Defence faces more pressure from US deficit panel

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Defence companies, already under pressure to cut costs and find new revenue streams, could face even more pressure in coming years should draft proposals of a US deficit reduction panel become reality.

The plan released on Wednesday by the two leaders of a US presidential commission outlines ways to cut US$100 billion from defense spending in 2015 as part of efforts to put the nation on a sounder financial footing.

Defense Secretary Robert Gates already has a plan to trim US$100 billion over five years from overhead and low priority programs as a way to pay for personnel costs and keep major weapons programs on track.

But under the co-chairmen’s proposal, those savings could go to deficit reduction instead, saving US$28 billion in 2015.

Overall, the Defense Department’s budget request totaled more than US$700 billion for fiscal 2011, including for the wars in Iraq and Afghanistan.

Shares of major defense companies moved lower on Thursday.

Industry leader Lockheed Martin Corp closed down 2.5 percent, tank manufacturer General Dynamics Corp was off 1.2 percent and Northrop Grumman Corp, whose products include ships and unmanned spy planes, gave up 1.8 percent. The Standard & Poor’s Aerospace and Defense index .GSPAERO shed 1.5 percent.

The commission faces a Dec. 1 deadline for at least 14 of the 18 members to agree to send a report to Congress. Even then it is not clear if lawmakers would embrace the ideas.
“If anyone needed a wake-up call that the growth in defense spending that we’ve experienced over the past decade is coming to an end, then this was it,” said Todd Harrison, a senior fellow with the Center for Strategic and Budgetary Assessments in Washington.

Because of the approvals that would be necessary to put the proposals into action, “it’s highly unlikely that this would be adopted in its current form,” he added.

The House of Representatives’ incoming Republican majority generally supports sustained spending on weapons programs, making it even less likely the plan of commission co-chairs Erskine Bowles and Alan Simpson would be implemented as drafted.

Lawmakers from both parties are typically eager to bring home the jobs that arms programs create in their districts.

Bowles and Simpson suggestions included cutting Defense Department spending on research, development, test and evaluation by 10 percent.

Other proposals would cut programs such as a General Dynamics landing craft and a Marine Corps version of Lockheed’s F-35 Joint Strike Fighter.

Lockheed’s chief executive has said the F-35, which is being developed by the United States and eight other countries, would account for more than 20 percent of the company’s revenues and profits when full production kicks in, perhaps in five years.

One analyst said some companies could see opportunities should some of the draft recommendations materialize.

Boeing Co could benefit from more purchases of the its F-18 Super Hornet fighter plane should they be added to replace F-35s, SunTrust Robinson Humphrey analyst Peter Skibitski said in a note to clients this week.

The cancellation of programs such as the Joint Tactical Radio Systems could aid demand for products supplied by Harris Corp and ITT Corp, while cuts to service contractors could affect information-technology companies, Skibitski added.
“The proposal definitely hits the defense industry across the board,” Skibitski said in the note.



The arms industry’s chief trade group, the Aerospace Industries Association, voiced grave concern at the draft recommendations, saying they would undermine the ability of the sector to build cutting-edge systems.