Military Contractors Await Details of Obama’s Budget

The good news for big military contractors from President Obama’s budget this week was his proposal to increase the basic Pentagon budget by 4 percent, to $534 billion.

But now the companies are contending with a new question: what will the priorities of the new administration — which has made clear it wants to shift spending from futuristic weapons systems to simpler arms that troops can use now — mean for the industry?

The big contractors “are sitting on the edge of their seats,” said Gordon Adams, a professor at American University in Washington and an expert on the defense budget.

The defense secretary, Robert M. Gates, said this week that he would probably not decide the fate of some marquee weapons systems — including the Air Force’s supersonic F-22 jet fighter and the Navy’s plans for a new high-tech destroyer — until April.

In an effort to blunt some of the inevitable lobbying, he has taken the extraordinary step of requiring members of the Joint Chiefs of Staff to sign documents promising not to leak any details of the deliberations.

In addition to the basic budget, the Obama administration expects to spend at least $130 billion to cover the cost of the wars in Iraq and Afghanistan, bringing the total defense budget to $664 billion in fiscal 2010, which begins Oct. 1.

That is slightly higher than the $654 billion the government has set aside in the current fiscal year — the most it has spent, in inflation-adjusted terms, since World War II.

Some military executives acknowledge that the spending proposal for next year remains generous given the government’s spiraling budget deficits.

“It’s a good number in this economic climate,” said Kendell Pease, a spokesman for General Dynamics, the giant military contractor.

But, he said, “There are so many contentious issues to decide, and nobody is going to do anything in Congress until they see the line-item decisions.”

Investors also seem unnerved by the uncertainty; the stocks of the leading military companies fell even harder than the general market averages Friday.

Investors were also concerned that with the plans to gradually withdraw forces from Iraq, the level of supplemental war funding will drop sharply in the future.

Ronald Epstein, an analyst at Merrill Lynch, said in a research note that this could end up “marking the end of the defense spending boom.”

But other analysts said some of the savings in Iraq could be offset by greater spending in Afghanistan. James McAleese, whose company, McAleese & Associates, advises military firms on legal and business issues, said Mr. Obama’s proposed budget could also increase next year’s spending on weapons acquisitions and research by $6 billion.

But the military contracting industry is consumed now with the parlor game of guessing which prominent programs Mr. Gates will cut back or scrap as either “gold-plated” or troubled — and whether industry lobbyists will be able to persuade Congress to overturn some of those decisions.

Perhaps the most controversial program is Lockheed Martin’s advanced jet fighter, the F-22, which the Bush administration tried for years to halt, saying it was a cold war relic. Many analysts say they believe that a compromise to produce 60 more of the planes, at a cost of $9 billion to $11 billion, is likely, especially if the Air Force agrees to finance part of the cost by canceling other programs.

But others say President Obama’s statement this week that “we’re not paying for cold war-era weapons we don’t use” did not bode well for the F-22.

Other cuts seem clearer. During his campaign, Mr. Obama raised questions about the $10 billion missile defense programs — with parts led by Northrop Grumman and Boeing seeming most at risk — and the Army’s $160 billion modernization program, also led by Boeing.

Given Mr. Gates’s focus on systems that can help save lives, the Army should be able to hold onto its financing for a network of robots and other sensors to provide troops with better combat intelligence, Mr. McAleese said. But the Army might have to revise its plans for eight types of new ground vehicles.

Analysts say another likely target is the new DDG-1000 destroyer, which relies on sophisticated electronics systems from Raytheon. Even the Navy would like to drop the ship in favor of building more vessels of an earlier class.

Mr. Obama also said recently that he did not need a costly and long-delayed new fleet of presidential helicopters.

But because of cancellation fees and contractual obligations, it may make more sense to take possession of at least the first five, said Danielle Brian, executive director of the Project on Government Oversight, a nonprofit group that investigates government waste.
“We understand that the cost of canceling them could be too high,” she said.