Shipyard CEO Warns of Rising Costs for U.S. Navy Ships

The prolonged federal budget stalemate is likely to result in higher price tags for Navy warships, a senior industry executive predicts. This could upend Navy plans to acquire next-generation Ford-class aircraft carriers and new surface combatants within the service’s desired timeline and budget.
Congress extended the deadline for automatic cuts to military spending of up to $500 billion over the next decade from Jan. 2 to March 1. The uncertainty is expected to delay Pentagon contract awards. Further, the absence of a full-year budget — the Pentagon is operating under a stopgap funding measure that expires March 27 — means the Defense Department, by law, cannot approve any new production of weapon systems.
The timing of the so-called fiscal cliff could have significant impact on the schedule and cost of the USS John F. Kennedy, the second ship in the Gerald R. Ford class of nuclear-powered aircraft carriers, said Mike Petters, president and chief executive officer of Huntington Ingalls Industries, the nation’s largest military shipbuilder.
Navy officials said they expect to sign a contract this summer with HII to begin the construction of the Kennedy, known as CVN-79, at Huntington Ingalls’ Newport News Shipbuilding, in Newport News, Va. But in the absence of a full-year appropriation and with the Pentagon in the midst of contracting chaos caused by the lack of long-term funding, a delay is virtually certain.
Petters, during a Jan. 10 lunch meeting with reporters, declined to discuss cost estimates for the Ford. But he said costs will rise beyond current projections if contract awards are put off.
The Navy has estimated that CVN-79 will cost about $11.4 billion, andofficials have indicated that if Ford carriers exceed the $12 billion threshold, the ships would be unaffordable.
Petters said that a key determinant of ship costs is a construction schedule that allows the shipyard and its massive supplier chain to operate efficiently. “We know that the optimum schedule for building aircraft carriers is in three and a half to four-year sequences,” he said. The current plan is five years, which already creates inefficiency. If there are further delays, it is hard to predict now what the cost implications might be, said Petters.
Huntington Ingalls also is awaiting a Navy decision on a contract to build new DDG-51 Arleigh-Burke destroyers. Both HII and General Dynamics’ Electric Boat submitted bids last fall and were expecting the selection of the winner to be announced in the spring. The budget standoff, too, could impinge upon this program, Petters said.
“That has been driven strictly by politics,” he added. The Navy not having a full-year appropriation has “handcuffed” its DDG-51 construction plans.
If a decision is pushed into next fall, many subcontractors might not be able to afford to stay on the program, he said. That could ultimately affect the price tags and delivery schedule of new destroyers, he explained. “The timing of the supply chain is a challenge. … The [DDG] supply chain is getting thinner and narrower.” If a contract award is put on hiatus until the fall, “that’s a head scratcher,” he said. “Suppliers that you may be counting on might not even be there,” he said.
“The political process can have all this collateral effect that nobody is thinking about,” said Petters. Navy shipyards, for the most part, have been unaccustomed to this fiscal turbulence, and are now having to make contingency plans, including possible layoffs or slowdowns in hiring.
“Usually, defense [firms] tend to be a little bit insulated” from the tempestuous economic and political instability that the nation has seen in recent years, he that. “The Budget Control Act put defense contractors front and center in that discussion,” Petters said. “However all this stuff goes, it may affect how we hire and how we ramp up work in the future.”
HII is taking the long view, he pointed out, and is hoping for some stability over the next 18 to 24 months, when it expects new contracts, not just for CVN-79 construction, but also for the inactivation of the now-retired USS Enterprise aircraft carrier and the refueling of the USS Lincoln. It also anticipated more work on Virginia-class submarines, which it shares with Electric Boat.
“All this work will take us well into the 2020s,” Petters said.
The shipyard, meanwhile, is aggressively marketing its amphibious warships, the LPD San Antonio class, for missions other than their traditional role of taking Marines to war. Petters said the LPDs could serve in missile-defense, command-and-control and other functions for the U.S. military. Because the LPD assembly line will be running until at least 2017 or 2018 — when HII will complete delivery of 11 ships to the Navy — any future customers would benefit from buying off a “hot production line,” he said.
In the coming months, Petters said. “We’ll be engaged in trying to help people [lawmakers] understand how decisions made in appropriations bills affect the industrial base and our ability to execute contracts.”
Another wild card in HII’s future is its Avondale, La., shipyard, which is scheduled to be closed by the end of fiscal year 2013. There is not enough Navy work to justify keeping it open, Petters said. But the yard has been approached by energy firms about the possibility of building oil rigs or other offshore platforms in that facility.
“Three is a substantial amount of manufacturing demand in that area of the United States,” said Petters. Energy projects are fueling the need for expertise in manufacturing highly engineered and complex structures, he said.
Petters said he recognized that Navy shipyards have a spotty record in trying to diversify into commercial work. So he wanted to downplay expectations. “This is walk, not a run, into this space.”
Photo Credit: Navy

Topics: Business Trends, Shipbuilding, Aircraft Carriers, Submarines, Surface Ships