Defense Industry Countdown: 293 Days Until Doomsday

Leaders of the Senate Aerospace Caucus today teamed up with Lockheed Martin CEO Robert Stevens to remind Congress and the American public that the U.S. defense and aerospace industries are hanging on the edge of a cliff.
A digital countdown timer that has been handed out around Capitol Hill by industry supporters reminds everyone that there are just 293 days left before the clock strikes sequestration Jan. 2. That is the day when automatic budget cuts that Congress enacted in a deficit-reduction deal in August would go into effect. The defense budget would be slashed by $492 billion over a decade, $53 billion of which would come out of fiscal year 2013 spending.
The members of the Aerospace Caucus, along with Defense Secretary Leon Panetta and just about every senior military leader, insist that this scenario as unacceptable, as the Pentagon already has agreed to $487 billion in cuts for the next 10 years.
Enough is enough, said Sen. Saxby Chambliss, R-Ga., a co-chair of the Aerospace Caucus. Lawmakers have hinted in recent weeks that they would deal with the defense budget sequestration problem during the lame-duck session after the November elections. But that would be a too-close-for-comfort deadline, Chambliss said March 14 during an industry lunch on Capitol Hill hosted by the Aerospace Industries Association.
If in fact Congress is going to wait until late November to find ways to avoid sequestration, that is not going to leave industry and the Defense Department enough time to prepare for the budget guillotine that would be falling Jan. 2. “They’ll have to start planning way before the lame duck,” Chambliss said.
Amid the political maneuvering, aerospace and defense companies have become pawns in a complex budget chess game where lawmakers will have to figure out how to avert $1.2 trillion in overall cuts (half from defense and half from non-defense agencies), at they same time they are trying to pass a budget for fiscal year 2013 and negotiating a new debt limit for the United States.
The chairwoman of the caucus, Sen. Patty Murray, D-Wash., echoed Chambliss’ worries. She said the industry is too valuable to let it hang so close to the edge.
According to AIA figures, aerospace and defense generate about $340 billion in annual revenues, or about 2.3 percent of the U.S. GDP. That includes $89 billion in exports. The industry overall employs more than 1 million workers across 50 states who earn $84 billion in annual wages.
“A profitable industry is in our national interest,” Chambliss said.
Lockheed CEO Stevens suggested that the debate over aerospace and defense cutbacks should be viewed in the context of current U.S. policies to spur domestic manufacturing. Without mentioning the auto-industry bailout, Stevens implied that aerospace and defense are being treated as expendable assets that are not likely to receive any special aid.
Congress’ reluctance to raise taxes or make cuts to Social Security or Medicare programs leave little room for maneuver, which puts aerospace and defense in a vulnerable position, Stevens said.
Unlike other sectors, he said, “this industry is much less resilient to shocks and volatility.”
The nation is saddled with a huge debt and ever-growing budget deficits, he noted. “We intend to do our part” but the sequestration cuts are simply too much to take, he added.
He urged Congress to take action sooner, rather than later. “Our industry is at our strongest is when we have a predictable path forward,” said Stevens. “The prospect of sequestration is inducing an unprecedented amount of uncertainty. … We don’t have really rational responses to sequestration.”
Industry’s ardent lobbying campaign against sequestration is viewed as a predictable reaction to budget cuts, and some analysts have criticized Panetta and industry leaders for excessive fear mongering. They have pointed out that even with the additional half-trillion budget cut, the Pentagons’ base budget would drop to its relatively high 2007 levels.
Regardless of whether sequestration is enforced, aerospace and defense industries face tough times ahead, as they are under growing pressure by the Defense Department to cut costs and reduce the prices of weapon systems. That means downsizing staff, consolidating facilities and reducing administrative expenses. AIA President Marion Blakey also has argued that the Obama administration's proposed budget cuts fall disproportionately on procurement programs, compared to personnel accounts.
Tom Captain, vice chairman of aerospace and defense at Deloitte LLP, said that, under any budget scenario, companies are in for a rough ride. "We are in a tough situation between the need to keep the industrial base alive and the need to reduce the cost of weapon systems,” he said in an interview. The coming downturn is complex because technology is more advanced than it was in previous post-war drawdowns, he said. “It’s hard to flex the work force by turning it on and off."
At the same time, Captain said, “We need to press to get as much value as possible for every dollar we spend on defense.”

Topics: Business Trends, Doing Business with the Government, Defense Department, DOD Budget, Procurement