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Fiscal Year 2014 Defense Budget Snapshot

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.

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Army Releases Draft RFP for M113 Replacement

Late last month the U.S. Army released a draft Request for Proposals (RFP) for the vehicle to replace the M113 fully tracked, armored personnel carrier. The new Armored Multi-Purpose Vehicle (AMPV) will be used to provide supporting roles on the battlefield to the current M1/M2 forces and also work with the new Ground Combat Vehicle (GCV) as it enters service. The goal is to have the final RFP out later this year and award a single contractor a development contractor by the end of FY2014.

Of course this will have to wait on the available funds in the 2014 budget whihc has yet to be sent to the Hill by the Obama Administration.

The M113 entered service in the early 1960’s primarily as a lightly armored vehicle to move infantry around the battlefield in conjunction with the M48 and M60 tanks. It was designed to protect against small arms and artillery rather then direct anti-tank weapons. Troops would dismount to fight from the vehicle rather then fight while moving. The M113 was very similar to other armed forces systems like the British FV432 or the Soviet BTR50.

Since the M113 chassis was available it was heavily modified to conduct a series of support roles like ambulance, command vehicle, mortar carrier as well as carrying Anti-Tank Guided Missiles (ATGM) and even formed the basis for the M114 scout. The AMPV will not fulfill the infantry mission as the M2 and GCV are for that but is planned to do the supporting roles. The draft RFP calls for different versions including general support, mortar carrier, command vehicles and medical support vehicles. The Army plans to procure about 3,000 of the system.

The Army’s focus right now is on protection to counter the mine / Improvised Explosive Device (IED) threat which was most prevalent in Iraq and Afghanistan. The Mine Resistant Ambush Protected (MRAP) vehicles developed and deployed to counter them there were not tactical vehicles but provided safe ability to transport troops around the countries. The GCV and AMPV will be tactical vehicles and there armor requirements reflect this. The GCV will be tank like in weight to protect 9 troops and 3 crew. The AMPV will not be as heavy but still requires significant underbody protection. At the same time they must be protected against direct and indirect battlefield threats such as tank guns, ATGM and man portable anti-tank weapons.

These requirements will drive up costs and development times. To save money on the AMPV, like the GCV, the Army is now proposing only one winner where previously it had been hoped like the successful MRAP-ATV program more then one development contract could be awarded and a drive off occur. Both General Dynamics (GD), who make the current wheeled Stryker Interim Combat Vehicle, and BAE Systems, the M2 Bradley manufacturer, are expected to bid. Other companies could also bid as there are several systems already in production that could with some modifications meet the requirements.

The winner would not only see the Army 3,00 vehicle requirements but probably quite a bit of FMS sales as other nations adopt the U.S. system.

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Raytheon Bids for New Air Force Communications Terminal

The Global Aircrew Strategic Network Terminal (Global ASNT) is a U.S. Air Force project that is part of the Minimum Essential Emergency Communications Network (MEECN)system. It’s role is to provide messaging and aircrew alert functions. It will be part of the Advanced Extremely High Frequency / Extremely High Frequency (AEHF/EHF) system utilizing new AEHF communication satellites now being built by Lockheed Martin (LMT) to improve U.S. communication capabilities.

The requirement has existed for several years but earlier this month the U.S. Air Force asked for final proposals by 18 January. The solicitation information may be found on FedBizOpps.Gov here.

It has been reported that Raytheon (RTN) did submit a proposal for this requirement. It believes that the contract will be awarded this summer. The company is already building AEHF ground terminals for use by the military.

The program is still R&D and this contract would develop the terminal. It would then move into production later. If any other company bid on the contract it has not been publicized.

Due to the budget uncertainty of the sequestration and continuing resolution it may be hard in FY13 to begin new programs like this. They might, as the Army has already announced with the Ground Combat Vehicle, delay them a few months to get to FY14 and a more stable fiscal environment.

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Final Conference Defense Spending Bill from Congress Kills MEADS

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.

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Air Force Cost Goals Restrict Competition for New Rescue Helicopter

The U.S. Air Force is once again trying to attempt to buy a new aircraft to replace their MH-60 rescue helicopter fleet from the Eighties. The original CSAR-X program faltered twice earlier this century due to protests. Boeing (BA) had one the last contest with a version of the CH-47 but after protests from the losing bidders it was decided to start over.

The current Combat Rescue Helicopter program had put out a RFP for new proposals due in January. The goal is to buy just over 100 aircraft at a cost of $6.4 billion.

Unfortunately it was announced this past week that the only company interested in bidding on the contract is Sikosrky, part of United Technologies (UTX), teamed with Lockheed Martin (LMT). Sikorsky made the current HH-60 fleet. Other potential bidders including Augusta Westland, Eurocopter, Bell and Boeing believe that the cost goals will be too hard to meet for their products. Some have basically said the contract requirements were written in such as way so only a version of the UH-60 Black Hawk could meet them.

The Pentagon is obviously trying to reduce cost but at also at the same time promoting competition. Sometimes, as here, the two things don’t always work together as to attract bidders there must be some profit in it for them.

The Air Force has struggled with large acquisitions for a few years now. The new aerial tanker, KC-X, took 3 tries before Boeing won. The CSAR-X has already been discussed. They are currently redoing the Light Air Support aircraft contest after Embraer and Sierra Nevada’s win of the original contract was overturned on protest.

Whether they want to continue the current contest with limited bidders or try to re-do the requirements to attract more will be the next decision. They could just wait and see if more then one bid in January as originally intended.

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Contenders for New Presidential Helicopter Lining Up

Earlier this century the Pentagon started a program managed by the Navy and Marine Corps to replace the existing helicopters used to transport the President. Currently a mix of Sikorsky, part of United Technologies (UTX), made VH-3 and VH-60 aircraft are used. Some of them are now over 40 years old. It was felt that a new system was needed that was more efficient, capable and equipped with modern communication equipment. This was the VH-71 program.

The VH-71 planned to use an aircraft from Augusta Westland modified by prime contractor Lockheed Martin (LMT). The program was to proceed in two stages with a few aircraft bought early to test and integrate modifications. This proceeded with several aircraft purchased and modified. The problems arose as the requirements for the second effort changed considerably over time leading to schedule and cost growth. By 2009 the program was several billion dollars over budget and was cancelled by the Obama Administration as part of their defense reforms.

A draft RFP was released this week for the new program. It plans to save money and manage schedule by requiring the use of an existing, in production aircraft which will be modified. It is requesting that the bidders plan to minimize changes to expensive parts of the aircraft such as the power train, transmission, structure and rotor system. A communication system is being developed separately that will be integrated onto the new aircraft.

The VH-71 suffered as the requirements meant new major systems had to be developed and integrated to meet power, range and hovering capability requirements. The RFP is for 23 aircraft at a cost of just under $1 billion with the first ones entering service in 2020.

Currently teams made up of Sikorsky and Lockheed and Augusta Westland and Northrop Grumman (NOC) are interested. Boeing (BA) may propose after doing analysis as to whether their large CH-47 or V-22 tilt rotor aircraft may meet the requirements.

The VXX program is aggressive in that it hopes to contain cost, schedule and technical creep. As the VH-71 program indicated it may be hard to do this. With the expected defense cuts coming up the contract is very attractive not only due to its size but also the prestige. As with other large aviation programs the winner may also expect several decades worth of support contracts which could be worth billions.

Photo from dailymatador’s flickr photostream.

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Trying Again for the U.S. Air Force as Request for Proposals Released for New Rescue Helicopter

The U.S. Air Force has had its struggles over the last decades conducting competitions for new aircraft. The KC-X tanker program took 3 tries before Boeing (BA) ended up the winner with their modified 767 aircraft. Another program was a new Combat Search & Rescue (CSAR) helicopter to replacing aging MH-60 helicopters originally built by Sikorsky, part of United Technologies (UTX).

That program saw two attempts which ended up going nowhere due to protests and reviews. The last one in 2008 did see Boeing win the contest with a version of the CH-47 Chinook heavy lift helicopter but after the GAO upheld protests by the losers, Sikorsky and Augusta Westland, the Air Force decided not to pursue a 3rd attempt at that time.

Now reportedly a Request for Proposals for a new program, Combat Rescue Helicopter (CRH), was put out recently. This gives vendors 90 days to submit their proposals with source selection planned for most of next year and a contract award in late Fiscal Year 2013.

The program is for 112 aircraft and has a cost goal of under $6.8 billion.

Potential bidders will include Boeing, Sikorsky, Augusta Westland, and presumably EADS North America could participate with a Eurocopter aircraft.

Based on past history with recent Air Force acquisitions the service will have to do a very thorough and documented source selection process as a protest is very likely due to the upcoming budgetary situations and lack of new helicopter programs.

The FedBizOpps page for this procurement may be found here.

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Pentagon Plan JSF Upgrade Contract

The U.S. Air Force and Navy Joint Project Office for the Joint Strike Fighter (JSF) announced recently that they plan to tender a contract to upgrade the first 93 F-35 aircraft to be consistent with a later production version. This covers 4 years of Low Rate Initial Production (LRIP) aircraft that are currently being delivered.

No value for the contract was estimated but it should be several hundred million dollars to modify that number of aircraft.

It would be expected that Lockheed Martin (LMT), the prime contractor on the current JSF development and production effort, would be awarded the contract. The announcement though did leave an opening for others to submit proposals to do the work. This would be extremely hard for another contractor to do depending on how much technical data the Government owns and is available. Just estimating the cost of the work without that information would be difficult.

The JPO is expecting this contract to take some time to develop, negotiate and award as the LRIP 5 production contract remains in negotiation with Lockheed and probably won’t be awarded until the end of this year. Those aircraft would be coming off of the production line in several months. This will allow the program to continue production, testing and training while then beginning to retrofit the existing aircraft.

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Reports of 2 Deals for AH-64D Apaches

There are reports that 2 Asian nations have decided to purchase Boeing’s (BA) AH-64D Apache attack helicopters. These advanced aircraft are in use with the U.S. Army and several allied nations such as Great Britain, the Netherlands, Israel and others. They have seen extensive use in Afghanistan and Iraq. The U.S. is currently buying AH-64D Block III versions of the helicopter.

Now it seems that India will be adding them to their inventory. The plan is to purchase 22 aircraft with weapons and other support. Total contract value could be as high as $1.4 billion. India had also been looking at the Russian Mil-28 helicopter. India has recently been looking to more Western sources and already has purchase Boeing P-8 and C-17 aircraft. The deal will include offsets allowing for Boeing purchases and investment in India.

It is also being reported that Indonesia will move out and buy 8 AH-64D. There are less details on this proposal available. Indonesia was looking at using a domestically produced aircraft for this mission but it now seems the Apache is a preferred option.

The U.S. military has invested billions in rotary wing platforms over the last decade as they have been a critical force multiplier. The plans to reduce their spending over the next decade will make contracts like this more important to the bottom line of defense contractors.

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Discussion of Sequestration Effects Heats Up

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.

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FMS of Apache to Persian Gulf States to Grow

The United States has over the last decades sold billions to the various Gulf States to counter threats first from Iraq and now Iran. This has included increasingly sophisticated systems such as the PATRIOT and THAAD missile defense systems, C-17 transports and large amounts of helicopters. One aircraft that has proven popular is the AH-64D Apache attack helicopter made by Boeing (BA).

This is in use with countries like Saudi Arabia, Israel, Egypt, the U.A.E. and others. Now it is being reported that Qatar has made a request for up to 24 of the helicopters. The deal if fully executed would be worth about $3 billion. This includes not only the new aircraft but also spares, support equipment, training and weaponry.

Qatar has also proposed buying Black Hawk helicopters from the U.S. made by United Technology’s (UTX) Sikorsky Aircraft Corporation.

The addition of the Apache increases commonality with the U.S. military as well as providing significant capability for the Qatar military. These aircraft have seen heavy use in Iraq and Afghanistan providing fire support for ground troops as well as carrying out strike missions.

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Australia to Stretch Out F-35 Deliveries

One of the key components of the F-35 Joint Strike Fighter (JSF) program was the early participation by U.S. allied countries. Unlike traditional Foreign Military Sales (FMS) these countries provided some of the development costs and committed early to buy the the aircraft rather then wait for the establishment of production and get it after the aircraft entered U.S. service. These included Great Britain, Australia, Canada and The Netherlands.

These countries planned to buy different amounts of the three types of the F-35. Britain to operate from their new carriers and replace the Harrier Jump Jet, Canada to retire their CF-18 fleet and the other two to upgrade from the aging F-16. In fact the F-35 would be similar to the F-16 program with parts and components made by the buying countries. Norway, Japan and Israel have also decided to buy the F-35 over other potential aircraft.

The F-35 has seen serious delays and cost growth due to testing and development issues. It is currently in Low Rate Initial Production (LRIP) as well as continuing testing. The U.S. in their latest budget proposal have decided to stretch production out to save money in the near term. Australia has now decided to do the same thing.

That country’s budget plans now call for delays of accepting the majority of their aircraft to mirror current U.S. plans. The goal is to save over $1.6 billion in the next few eyars. The first two Australian aircraft are in production and should be delivered in 2014-15 to start training but their first squadron will not stand up now for a few years after that.

The problem with stretching out production buys is that while it does save money in the near term the same number of systems will have to be bought over a longer time. Due to inflation alone as well as the loss of production efficiencies the average price per aircraft will increase causing the whole program to get more expensive. One potential problem that may arise is that the total number to be bought will be reduced.

Canada is also re-considering their F-35 buy due to issues with how the contract was awarded last year. These decisions will be a blow to Lockheed Martin (LMT) as they reduce near term revenue and earnings.

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Congress Continues Push Back on Defense Spending Proposals

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.

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House Begins Markup of 2014 Budget with Add of Submarine

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.

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Air Force Will Attempt Second Contest for Light Air Support Aircraft

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.

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Air Force New Radar to Have Competitive Technology Development Phase

The U.S. Air Force has announced a change in their proposed acquisition strategy for the Three-Dimensional Expeditionary Long-Range Radar (3DELRR) program. This will replace the current TPS-75 radars used for deployment to operational areas to develop air pictures and identify enemy and friendly aircraft. The program is currently in its Technology Development Phase.

Unlike previously where the Air Force planned to award one contact to complete this phase they now expect to award up to three. This will be for the pre-EMD phase and support the transition into EMD and ultimately production.

The plan is also to try and use Firm Fixed Price or Fixed Price Incentive contracts rather then the more traditional Cost Plus for this phase. This means the winning contractors will be assuming more risk then normal and will have to have a good handle on their expected costs. The use of these types of contracts at this stage of the program can be risky if there are technical or test problems with the program which could add scope or schedule to the program.

Interested contractors include Lockheed Martin (LMT) and Sensis Corp.

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JLTV Program EMD Contract Summary — Seeking Alpha

This is an exclusive article I wrote for Seeking Alpha discussing the bids for the Joint Light Tactical Vehicle (JLTV) EMD contract.

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Sierra Nevada and Embraer’s Light Attack Contract Canceled by Air Force

Late yesterday the U.S. Air Force announced that it had canceled the contract signed in December with Sierra Nevada and Embraer to provide Light Attack aircraft for use by the Afghan military. The contract was in dispute by Hawker Beechcraft whose own proposal had been eliminated by the Air Force prior to source selection even taking place and no work was being done by the winners.

Hawker was in the process of suing in Federal court to get the decision to award to the winning team overturned. Earlier it had been denied a chance to protest as the Government Accountability Office (GAO) ruled it did not file in time. During one of the first court hearings about the case the Air Force admitted that they had gone ahead and given the contract to Sierra Nevada who was going to use aircraft manufactured by Brazil’s Embraer SA. Sierra Nevada had established a plant in Jacksonville for this effort.

Not only did the Air Force cancel the existing contract they announced that they will conduct an investigation of the process used to select the winners. There was no discussion of whether there would be a new requirement and contest.

Hawker had bid a version of their T-6 trainer used by the Air Force and Navy currently while Sierra Nevada was going to use a variant of Embraer’s Tucano aircraft which is in use by several countries. The initial contract would provide systems for use by the Afghans with the potential for further sales to the U.S. or other customers.

This is the third major acquisition in the last ten years that the Air Force has struggled to award. The KC-X tanker took three tries before Boeing (BA) won it. The CSAR-X new rescue helicopter never was completed despite two tries and multiple protests. This means that the LAS contract will have to be begun again or a new requirement created.

Hawker Beechcraft has had its struggles over the recent years due to the general downturn in aviation. Facing a rougher future with the proposed cuts in the U.S. defense budget it had been reported that the company had recently engaged a law firm known for its work in bankruptcy or restructuring. The decision by the Air Force will only be good if a decision is made to have another contest which there is no guarantee that Hawker will win.

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U.S. Navy Orders 2 of Last 3 JHSV from Austal

Yesterday the U.S. Navy announced that it had executed a contract option for 2 more Joint High Speed Vessels (JHSV) from Australian ferry builder Austal. This brings the total number of these ships ordered to 9.

Austal is close to finishing the first and has two more in production. The contract yesterday will allow the builder to begin buying long lead items and components for the two ships.

The JHSV is a fast transport based on Austal’s ferry designs that was originally planned to be used by the Navy and Army for rapid transport of troops and supplies to needed areas. It was decided that the Navy would manage the whole program and the ships were transferred to them.

Originally it was thought that up to 23 of the ships would be procured but in their FY13 budget proposal the Obama Administration reduced the planned number to 10. This means that 9 of them are now on order with the chance that only one more will be purchased.

Austal is building the ships in their Mobile, AL yard where they also make the Littoral Combat Ship (LCS). They have a contract for up to 10 of these. Interest

Photo from HerrKrueger’s flickr photostream.

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U.S Army Exploring Renewable Energy Contract

On Friday the U.S. Army released a draft RFP related to the purchase of renewable energy for facilities. The potential contract could be for up to 30 years and involve $7 billion.

The contract is not for generating capacity or for equipment related to electricity but actually just to buy power from different sources. The caveat is that it needs to be renewable generated electricity which normally implies solar, wind or geothermal rather then traditional means such as natural gas, oil or coal.

The Department of Defense is one of the biggest users of not only gasoline but also electricity to power their large number of facilities across the U.S. and the world. They have been aggressively exploring ways to reduce this demand not only through economizing but through use of other sources. This includes investments in biofuels such as algae and vegetation based. The goals are to reduce reliance on traditional fuels as well as save money.

The issuance of a draft RFP does not necessarily mean a contract will be awarded or that the final one will look like this but it will get industry thinking and figuring out how to respond. The issuance of this contract could provide some more jump start to the renewable power industry by creating massive demand. The Defense Department could also through pricing make it more financially viable.

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Oshkosh (OSK) and the FY13 Defense Budget — Seeking Alpha

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.

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FY13 Defense Budget Hits Aircraft Procurement

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.

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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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Global Hawk Rumored to be Cut

Update – The Defense Department released their Budget Priorities and Choices today and that included cancelling the remaining Block 30 Global Hawk production. The rationale given was that it provided the “same capability as the U-­‐2 manned aircraft for significantly less money to both buy and operate. As the program has matured, these cost savings have not materialized and, at best, we project the future cost of Global Hawk Block 30 operations to be comparable with the U-2.” Northrop Grumman responded this afternoon and said in their press release that “Northrop Grumman is disappointed with the Pentagon’s decision, and plans to work with the Pentagon to assess alternatives to program termination.” They also said that:

“The Global Hawk program has demonstrated its utility in U.S. military operations in Iraq, Afghanistan and Libya, as well as its utility in humanitarian operations in Japan and Haiti. Just a few months ago, the Pentagon published an acquisition decision memorandum regarding Global Hawk Block 30 that stated: ‘The continuation of the program is essential to the national security… there are no alternatives to the program which will provide acceptable capability to meet the joint military requirement at less cost.’

Today the Pentagon will begin to present its plans to reduce the U.S. defense budget by close to $500 billion over the next ten years. There have already been reports of programs being ended or reduced but so far none have been confirmed. As the plans are revealed it will be seen if these reports are true.

Yesterday it came out that the U.S. Air Force is considering reducing its planned purchase of Northrop Grumman’s (NOC) Global Hawk strategic reconnaissance Unmanned Aerial Vehicle (UAV). The Global Hawk has been in development since before 2000 and early versions went into use right after 9/11 supporting collection and targeting efforts across Afghanistan and Iraq. The Global Hawk was planned to replace the manned high altitude reconnaissance U-2 aircraft.

The Air Force has been steadily improving the system and buying different versions. The current production model is the RQ-4 Block 30 and the plan was to buy about 28 of them. Now there are reports that 10 of the systems will not be purchased and the U-2 will continue flying for several more years.

The Air Force would buy 3 more of the Block 40 version and the naval version to fulfill the Broad Area Maritime Surveillance (BAMS) requirement would continue so Northrop would not be losing all of its Global Hawk business but the loss of the ten systems would significantly reduce near term revenue.

In order to save that kind of money the Pentagon will have to cancel entire programs preferably before they go into production such as the Army’s Joint Air-to-Ground Missile (JAGM) program which has been a potential cut or reduce the amount of procurement items significantly such as with the Global Hawk. You cannot cut a slice of the budget proportionally without seriously affecting readiness, training and effectiveness of the armed forces overall. It is better to kill off whole programs and continue to utilize existing systems.

With these kind of reductions in planned spending there may be a time of flat or little growth for defense contractors. These decisions will force defense contractors to lose development and production programs they will still be able to keep their business of maintaining and supporting existing, older programs and equipment. The decisions may also force contraction in the industry as a whole.

Photo from ewen and donabel’s flickr photostream.

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The New Obama Doctrine: Doing Less with Less

The Obama Administration announced its new strategy for the U.S. armed forces yesterday that will reflect future budget reality for the Defense Department. While no nation ever wants to state that its military size and missions are backed into a total budget number rather they claim to be buying the necessary capability at a certain price. The Obama defense team stood there yesterday and made that claim.

It really is though a combination of the two. The U.S. is under severe budgetary pressure. The Supercommittee failed which mandates a series of cuts to all spending including defense over the next several years. The DoD and Armed Services will have less money to buy things so our capability will be reduced. Similar to the Nineties with the ending of the Cold War but worse due to the current economic state and the overall size of the military.

The core change enunciated is the ending of the “Two War” plan which supposedly drove U.S. strategy since WW II. The U.S. had to have the ability to deal with a major war in Europe and a regional one. The new plan limits our ability to fighting one war and containing another. Conventional forces especially will be reduced to mean troops, aircraft, ships and heavy equipment.

That does not mean there are not opportunities as the hope is to use new systems such as UAV’s and better intelligence to make up for the lack of firepower. Special Forces will be used for regional conflicts rather then heavy brigades deploying such as they did to Iraq and Afghanistan. They will need equipment and force multipliers from across the spectrum.

The defense industry will also have to contract and adjust. There may not be any new heavy programs for several years. Aircraft will be limited to the F-35, the KC-46A and a new bomber of some sort. Carriers, destroyers and submarines along with amphibious ships will be cut and construction of new ones reduced. The Army and Marines will lose boots on the ground and the need to train, equip and support them. Big contracts will be fewer and competition for them much greater until the industry right sizes.

We will probably see many companies exiting the business. Either through M&A or just testing other markets to just disappearing. This will be hardware and support contractors. The DoD workforce will also shrink. Some communities will be hit hard as Wichita, KS is learning this week.

Congress will fight for some programs with each other and the Administration. The budget may not shrink as fast as planned and individual efforts may be saved.

All-in-all the next ten years will see a major adjustment to what the U.S. invests in its military and to the defense economy as a whole. Long term a path similar to the United Kingdom where conventional forces have shrunk precipitously over the last thirty years may be the best case. No matter what the U.S. defense budget will go down for a few years with a magnifying effect on the U.S. economy.

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