Bloomberg News

Pentagon’s $525 Billion Budget Takes Most From Lockheed F-35

February 21, 2012

(Updates with comment from McKeon in fifth paragraph. For further information on the budget, see BUDG <GO>.)

Feb. 13 (Bloomberg) -- The Pentagon’s proposed $525 billion budget for fiscal year 2013 would seek the most savings on weapons by reducing purchases of Lockheed Martin Corp.’s F-35 Joint Strike Fighter, the military’s costliest program.

The Defense Department would cut $1.6 billion from the F-35 program by eliminating 13 planned aircraft, part of $18 billion in weapons cuts proposed in the budget that President Barack Obama sent to Congress today for the year beginning Oct. 1.

The proposed spending plan of $525.4 billion is $45 billion less than projected a year ago and the first installment in an 8.5 percent reduction by 2021. With $88.5 billion in war spending added in, the Pentagon total would come to $613.9 billion, down $31.8 billion from the amount enacted by Congress for this year.

Representative Howard “Buck” McKeon of California, the Republican chairman of the House Armed Services Committee, criticized Obama’s budget proposal.

Obama’s priorities will reduce “resources for our struggling armed forces and redirect them to exploding domestic bureaucracies,” McKeon said in a statement. “This budget reflects a true reduction, in real terms, of military spending while we have troops in combat.”

The budget request marks the third consecutive year of slower growth in military spending since former Defense Secretary Robert Gates told Congress in January 2009 that “the spigot of defense spending that opened on 9/11 is closing.”

Cuts by Categories

The Pentagon is proposing to cut $259 billion through 2017 from previous plans through reductions of $94 billion in weapons procurement, $69 billion in military personnel, $60 billion in operations and maintenance, $19 billion in military construction and $17 billion in research and development.

The budget proposal provides $9.17 billion for 29 F-35 aircraft, two fewer than this year. The Pentagon also proposed delaying the purchase of 179 F-35s beyond 2017 for a total of $15.1 billion in savings.

The cut in funding for the F-35 built by Bethesda, Maryland-based Lockheed results from “changing priorities, funding constraints and the need to reduce” the overlap between the program’s development and initial production, the Pentagon said in its budget documents.

McKeon criticized the Pentagon for planning to reduce military compensation and for failing to plan for so-called sequester, automatic defense cuts of as much as $500 billion that are scheduled to start taking effect in January 2013.

Panetta Before Congress

Defense Secretary Leon Panetta will be questioned about the budget by lawmakers, starting with a scheduled appearance tomorrow before the Senate Armed Services Committee.

Panetta presented the strategic backdrop for the budget on Jan. 26, outlining a strategy that places increased emphasis on the Asia-Pacific region while retaining a Middle East focus. The Pentagon promised in budget documents today “a force that is smaller and leaner, but also agile, ready, flexible and technologically advanced.”

More resources will go to special operations such as the commando unit that killed al-Qaeda leader Osama bin Laden last year.

Electronic Warfare

To deliver on the strategy, today’s budget proposal would provide $1.8 billion for unspecified upgrades to tactical sensors and electronic warfare systems, $600 million in fiscal 2014 for a new floating command base and $300 million for a new bomber.

In addition to the F-35, the Pentagon seeks savings in fiscal 2013 of: $1.3 billion from delays in the Army’s new Ground Combat Vehicles program; $800 million from truncating purchases of Northrop Grumman Corp.’s Global Hawk drones; and $600 million from delaying by two years starting development on a new ballistic missile submarine, the SSBN(X).

An additional $400 million would be saved from reduced purchases of the V-22 Osprey, a tilt-rotor aircraft built by Boeing Co. and the Bell Helicopter unit of Textron Inc., while $200 million more would be saved by canceling a program to upgrade the Army’s all-terrain Humvees.

Winners, Losers

Boeing and Raytheon Co. may be among the winners in the Pentagon’s proposed budget, Roman Schweizer, a Washington-based defense policy analyst at the investment firm Guggenheim Partners, said in a note to clients.

“Boeing’s franchise aircraft programs appear to be in great shape,” Schweizer wrote. Proposed funding for the company’s Air Force tankers, AH-64 Apache helicopters and P8-A Poseidon surveillance planes are all “up substantially,” compared with this year, he said. Funding for Raytheon’s missiles, including the Advanced Medium Range Air-to-Air Missile, AIM-9X and Joint Standoff Weapon, “are either about even or up significantly,” Schweizer said.

Oshkosh Corp., General Dynamics Corp. and United Technologies Corp.’s Sikorsky unit may be losers, with funding for their programs declining “significantly,” while Lockheed and Textron may emerge as neither winners nor losers, according to Schweizer.

The Standard & Poor’s 500 Aerospace & Defense Index rose less than 1 percent at the close in New York trading. The biggest gainers were Textron, United Technologies and Raytheon.

Textron gained 4 percent to $28.04. Oshkosh, whose medium- duty trucks for the Army would be cut back under the budget plan, fell 5 percent to $23.68. Lockheed Martin rose 72 cents to $88.23.

Base Closings

The Pentagon also is requesting congressional authority to begin two additional rounds of domestic base closings in 2013 and 2015, a politically sensitive proposal in an election year, as troops are reduced almost to the levels before the Iraq war.

The budget documents include for the first time this year numerous examples of spending reductions and increases planned for 2013 through 2017, useful information for defense contractors making long-range plans.

The Navy intends to spend $17.7 billion in fiscal 2013 on Navy and Military Sealift Command shipbuilding and $83.7 billion through 2017. The programs benefit Huntington Ingalls Industries Inc., General Dynamics, Lockheed Martin and Austal Ltd.

Missile defense spending is projected at $9.7 billion in 2013 and $47.4 billion through 2017.

The Pentagon intends to spend $25.1 billion through 2017 for “strategic deterrence,” including improvements for the B61 nuclear bomb, D5 Trident missiles and Minuteman III missile arsenal.

Air Force, Navy

The Air Force plans to request $6.3 billion for a new bomber through 2017. The Army wants to spend $5.7 billion through 2017 on buying new Boeing CH-47 Chinook helicopters or improving current ones.

The Navy plans to buy 10 fewer of Chicago-based Boeing’s P- 8 Poseidon maritime reconnaissance aircraft, saving $5.2 billion through 2017.

Cancellation of the Defense Weather Satellite System by Northrop Grumman, based in Falls Church, Virginia, would save $2.3 billion through 2017, and truncating the Block 30 version of Northrop’s Global Hawk drone saves $2.5 billion over five years.

Lockheed Martin’s Thaad missile interceptor program would be trimmed by 150 weapons through 2017, for $1.8 billion in savings.

Canceling eight Austal Joint High Speed Vessels would save $1.5 billion through 2017, including $200 million in 2013.

Pace of Reductions

The fiscal 2013 budget proposal is 2.3 percent less, adjusted for inflation, than this year’s budget. The Pentagon projects a 1.6 percent reduction in inflation-adjusted spending power from 2013 to 2017.

By contrast, the base defense budget grew from 2002 to 2009 at an average inflation-adjusted rate of 4 percent annually.

Base budget reductions would deepen from $45 billion next year to $53 billion in fiscal 2014 and $54 billion by 2017, according to administration figures outlining the first five years of the Pentagon’s proposed deficit-reduction plan.

To save $29.4 billion through 2017, the Pentagon also is proposing to provide smaller pay raises starting in 2015 and to increase enrollment fees and deductibles for new entrants into the military’s TRICARE For Life program. The health-insurance system costs are requiring the services to set aside as much as $11 billion annually.

The budget doesn’t propose revamping the military retirement system to save money, instead recommending that Congress set up a Retirement Modernization Commission.

The cumulative personnel changes would save $11 billion in fiscal 2013, the Pentagon said.

Personnel Cuts

The Defense Department proposes reducing military personnel by 31,300, or 1.4 percent, from this year. Including cuts this year, military personnel, including Reserve and National Guard units, would be reduced by about 124,000 through 2017.

Personnel levels would drop to 2,238,400 from 2,269,700 this year. The total would be 2,145,800 by 2017.

Army forces will be reduced by less than 1 percent to 1,115,300 in 2013 and drop to 1,048,200 in 2017. The Navy would have 1.7 percent fewer personnel, for 385,200 in 2013, and face a reduction of 3.9 percent to 376,600 people by 2017.

The Marines will be down to 236,900 in 2013, or 2 percent less than this year. By 2017, the Marines face a reduction of 8.3 percent to 221,700.

The Air Force will have a total of 501,000 personnel in 2013, or 1.9 percent fewer people than this year. In 2017, the Air Force’s personnel will decline to 499,300.

High Priorities

The Pentagon lists as “high-priority initiatives” investments in special operations forces, unmanned systems, cyber defense, ballistic missile defense, satellites and Boeing’s KC-46A tanker, which sees a funding increase to $1.82 billion next year from $877 million this year.

The budget calls for spending $8 billion on the purchase and launch of Lockheed Martin and Boeing satellites, 22 percent less than this year. Still, the military is planning $40.1 billion through 2017 for space purchases.

The budget requests $3.4 billion for cyber security in fiscal 2013 and $18 billion through 2017.

The General Dynamics WIN-T program is highlighted as the Army’s “cornerstone tactical communications systems,” receiving $1.2 billion in fiscal 2013 and $6.1 billion through 2017.

The proposed base budget for weapons spending is $98.8 billion in fiscal 2013, or about $18 billion less than projected previously; $104.3 billion in fiscal 2014, or $21.6 billion less; $112.3 billion in fiscal 2015, or $17.2 billion less; $116.3 billion in 2016, or $20.9 billion less; and $122.9 billion in 2017 or $16.8 billion less.

--With assistance from Roxana Tiron and Viola Gienger in Washington. Editors: Larry Liebert, Mark McQuillan.

To contact the reporters on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net; Gopal Ratnam in Washington at gratnam1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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