Defense companies should brace for years of Pentagon spending cuts even if automatic reductions set to begin in January are averted, said Sean O’Keefe, who heads EADS North America.
Any debt-reduction compromise between Congress and President Barack Obama to avoid the so-called fiscal cliff is still likely to make deep cuts in defense and other programs, according to O’Keefe, chairman and chief executive officer at the U.S. unit of European Aeronautic, Defence & Space Co. (EAD)
“Every industry and every company that is doing business contractually with the U.S. government is, I think, girding for the probability that there’s going to be a major adjustment, whether it’s by this mechanism or by some other” devised as an alternative, O’Keefe said in an interview for Bloomberg Television’s “Conversations with Judy Woodruff” set to air on Nov. 22.
O’Keefe, 56, said he’s also preparing his company and its workforce for the possibility an agreement won’t be reached.
Such a failure would mean $607 billion in U.S. tax increases and spending cuts beginning in January. Over a decade, the automatic cuts would reach $1.2 trillion, with more than $500 billion stemming from defense.
O’Keefe said he’s already notified workers at the Herndon, Virginia-based company that some may get layoff notices if the cutbacks take effect. Some EADS contracts may be reduced by 10 percent to 20 percent, although determining where the spending cuts would hit is an “evolving process,” he said.
Companies such as Lockheed Martin Corp. (LMT:US), the world’s largest defense contractor, have campaigned against the automatic cuts as devastating and warned they may respond by eliminating thousands of jobs.
Others, such as executives at Honeywell International Inc. (HON:US), have said defense cuts approaching the magnitude of the across- the-board process known as sequestration are inevitable even if a more precise method of targeting the reductions is preferable.
“We recognize these cuts are going to occur,” Mike Madsen, president of Honeywell’s defense and space unit, said yesterday on a conference call for investors. “They need to occur. That’s the right thing to happen actually. We’re probably a little different in that regard, and that we’re not really trying just to push it back.”
In the interview, O’Keefe said that EADS, based in the Netherlands, has “turned the page” after the October collapse of its planned merger with London-based BAE Systems Plc. (BA/) He said EADS will build on partnerships with other companies, including Bethesda, Maryland-based Lockheed Martin, to boost its business.
EADS and BAE faced government resistance to a merger, primarily from officials in Germany. At the start, EADS executives thought they had a 50-50 chance of completing a merger, he said.
“The fact that that didn’t converge and come together was probably a testimony of the fact that it was a longer shot than 50-50, but we certainly tried,” he said. “And it was one that we’re much happier for having made the effort and disappointed by the outcome, but much more pleased to have done so than not at all.”
O’Keefe, a former chancellor of Louisiana State University in Baton Rouge and former administrator of the National Aeronautics and Space Administration, said his life was changed by the Aug. 9, 2010, plane crash that that killed former Alaska Republican Senator Ted Stevens and four other people.
O’Keefe and his son, Kevin, were among four survivors when the small plane crashed 10 miles northeast of Aleknagik, Alaska. The group was on a trip to fish for silver salmon.
He said his good fortune at surviving the crash of the DeHavilland DHC-3T gives him some inspiration to face adversity, and that he now views each day as a “bonus.”
“It’s an opportunity every day, and it’s a different way of looking at the world and one that makes some of the challenges that I now confront seem not nearly as significant” as before, he said.
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