Pentagon suppliers discount leaner times
WASHINGTON |
WASHINGTON (Reuters) – Pentagon suppliers, facing a U.S. government squeeze on spending for everything from bullets to bombs to bombers, said they generally expected to remain profitable despite the new austerity.
The industry is getting leaner, with companies that are increasingly diversified and relatively flush with cash, said Marion Blakey, who heads the Aerospace Industries Association, the industry’s chief lobbying group and trade federation.
The fundamentals are sound for now, she added on Wednesday at the annual Reuters Defense and Aerospace summit in Washington, citing less dependence than in the past on the federal government as its customer. She cited growing markets at home and abroad in cybersecurity, industrial security and homeland security.
Blakey declined to be drawn, however, on whether the companies could generate sufficient returns over time to satisfy Wall Street in the face of further Pentagon belt-tightening.
‘LEANER’ ARMS BUILDERS
The Defense Department will promote “leaner” arms builders as part of an economy campaign launched by Defense Secretary Robert Gates in June, Frank Kendall, a deputy under secretary of defense, told an industry conference on Wednesday.
“We think we have to do more together” with the industry to trim costs across the board, Kendall said. The Pentagon spends about $ 400 billion a year on goods and services. It is seeking real growth of about 1 percent a year in its base budget over the next few years to fund modernization.
Details of the new austerity plan targeted at suppliers are to be announced in the coming month by Under Secretary Ashton Carter, the Pentagon’s top arms buyer. Kendall said Lockheed Martin Corp’s (LMT.N) F-35 fighter jet, the Pentagon’s costliest purchase at up to $ 382 billion for 2,457 planes, will be one focus of the effort.
The chief executive of Northrop Grumman Corp (NOC.N), the Pentagon’s No. 3 supplier by sales and a top F-35 subcontractor, shrugged off any threat to the industry’s profitability from a new Pentagon squeeze.
“I think this is something that can be very healthy, can make our businesses operate better and can make the department operate more efficiently,” Northrop CEO Wes Bush told the Reuters summit. He said he would reserve final judgment until details of the new push are made public.
Referring to Gates’ efficiency campaign to date, Bush predicted it would be a “positive for the companies that are best aligned with where the services are going” over time.
Gates is seeking to free cash for military modernization by attacking bureaucratic bloat, not cut the core defense budget overall.
The head of Airbus parent EADS (EAD.PA), which is bidding for a potential $ 50 billion U.S. refueling-aircraft deal, said demand for arms would never disappear because the world remains dangerous.
Although arms builders’ shares have sold off since Gates announced his efficiency drive, they will recover, Louis Gallois, the European company’s chief executive, told the summit.
“We’ll be competitive but we intend to be profitable,” he said of the current rematch with Boeing Co (BA.N) to sell 179 tankers to the U.S. Air Force. IDnN08116704
David Hess, president of United Technologies’ (UTX.N) Pratt & Whitney aircraft engine-building unit, said he did not expect his company’s margins to take a hit from the Pentagon’s cost-containment push.
“Restructuring is forever,” he said, citing headcount reductions, operations consolidation and low-cost sourcing efforts among other responses. “You’re never done.” He praised Pentagon leaders for working closely with suppliers on the economy drive.
Kendall, addressing the defense conference known as ComDef 2010, said he thought the government was “on a path” to negotiating a deal with Lockheed Martin to buy 85 F-35s at what he described as a previously projected total price for 80 — a price cut of about 6 percent.
Kendall did not spell out his target price for the radar-evading F-35.
Lockheed has already said it is working to cut the price for the next group of its F-35 fighters to at least 20 percent below what Pentagon officials had projected a year ago.
Kendall’s remarks suggested the Pentagon was seeking an even deeper cut.
Robert Stevens, Lockheed’s chief executive, said on Tuesday he expects to reach an agreement with the Pentagon “any day now” for a fourth batch of F-35 fighter jets, with no major obstacles in view.
The F-35 fighter would account for “a little better than 20″ percent of the company’s revenues and profits once the plane reaches full production rates, expected in five to seven years, he told the summit.
Kendall said the Defense Department was not targeting suppliers’ profit margins or profits, but prodding them to use their profits more efficiently.
“We’re going to reward good performance,” he said. “It’s, I think, a more enlightened approach.”
(Additional reporting by Soyoung Kim, Andrea Shalal-Esa and Karen Jacobs, Deepa Seetharaman, Tim Hepher, Kyle Peterson, Phillip Stewart and John Crawley, editing by Matthew Lewis)