investing in new capabilities for them. The current budget without considering those mandatory cuts already is starting to make those kind of decisions.
Fiscal Year 2014 Defense Budget Snapshot
Filed under: BRAC, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, logistics, Military Aviation, production program, Proposal, Services
The Presidential Administrations are required by law to submit their budget to Congress for consideration for the next Fiscal Year on the first Tuesday of February. Yesterday, about 2 months late, the Obama Administration submitted their budget for Fiscal Year 2014 (FY14). One major part that will be poured over is the defense budget.
Setting up a quick and early fight with Congress the about $600 billion request does not include the mandated $50 billion odd sequestration cuts. This means that Obama is assuming some grand deal to eliminate that requirement. Based on this year’s efforts that may be difficult as it would require major compromise by both the Democratic Senate and the Republican House. Of the request $88 billion will fund Afghanistan and the remaining $615 the rest of the defense services and should also cover the Department of Energy’s nuclear weapon related costs.
overall the defense budget without sequestration goes down slightly from his previous one but with those cuts included it would be close to a 14% reduction.
Lockheed Martin (LMT) sees the continuation of the controversial F-35 at planned production rates and overall investment which may cause tension with legislators. This huge program is over $8 billion in total funding requirements and will include 29 more of the advanced aircraft for the U.S. military and allied nations. The request also pays for continued development of the oft delayed system and reportedly put it on the path for production rates of 100 a year by the end of this decade.
In another area that will cause heartburn with both sides of Congress the defense budget includes another round of Base Realignment and Closure (BRAC). This was something that Obama said would not happen in the foreseeable future during his campaign last year. BRAC leads to base closings and movement of people and jobs out of Congressional districts which in some case leads to major effects on local economies. There have been multiple BRAC rounds since 1991 with the most recent in the 2005-2006 time frame. Getting BRAC through Congress may be difficult.
At this point and based on recent history it is hard to say how much of this budget will become final law. There has not been a proper budget for several years. There could be a repeat of this year with a Continuing Resolution funding all of 2014. Parts of Obama’s proposals will not be accepted but the majority of funding decisions will. Some programs will be cut, realigned or eliminated and some will get more funding. Right now it is hard to predict especially with sequestration what the final end product will be.
Navy Awards Contracts for New Ship Components
Filed under: Alabama, Alliant Techsystems, Austal, Business Line, Companies, Congress, Contract Additions, Contract Awards, Events, General Dynamics, Lockheed Martin, Marinette Marine, production program, Services, States, U.S. Navy, Wisconsin
The building of a modern warship requires not only the initial large contract with the builder but numerous other ones to buy components and support for the actual ships. Other systems are purchased with separate contracts and then items are provided to the builder for installation on the ships as they are assembled. The U.S. Navy is currently building new aircraft carriers, missile destroyers, Littoral Combats Ships (LCS), amphibious warfare ships as well as support vessels.
The LCS is being built by 2 different yards under 2 separate contracts. The LCS-1 design are made in Wisconsin by Marinette Marine and Lockheed Martin (LMT). The LCS-2 in Mobile, AL by Austal America and General Dynamics (GD). While they have dissimilar hull designs the basic weapon fit remains the same and both will carry mission modules. Up to 20 LCS are on contract to be built with the Navy periodically issuing contracts for 2 from each builder.
2 related contracts were recently awarded to support U.S. Navy ship construction. First General Dynamics (GD) received one for 8 MK 46 Naval Weapon Systems. The MK 46 is a 30mm cannon mounted in a stabilized turret. These will be installed on LPD-12 amphibious assault ships and the LCS. The contract is worth $26 million and is a follow on to previous contracts under which 30 systems have been delivered.
Then ATK (ATK), the ammunition and explosive manufacturer, received a contract for 30mm ammo. This $12 million contract is for incendiary rounds for the MK 46. It is a 5 year Indefinite Delivery / Indefinite Quantity (ID/IQ) contract with 1 base and 4 option years. As an ID/IQ the Navy will order off of the contract what is required to outfit ships with the Mk 46 weapon.
With Sequestration and the budget reductions recently passed by Congress and agreed to by the Obama Administration FY13 will probably not see many more major contracts awarded. There may be many though like these to support bigger programs already underway.
LAS Controversies Continue
Filed under: Brazil, Business Line, Companies, Congress, Contract Awards, Countries, Department of Defense, development program, Embraer, Events, Federal Budget Process, Hawker Beechcraft, Military Aviation, production program, Protest, Services, Sierra Nevada, U.S. Air Force, United States
In this time of Continuing Resolution the U.S. Air Force’s Light Air Support (LAS) contract is one of the few major new programs to begin in FY13. The second attempt to conduct the contest led to same result as the first. Sierra Nevada (SNC) using a airframe from Brazil’s Embraer was selected and Beechcraft’s T-6 based proposal was rejected. As with the first attempt Beechcraft has filed a GAO protest.
The Air Force has announced that using available policy they will override the stop work that normally happens for 100 days while the GAO works out the protest. This has been done in the “best interests of the United States or unusual and compelling circumstances.” Due to the first protest and the do over on the contest it is already a year behind schedule. This new one could also cause several months delay.
The protest and the award remained tied up in politics and concerns about loss of work to a U.S. company. Sierra Nevada had originally planned to have a facility in Florida to do some of the work finishing the aircraft but they would be assembled in Brazil. The company is now looking at ways to increase the amount of jobs created by the contract through “in-sourcing” the work.
The loss of the contract to the U.S. company has been a further blow to the Kansas military aviation industry. Boeing (BA) has moved their work from the Wichita facility to Washington for the new KC-46A tanker. Beechcraft had planned to build their AT-6 in the state. As such it is attracting the interest of Kansas’ Congressional delegation.
With so few major programs and contracts predicted for the near future fights like this over awards will continue. Each company has a lot to gain by winning the work and as the defense budget declines there will be less contracts available.
P&W Receives JSF Engine Contract
Filed under: Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, development program, Events, GE, Lockheed Martin, Military Aviation, Pratt & Whitney, production program, Rolls-Royce, Services, U.S. Air Force, UTC
The Joint Strike Fighter (JSF) is produced by Lockheed Martin (LMT) but the engine for the advanced tactical aircraft comes from United Technologies (UTX) Pratt & Whitney. As with many other aircraft programs the engine is procured under a separate contract and then provided to the aircraft manufacturer. This means as aircraft options are executed another contract action must take place for the engines.
P&W received their contract recently to support the most recent JSF order. This contract will be for 32 more F135 engines and is the 5th order so far to match the first 5 Low Rate buys of the F-35. No value was given but earlier estimates were of a cost that was close to $40 million per unit.
For several years Congress funded against DoD wishes another engine development program as risk reduction. This was with General Electric (GE) and Rolls-Royce (RR) and several hundred million dollars was given to them for the F136 engine. The idea was to have enough production capability or maintain schedule if there were issues with the primary F135 engine. In the first Obama administration this was a program that was terminated.
The JSF program continues to gain momentum as more are produced, more training conducted and development continues. It still is several years behind its original schedule and has had significant cost growth. This has led to some of the original international partners to re-consider how many aircraft they will buy and the terms of their contracts.
As the largest part of the Pentagon’s budget it would face cuts of several hundred million dollars if the required reductions are spread evenly. This would affect this years operations and perhaps cause further delays in the overall program.
Despite Budget Worries Programs Continue
Filed under: Alenia Aeronautica, Business Line, Companies, Congress, Department of Defense, development program, Events, General Dynamics, Lockheed Martin, Military Aviation, Press Releases, production program, Services, training, U.S. Air Force, U.S. Army
The U.S. Congress and the Obama Administration may have pushed off the decision on sequestration and dealing with the planned budget cuts for the Defense Department but that does not mean development and new programs don’t continue. Using available funding the work goes on to advance these efforts 2 recent press releases illustrate this activity.
General Dynamics and Alenia Aermacchi Join Forces for U.S. Air Force T-X Trainer Competition — “General Dynamics (NYSE: GD) and Alenia Aermacchi, a Finmeccanica company, announced today the signing of a Letter of Intent (LOI) to join forces and compete for the U.S. Air Force’s T-X trainer program, which will replace aging T-38 trainer jets and related training systems.” The American defense contractor will team up with Italy’s Alenia Aermacchi to propose a variant of the M-346 military aircraft trainer designated the T-100. The T-X program will replace the U.S. Air Force’s T-38 fleet. THe M-346 was recently selected by Israel to be their primary training aircraft.
Lockheed Martin JLTV Undergoes Successful Design Review — ” Lockheed Martin’s (NYSE: LMT) family of Joint Light Tactical Vehicles successfully completed a top-to-bottom government design review in late December, well ahead of the first Engineering and Manufacturing Development (EMD) JLTVs that will begin rolling off the assembly line this spring.” The JLTV is the planned replacement for the HUMVEE in use by the U.S. military and potentially its Allies. It will be a large program if fully executed as there will be a requirement for thousands of the vehicles. The U.S. is utilizing a process where multiple designs are being developed independently by contractors and then one or more may eventually be selected to go into Engineering, Manufacturing and Development (EMD) and then production.
The hard decisions facing U.S. defense budget decision makers is whether to cut back funding for these types of programs and make do with existing systems that may cost more in the long run to operate and maintain due to their age and capabilities. In the past it has been tempting to reduce investment in new systems beyond basic development to manage the size of the budget. If these types of programs continue it may mean cuts to current operations and force sizes to fee up the necessary investment requirements. The types of cuts required by sequestration will be hard to implement in the current budget but could be easier in future ones as more specific cuts may be made.
In the end if the cuts are carried out the U.S. will lose capability and may see new programs like these executed.
South Korea Interested in Global Hawk
Filed under: Business Line, Companies, Congress, Contract Additions, Contract Awards, Countries, Department of Defense, development program, Events, FMS, Military Aviation, Northrop Grumman Corp., production program, Services, South Korea
It is being reported that South Korea has requested to purchase 4 of Northrop Grumman’s (NOC) long range, strategic Unmanned Aerial Vehicle (UAV), the Global Hawk. With supporting parts, services and other items the contract is estimated at around $1.2 billion. Congress will have to approve the sale.
The Global Hawk conducts long range surveillance and intelligence data collection missions. It is currently used by the U.S. Air Force and will also support European and U.S. Navy missions. The Global Hawk has been in service since the early part of this century and has flown thousands of hours of missions in support of Iraq and Afghanistan. The system has consistently been upgraded with new sensors and other equipment over time.
In their original 2013 budget the Obama Administration had proposed reducing the number of Global Hawks that they planned to buy as well as retire some others. Congress fought this proposal questioning the rationale of continuing to use manned U-2/TR-1 aircraft for these missions.
This contract will follow on to a European order for 5 and the annual buys by the U.S. Air Force and Navy to support their programs.
Final Conference Defense Spending Bill from Congress Kills MEADS
Filed under: Business Line, Companies, Congress, Countries, Department of Defense, development program, Events, Federal Budget Process, Germany, Italy, Lockheed Martin, Military Aviation, missile defense, Proposal, Raytheon, Restructuring, Services, U.S. Army
Despite threats of a veto from the Obama White House the current conference version of the 2013 Defense Authorization Bill will end the MEADS program. The final version of the law cuts the last planned $400 million expenditure on the new, joint air defense system.
The Medium Extended Air Defense System (MEADS) was being developed by the U.S., Italy and Germany as a replacement for the PATRIOT system made by Raytheon (RTN). Lockheed Martin (LMT) is the lead contractor for the MEADS system. The Administration and Congress have already agreed that newer versions of the PATRIOT will suffice and work on MEADS would end. The dispute is that Congress decided that there was no reason for funding in FY13 rather then completing that year of work.
Italy and Germany had wanted to continue the program having provided several hundred million dollars of funding over its life stretching back to the Nineties. Not only will there be fall out internationally from this decision it is estimated that paying out contract termination fees and close out costs would probably be close to the planned $400 million in funding.
The program had been in its test phase and had recently had some successes.
Unfortunately in the potential fiscal situation new programs that are yet to enter service are the ones that face the biggest cuts as it is possible to utilize some of the things developed but by avoiding production and deployment large amounts of funding are saved. While the Administration wanted that last year of funding it seems clear that Congress intends to not provide it in the FY13 bill.
HASC Members, Air Force Trying ‘End Run’ on Air Guard Budget Talks — Press Release
Filed under: Air National Guard, Business Line, Congress, Events, Federal Budget Process, Military Aviation, Services, U.S. Air Force
WASHINGTON, Dec. 13, 2012 /PRNewswire-USNewswire/ — The National Guard Association of the United States today released the following statement by retired Maj. Gen. Gus L. Hargett Jr., the NGAUS president:
“Fueled by misinformation from some Air Force officers, it appears a handful of House Armed Services Committee members are willing to circumvent the legislative process to force a budget on the Air National Guard that the governors, the adjutants general and most in Congress oppose.
“This is the kind of mischief that can occur during conference, when a handful from the House and Senate can go behind closed doors and literally change legislation in the name of forging compromise between the two chambers.
“The House and Senate both rejected the Air Force’s fiscal 2013 budget request, which would take disproportionate cuts from the Air National Guard. Both chambers told Air Force officials to go back and work with the governors and the adjutants general on a new proposal that addressed state concerns.
“Unfortunately, Air Force officials have since ignored the governors and the adjutants general. Neither group has been able to provide meaningful input to a new budget plan. Nevertheless, Air Force officers have told members of Congress that they have a compromise plan in hand.
“For the record, the nation’s governors and adjutants general favor a freeze on Air Guard manpower and force structure and the establishment of a National Commission on the Structure of the Air Force. Neither organization has agreed to any Air Force proposal. Both remain concerned that the cuts to the Air Guard would adversely affect domestic response.
“In addition, to our knowledge, the chief of the National Guard Bureau has not endorsed any compromise plan for the Air National Guard in the fiscal 2013 Air Force budget.
“Commissions are certainly not the ideal way to craft budget decisions. They are a last resort. But at this point, a commission independent from the Air Force is our only remaining hope for a transparent process that includes real input from the governors and Guard leaders.”
About NGAUS: The association includes nearly 45,000 current or former Guard officers. It was created in 1878 to provide unified National Guard representation in Washington. In their first productive meeting after Reconstruction, militia officers from the North and South formed the association with the goal of obtaining better equipment and training by petitioning Congress for more resources. Today, 134 years later, NGAUS has the same mission.
5th LRIP Batch of F-35 JSF to be Awarded
Filed under: Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, development program, Events, Lockheed Martin, Military Aviation, production program, Services, U.S. Air Force, U.S. Marine Corps, U.S. Navy
Lockheed Martin (LMT), the prime contractor on the Joint Strike Fighter (JSF), and the U.S. Department of Defense have pretty much wrapped up negotiations for the latest batch of F-35 Joint Strike Fighter (JSF) production. This goal was to complete and award this by the end of 2012 and it looks like that will be met.
The FY13 order will be for 32 more of the advanced aircraft split between the 3 variants. The bulk, 22, are the Air Force’s Conventional / Take Off and Landing (CTOL) version. These are intended to replace the F-16 and A-10 platforms currently in use. Then there are 3 F-35B Short/Vertical (S/VTOL) for Marine Corps to meet the AV-8A mission and finally 7 F-35C carrier based aircraft for the Navy. Estimates for the cost of the aircraft along with engineering services and other money is in the $3.8 – 4 billion range.
The F-35 program remains several years behind original schedules and cost have increased greatly but much progress has been recently made. There are now over 150 aircraft delivered or in production with this order. They are supporting test and development along with training for pilots and ground crew.
Due to the high concurrency remaining with the program Lockheed will have to go back and modify many of the current production aircraft to the final standard after they are delivered. This is due to the much more T&E remaining for things like the advanced helmet, software and other parts of the aircraft. The F-35 continues to remain on track to be the most expensive defense acquisition program in history.
Photo from U.S. Navy Imagery’s flickr photostream.
Discussion of Sequestration Effects Heats Up
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.
Lockheed Receives Their JAGM Contract
Filed under: Boeing, Business Line, Companies, Congress, Contract Awards, Department of Defense, development program, Events, Lockheed Martin, Military Aviation, Raytheon, Services, U.S. Army
The new Joint Air-to-Ground Missile (JAGM) is the second effort conducted by the Army to build a replacement for the Hellfire and Maverick air launched missiles. The earlier Joint Common Missile (JCM) program was cancelled. The Army has used 100′s of Hellfires in the fighting in Iraq and Afghanistan and what was originally an anti-tank missile has been modified for other roles. The Maverick is an earlier designed system that too was primarily for anti-tank but did have other warheads. The missiles were launched from a variety of platforms including the AH-1, AH-64, OH-58D, A-10, F-16 and F/A-18 helicopters and aircraft.
Due to budget constraints there have been some recommendations to cancel the new program and continue with the Hellfire. The total cost of development and production for the JAGM could be around 10-12 billion. The Army had been proceeding with a contest between Lockheed Martin (LMT) and a team of Raytheon (RTN) and Boeing (BA) to decide on one source when the decision was made to slow the program down.
The Army decided to use available funds to award the two contenders technology development contracts to keep work going until a final decision was made. At the very least potentially new technology would be developed that might be inserted into older missile systems. If funds were found the JAGM development and production could continue.
Now Lockheed has received their latest contract. It has a value of up to $64 million and is part of the “Extended Technology Development Phase”. Normally a program enters Engineering, Manufacturing and Development (EMD) phase at this time and the Army planned to choose one bidder for that.
Discussions between the Army and Raytheon on their contract continue but it should be awarded soon.
U.S. Continues to Invest in Alternate Fuels
Filed under: Business Line, Companies, Congress, Contract Awards, Department of Defense, development program, Events, Lockheed Martin, logistics, Services, U.S. Navy
The U.S. Department of Defense over the last few years has made some investments in alternate fuels and energy. Much of this has been driven by the needs of the battlefields in Iraq and Afghanistan for significant amounts of batteries and electrical power. They also spend billions a year on fossil fuels to move aircraft, vehicles, ships as well as generate electricity. The cost of the fuel as well as the effort spent transporting it has led to interest in alternate fuels.
While there have been some in Congress pushing back over the cost of the “green fuels” being developed for ships and aircraft that has not stopped continued interest in the different programs.
With that in mind two contracts were awarded recently to support fuel cell and solar power for the U.S. Navy.
The first is a $3.8 million effort to FuelCell Energy to test a fuel cell battery for different uses. These include running unmanned submersibles. Fuel cell like motors have been used to power torpedoes for years and this is just taking capability already developed for commercial applications and testing them with Navy systems.
The second is worth $3 million and is with Lockheed Martin (LMT). This is to develop a fuel cell power node to provide tactical power generation. The systems will also be integrated with solar power to provide other sources of electricity. The fuel cell will be compatible with standard JP-8 fuel used in vehicles.
While the costs of development for alternate fuels seem high especially with large amounts of fossil fuels remaining it is still overall a good investment for the U.S. military. If it can cost effectively reduce fuel requirements and transport it allows more capability for other important supplies. Long term the use of these types of power sources will be necessary as well.
House Supports Status Quo for FY13 Defense 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.
TRICARE West Contract Finally Settled in UnitedHealth’s Favor
Filed under: Business Line, Companies, Congress, Contract Awards, Department of Defense, Events, Federal Budget Process, IT, logistics, medicine, Protest, Services, UnitedHealth
In 2009 the Department of Defense attempted to award new contracts to administer their primary healthcare program, TRICARE. These are regional contracts with the country divided up in groups of states as well as a contract to provide overseas services. The Western and Southern regions due to the density of military bases were the two largest and amount to several billion a year. As to be expected competition was fierce for these by different health insurance companies. It is just now, over three years later, that the government is finally resolving these contracts due to the amount of protests and reviews required.
The Western Region contract is worth about $21 billion over its predicted five year life. After a final round of awards and protests the Government Accountability Office (GAO) has upheld the award earlier this year to UnitedHealth (UNH). The GAO ruled in a protest by the incumbent, TriWest to the award in 2012.
TriWest has had the contract since 2003 and won the original re-compete in 2009. This decision was protested by UnitedHealth. In the last three years there have been new competitions, awards and protests. This final decision should stand and UnitedHealth will become the provider.
This is unfortunate for TriWest as their primary business is the TRICARE contract and the company may have to fold without it. There is a good chance that many of their employees could be absorbed by UnitedHealth as is often the case when a new company takes over an existing contract but that is not guaranteed.
The Defense Department faces growing pressure on their health spending which has increased dramatically over the last ten years due to the fighting in Iraq and Afghanistan. Not only has the size of the military grown with more dependents there are also more retirees and severely injured that require health care. TRICARE is the primary mechanism for this.
The Obama Administration has proposed raising the co-pays and annual payments that the military and retirees make but that was struck out of the 2013 defense budget by Congress loathe to pass those costs onto the military. Obama has threatened to veto the bill as it stands due to that provision but many times once the bill is complete it will be signed.
Despite Recent Progress Lockheed Martin Faces Some Challenges
Filed under: Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, General Dynamics, Lockheed Martin, Military Aviation, Northrop Grumman Corp., production program, Raytheon, Services
Lockheed Martin (LMT) remains the largest defense contractor in the United States as well as globally. It is responsible for the biggest military acquisition program in the history of the world – the F-35 Joint Strike Fighter (JSF) as well as several other major aircraft and hardware systems. The company has consistently done well with its earnings and maintained a high dividend.
The Lockheed stock seems attractive right now. Price as of 29 June was $87.08. It has outperformed the market by 6 percent over the last year, its P/E is a little above 10 and it pays a dividend of $4.00 a year. The major defense contractors like LMT or Northrop Grumman (NOC), Raytheon (RTN) and General Dynamics (GD) have consistently increased their dividend over time. The companies have also focused on reducing their costs to boost profit margins as well as make them more competitive with the Pentagon when it comes to price meaning as long as defense spending remains fairly consistent there should be increases in earnings and profit as these trends continue.
Lockheed has moved to reduce its workforce especially those in the middle management or overhead positions. It has also when possible adjusted its pension plans and negotiated new contracts with its unionized workers to lower personnel costs when possible. It’s most recent quarter set it apart from its competitors as the company had both growth in earnings and revenue. Most others had seen earnings up but on a revenue drop as their efforts to reduce overhead and cost of providing their products helped.
As the Pentagon continues to execute its Fiscal Year (FY) 12 budget plans new contracts are competed and awarded with Lockheed winning their fair share of them. Yet the future of defense spending is clouded with uncertainty due to the plans for FY13 spending caused by sequestration. Sequestration is automatic budget cuts of up to $100 billion a year in defense spending due to the failure of the Obama Administration and Congress to reach a budget deal last year. All acknowledge that these cuts would have a severe effect on the military, its contractors and the U.S. economy in general yet without changing the current law they will occur.
Lockheed just finally settled a major strike by its Dallas-Fort Worth aircraft assembly workers. This lasted over two months and was driven by Lockheed’s request for them to cut their pension plans. These workers make the F-35 and the F-16 fighters which are a large portion of Lockheed’s portfolio. The key part of the new contract as stated in the press release is “The agreement compensates union members fairly while allowing Lockheed Martin Aeronautics to be competitive for new contracts and respond to customer demands for greater affordability in defense products.” The settlement of this action will allow Lockheed to focus on delivery of the aircraft.
Other then the potential budgetary issues facing the industry as a whole Lockheed does raise some concerns. It has a large debt and pension obligation due to a large workforce and a more traditional defined benefit plan. The Pentagon recently announced that due to concerns with Lockheed Earned Value Management System (EVMS), which tracks cost and schedule data, it will now withhold up to 5 percent of payments. This is the maximum penalty that may be applied. The EVMS for the F-35 is the major concern which is a program that faces scrutiny of its costs and schedule from Congress. If Lockheed cannot get its system into compliance then it faces a potential hit to its earnings and profits as the F-35 program is so large.
Congress has already made some moves to keep parts of the budget recommended for cuts by the Obama Administration. (http://seekingalpha.com/article/566861-defense-contractors-aided-by-congress-keeping-money-in-defense-budget) It may be expected that these will continue. Sequestration is designed to prevent Congress from doing this which is why all are focused on ways to prevent it or minimize the effect on defense spending. Too many jobs, and votes, are affected by it. That does not mean that there will be success in preventing the reduced spending. The U.S. deficits are recognized as too high and something must be done.
Lockheed stock due to its current price, dividend and their large contracts should probably continue outperform the market over the next few months. Until the full effects of sequestration or efforts by Congress to minimize cuts to defense spending are identified there should be no major movement of the price. If the worst case happens and the U.S. faces cuts to defense spending in the range of $50-100 billion a year Lockheed should at least see some short term pain. If the plan is changed and defense spending is protected then this stock along with the other defense industrial stocks should see some increase. This, though, won’t occur until 2013 and the stock like most of its competitors really remains a dividend buy only.
Defense M&A — Seeking Alpha
Filed under: Acquisitions, Business Line, Companies, Congress, development program, Events, Federal Budget Process, HII, ITT Corporation, Northrop Grumman Corp., production program, Seeking Alpha
Here is an article I wrote for Seeking Alpha on potential defense M&A activity.
Congress Continues Push Back on Defense Spending Proposals
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.
House Begins Markup of 2014 Budget with Add of Submarine
Filed under: Business Line, Companies, Congress, Connecticut, Department of Defense, Events, Federal Budget Process, General Dynamics, HII, production program, Proposal, Restructuring, Services, States, U.S. Navy, Virginia
The House and Senate are in the process of considering the President’s 2014 budget request. As often different committees will review it and make changes sometimes based on their own priorities which means adding things or removing items from the original request. The budget has to go through two committees in each the House and Senate. Then it is voted on and a Conference Committee held. This means that often the final budget is not necessarily similar to what was submitted in February.
Not only do different companies lobby Congress for inclusion of their products and projects but sometimes the Services will indirectly. There exist lists of “unfunded priorities” and needs that Congress may address even though they are not part of the budget request.
The House Armed Services Committee as part of its review has reportedly increased the Navy’s buy of U.S.S. Virginia class attack submarines by 1 more then requested. The Navy had originally planned to buy two a year but in order to meet budget cut goals and reduce spending only 1 was asked for in 2014. The HASC has bumped that back up to 2.
Congress also wants the Navy to consider signing a multi-year contract for 10 submarines. Multi-year contracts are normally for five years and done for systems, especially aircraft, in steady state production. This allows efficiencies and better pricing due to stable quantities and funding. Virginia submarines are currently built by two companies – Huntington Ingalls Industries (HII) in Virgina and General Dynamics (GD) Electric Boat in Connecticut and Rhode Island.
One of the problems that the Pentagon will face as it tries to cut money required to meet budget goals is that Congress is loathe to reduce programs. There are 435 House members and 100 Senators who see defense spending as a way to bring money and jobs into their districts. The idea of keeping one more submarine in the current budget will do so. It will also require the Navy to cut less money or take it from other budget priorities.
More V-22 Engines for Rolls-Royce
Filed under: Bell, Boeing, Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, Events, Military Aviation, production program, Rolls-Royce, Services, Textron, U.S. Air Force, U.S. Marine Corps
Following the second operational crash of a V-22 during exercises in Morocco there was the usual hand wringing about the safety of the V-22 Osprey tilt-rotor made by Boeing (BA) and Bell, part of Textron (TXT). Even so the program continues with planned expanded deployment and new missions including support of Presidential movement operations.
It has been reported that as part of the planned reductions in spending starting next year that V-22 quantities will be reduced. The total purchased should remain the same but it will be spread over more years. The next five year multiyear production contract is still being negotiated as the current one ends.
Even so the Pentagon went ahead and place orders for engines to support delivery of over 100 more aircraft with Rolls Royce (RR). The almost $600 million contract for 268 engines will have one base and four options years. The base contract will be for 70 engines.
The company has delivered over 500 engines for the V-22 program.
The V-22 offers unique capabilities compared to traditional rotary wing aviation assets. It has served in Iraq and Afghanistan with no combat losses although an Air Force one crashed in Afghanistan and now a Marine one has crashed as well. It is planned to replace Navy logistics aircraft as well as serve more with the Marines and Air Force Special Operations.
Boeing and Bell are obviously looking for new missions and customers for the aircraft. Certainly there may be pressure as the Pentagon reduces its budget to cut the number of V-22 to buy as they are expensive to buy and operate. The more that are sold, though, drives down the price for every customer.
U.S. Continues Investment in AEGIS Ashore
Filed under: Alabama, BAE Systems, Business Line, Companies, Congress, Contract Additions, Contract Awards, Countries, Department of Defense, development program, Events, MDA, missile defense, production program, Raytheon, Services, States, U.S. Navy
The AEGIS system is the primary ship based anti-air warfare weapon used by the U.S. Navy and some allied Navies. It consists of radars, fire control software, vertical and rail launchers and version of Raytheon’s (RTN) STANDARD missile. It has been in use since the 1970′s and consistently upgraded.
Using modified software and the SM-3 missile it provides ballistic missile defense. The SM-3 has the ability to engage targets at high altitude. More advanced models of the SM-3 are being developed with a new plant being constructed in Huntsville, AL at Redstone Arsenal.
A few years ago the Obama Administration decided to end deployment of the Ground Based Mid-course system in Europe. That Army operated ballistic missile defense program now has interceptors based in Alaska and sensors across the globe. A similar installation of interceptors was planned for Eastern Europe but it was decided to pursue other ways to provide the defense for NATO allies.
Part of this is to take an AEGIS system and base it on the land. This “AEGIS Ashore” will make the majority of the ship installed components and make them transportable. This includes radars, fire control installations, the SM-3 and a version of the Mk 41 Vertical Launch System.
BAE Systems (BAE:LSE) is the manufacturer of the Mk 41 through the acquisition of a U.S. defense contractor several years ago. The just received a further contract for Mk 41 components for both AEGIS ashore and new DDG-51 class destroyers. This contract has a value of about $23 million.
The contract will see Mk 41 components for DDG-116 and parts of the AEGIS Ashore installation. The use of the Navy’s missile system to provide land based missile defense is rather innovative and combined with ship based systems as well as the Army’s shorter ranged PATRIOT and THAAD provide some layer of defense for an area.
Air Force Will Attempt Second Contest for Light Air Support Aircraft
Filed under: Boeing, Brazil, Business Line, Companies, Congress, Contract Awards, Countries, Department of Defense, development program, Embraer, Events, Federal Budget Process, Hawker Beechcraft, Lockheed Martin, Military Aviation, production program, Proposal, Protest, Services, Sierra Nevada, U.S. Air Force
Following up on its decision to cancel the initial contract to Sierra Nevada and Brazil’s Embraer for the initial order of Light Air Support (LAS) aircraft for use by the Afghan military the U.S. Air Force now plans a new contest. The contract was protested by Hawker Beechcraft whose T-6 based proposal was removed from the competition. After the start of an investigation into the source selection which continues the service’s leadership decided to end the first attempt and begin again.
The Air Force investigation found that there was not sufficient justification for the decisions to remove Hawker and award the $300 million contract to Sierra Nevada. This company teamed with Embraer which would see their Tucano based system assembled in Florida.
Now it is expected that an amended Request for Proposals will be issued in the near future allowing the two companies to compete again.
If the program goes as planned it could be worth up to $1 billion in orders.
With the new proposal process it is hoped that a decision will be made next year.
Hawker is struggling and may face bankruptcy in the near future and the LAS win would be a major boon for the company. Brazil is looking at buying a new fighter and Boeing’s (BA) F/A-18 is one of the major contenders and a win for Embraer is believed to be helpful for that contest.
The Air Force has struggled over the last decade with awarding new contracts. There was the long running KC-X tanker program which took three attempts to award finally to Boeing. The new combat rescue helicopter, CSAR-X, went through two iterations but is now currently on hold. The cornerstone of the new Air Force, Lockheed’s (LMT) Joint Strike Fighter, is facing cost and schedule problems. The Light Air Support program seems to continue that trend.
Update on Boeing’s (BA) Military Programs — Seeking Alpha
Filed under: Boeing, Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, Military Aviation, Pratt & Whitney, production program, Services, U.S. Air Force, U.S. Marine Corps, U.S. Navy, UTC
This is an exclusive post I wrote for Seeking Alpha on the current state of Boeing’s military aircraft programs.
Annual Reports to Congress Detail JSF Cost Growth
Filed under: Boeing, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, Military Aviation, missile defense, production program, Raytheon, Services, U.S. Air Force, U.S. Army
Each year the Pentagon submits reports on their major programs to Congress. These are called the Selected Acquisition Reports (SAR) and detail program’s costs and schedules. The SAR reports give a good picture of where the bulk of U.S. investment funds are going.
This year they were dominated by the one for the F-35 Joint Strike Fighter (JSF) made by Lockheed Martin (LMT).
This year the F-35 has been split into two programs to explain cost with the F135 engine made by Pratt & Whitney, part of United Technologies (UTX), being detailed separately. For this report the total price of the program which is for acquisition only the aircraft cost increased just over three percent to $331.8 billion. The majority of this increase was driven by plans to reduce production quantities in the near term causing a higher price.
The engine estimate increased almost ten percent to $63.9 billion because of an increase in the price of the initial sparing package for the system. The reduction in production quantities increased cost by just under a billion dollars.
The JSF has made some progress in testing and development. The initial low rate production contracts are delivering aircraft. The costs are going to increase in the short term due to the decision to stretch out production and reduce the near term quantities. This means a higher individual price for the aircraft.
Overall there was some increase to the total planned spending because the Pentagon is predicting higher inflation in the next several years. This causes annual growth in program’s budgets to reflect this growth.
Interestingly three programs were reported as having their planned production cut significantly. These are Raytheon’s (RTN) AIM-9X air-to-air missile, Boeing’s (BA) C-130 Aviation Modernization Program (AMP), and the Joint Land Attack Cruise Missile Defense Elevated Netted Sensor System (JLENS) also made by Raytheon. JLENS is a tethered aerostat that provides sensors and data link capability to support air defense systems for the Army.
There is probably no near term solution to the JSF cost increase until steady state production is reached and quantities become economic. By then development will be almost complete and the design fairly mature. That though could be several years.
New Light Air Support Contest for Sierra Nevada and Hawker Beechcraft?
Filed under: Brazil, Business Line, Companies, Congress, Contract Awards, Countries, Department of Defense, development program, EADS, Embraer, Events, Federal Budget Process, Hawker Beechcraft, Military Aviation, production program, Protest, Services, Sierra Nevada, U.S. Air Force
Late last year the U.S. Air Force awarded a contract to a team of Sierra Nevada and Brazil’s Embraer to provide light attack aircraft for use by the Afghan military. The contract also had the potential for further orders to support the U.S. military and other potential foreign customers. The only other company to submit a bid was Hawker Beechcraft.
The award was controversial as the Air Force eliminated Hawker’s bid for not being in the competitive range as well as denied their attempts to protest the decision. Hawker sued in Federal Court and it came out that the contract had already been awarded to Sierra Nevada. After reviewing the process the decision was made four weeks ago to cancel the contract and begin an investigation into the contracting process.
The Air Force has stated that the investigation will conclude next week and that it focused on documentation of the decision and not the actions of either contractor. Based on the data gathered so far the Air Force has decided to reinstate Hawker, allow new proposals and may conduct another evaluation. The service also may reserve the right to conduct a whole new competition with a new request for proposals and new bids.
At the same time there are reports that Hawker may have to file for bankruptcy due to its current debt load. If that is true then the Light Air Support contract may be key to keeping the company viable.
The Air Force has struggled over the last decade with evaluating bids and awarding contracts for new aircraft. The KC-X aerial tanker took three tries before Boeing (BA) won it with a version of their 767 airliner over Europe’s EADS. The CSAR-X rescue helicopter had two different competitions with no satisfactory result and the program ended up being cancelled. This contract follows in a similar vein.
The review seems to indicate that the Air Force found enough issues with the source selection process to warrant a new competition. Hopefully this one when it is completed will be conducted in such a way to avoid protest and strife and the service can move out with buying the aircraft.
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