Continued prosperity for war contractors

Muscular Defense Plan Buoys Contractors
Proposed Budget Would Benefit Area Companies

By Dana Hedgpeth

A run of healthy profits for defense contractors that has lasted nearly a decade will continue for at least another year, analysts and company executives said after the Bush administration last week submitted its new defense budget.

The $515.4 billion defense spending proposal for fiscal 2009 is 7.5 percent higher than the current year’s and promises to fund some of the armed forces’ largest and most costly weapons programs. It includes $104.2 billion for weapons procurement and nearly $80 billion for research and development, testing and evaluation.

That would mean big new opportunities and more funding for major projects for local defense and technology contractors, including Lockheed Martin of Bethesda, General Dynamics of Falls Church, SI International of Reston, CACI International of Arlington and Northrop Grumman, which is based in Los Angeles but has a large presence in the Washington area.

“The expectation has been that it can’t continue to increase as it has,” Phil Finnegan, a defense analyst at the Teal Group in Fairfax, said of defense spending. “But it has surprised everyone to see how long this increase has continued. This budget was a great budget for all defense contractors. It includes continuing growth — not as fast as last year, but it enabled everyone’s programs to be funded.”

Finnegan, other analysts and executives at contracting companies said they don’t expect the party to last indefinitely.

“The fiscal year 2009 budget may be about as good as it gets for defense contractors,” said Steve Kosiak, vice president of budget studies at the Center for Strategic and Budgetary Assessments. “We have had eight years of quite dramatic growth in [the Defense Department's] weapons acquisition accounts. Whoever the next president is, it is unlikely that we are going to continue a major buildup.

“The major area contractors have all done reasonably well, but they all also have major programs that are likely to face growing scrutiny in coming years, especially if budgets begin to get tighter, which seems likely.”

In the proposed budget, the Air Force plans to spend $3.4 billion on 20 F-22 Raptors, which are made by Lockheed Martin, Boeing and Pratt & Whitney. It also sets aside large sums to buy pilot-less planes such as Northrop Grumman’s Global Hawk and General Atomics Aeronautical Systems’ Predator.

The proposed budget sets aside $6.7 billion for the F-35 Joint Strike Fighter — the Pentagon’s most expensive weapons program which is being built by Lockheed Martin. The Pentagon has tried to save money on the $300 billion fighter program by eliminating a backup engine being developed by General Electric. The president’s proposed budget does not include such funding, however, Congress is expected to reverse that provision.

The White House moved $1 billion that was supposed to be used to buy more presidential helicopters from Lockheed Martin into research and development. The program has had problems with costs, changes the government wanted to make to the aircraft’s features and staying on schedule.

Lockheed Martin’s C-130 cargo plane is proposed to get $956.6 million, down slightly from what it got the year before.

The Army’s Future Combat Systems, a program that will use a wireless network to connect battlefield equipment overseen by SAIC and Boeing, would get $3.56 billion. And the White House asked for more than $21 billion for space and missile-defense initiatives, areas where Boeing, Lockheed and Northrop have strong roles. .

The demand for armored vehicles continues to benefit General Dynamics, which makes the Stryker and a version of the Mine Resistant Ambush Protected vehicle, or MRAP. The Stryker program got $1.2 billion and upgrades of the company’s Abrams tank was funded at $727 million, though no funding was allocated for MRAPs, which are being built by several contractors.

The Navy reduced the number of littoral combat ships being developed to operate close to shore — a reduction that is going to have “negative consequences” for Lockheed Martin and General Dynamics, which are involved in building the ships, said defense consultant Loren Thompson. The fiscal 2009 budget proposes spending $1.3 billion for two such ships, but the long-term future of the program is uncertain.

Bush’s budget postpones decisions on some big-ticket items.

The Pentagon had been preparing to shut down the production lines of the F-22 Raptor fighter jet, analysts said, and the C-17 transport plane, made by Boeing. But no money was set aside in the fiscal 2009 budget to do so. Without funding, analysts said, it effectively defers the decision of whether to buy more planes or to shut down the lines to the next administration.

“These are politically contentious,” said Finnegan. With elections coming up, he said, the White House “is saying, ‘Why deal with them? Why take the pain for them of shutting down the lines? Let the next administration decide.’ ”

CACI’s president and chief executive, Paul M. Cofoni, said that when the Pentagon shifts from wartime expenses to other programs that have been put on hold, he nevertheless sees opportunities for contractors. He expects that as the military draws down troops in Iraq, the “expenses necessary to house them, to feed them, to provide ammunition for them, all get reduced.

“Those funds can be redeployed to other needs of the Army, Navy, Air Force and Marines,” he said. “So the money’s going to go to things like intelligence and homeland security. That’s where we’re well positioned.”

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