Bloomberg News

Lockheed Martin Benefits in Pentagon $527 Billion Budget

April 10, 2013

Lockheed Martin Benefits in Pentagon’s $527 Billion Budget Plan

A pilot passes through a Lockheed Martin Corp. C-130 Hercules military airplane during the Farnborough International Airshow. Photographer: Chris Ratcliffe/Bloomberg

Lockheed Martin Corp. (LMT:US), the world’s No. 1 defense contractor, would benefit from increased spending on its troubled F-35 fighter and Littoral Combat Ship programs as well as orders for additional C-130 transports under the Pentagon’s proposed $526.6 billion budget.

The $3.8 trillion federal budget that President Barack Obama proposed today for the fiscal year beginning Oct. 1 would provide a total of $615 billion for defense with the anticipated addition of $88 billion in war spending, mostly for the conflict in Afghanistan.

A president’s budget plan is never more than a starting point for action by congressional defense committees, and the spending blueprint offered today assumes that the Pentagon won’t need to absorb $50 billion in cuts next year that are now mandated by law. That means Obama and Congress would have to reach a deal to cancel the spending cuts known as sequestration.

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The fiscal 2014 budget request includes $99.3 billion for procurement and $67.5 billion for research and development. It calls for a 1 percent increase in military pay. The Pentagon’s budget proposal said it will save $13.7 billion from costs that would have been incurred over time by ending some programs and restructuring others.

Budget Fundamentals

Even budget fundamentals are up in the air. The Pentagon said its request reflects an inflation-adjusted increase of 5.1 percent, a calculation based on comparing this year’s spending after sequestration cuts with a budget for next year that assumes no such reductions. Obama’s budget said the $526.6 billion is a decrease of $3.9 billion, or less than 1 percent, compared with the budget as enacted for fiscal 2012.

The White House budget office said Obama still supports efforts to achieve $1.8 trillion in additional deficit reduction measures over 10 years, including about $100 billion in cuts from military spending.

Unlike sequestration, which already has begun, most of the president’s cuts in defense spending would be delayed until the latter years of the next decade. That “gives this institution the time to manage and respond and adjust” its spending while meeting strategic goals, Defense Secretary Chuck Hagel said today at a Pentagon news conference.

Sequestration Repeal

“We have protected our military families and veterans while cutting defense spending on outdated military weapons systems,” as the U.S. winds down its role in Afghanistan after departing Iraq, Obama said in his budget proposal.

Hagel said in a statement that the budget plan makes “important investments” in new strategic capabilities, including cybersecurity, special operations and mobility needed for the Pentagon’s strategy of rebalancing its resources toward the Asia Pacific region.

Pentagon spending on cybersecurity would increase to $4.7 billion in fiscal 2014 from $3.9 billion this year, Pentagon Comptroller Robert Hale said today in a news conference.

Lockheed would benefit from $8.4 billion to continue development of the F-35, the Pentagon’s costliest weapon, and to purchase 29 of the fighters -- 19 for the Air Force and 10 for the Navy. The Air Force set a goal of increasing production to 60 F-35s a year by 2018, and the Navy is aiming for 40 by then.

The estimated cost for a fleet of 2,443 F-35 fighters has climbed to $395.7 billion, a 70 percent increase since 2001. Pentagon officials have prodded Bethesda, Maryland-based Lockheed and its subcontractors to improve performance and reduce costs.

Missile Defense

In addition to the F-35, the budget would boost funding for Lockheed’s missile defense programs, including the Army’s land-based Thaad system and the Navy’s Aegis-equipped ships. The plan includes downpayments on four additional military satellites for secure communications and missile launch detection,

The Air Force is requesting authority to enter into a new multiyear contract with Lockheed for 79 C-130 transport planes. The request for next year is $2 billion for 18 transports in different versions including five AC-130 special-operations gunships, up from seven requested this year. It’s an updated version of the transport that first flew in 1954.

Littoral Ships

Lockheed also would share in the Navy’s $2.3 billion request for the Littoral Combat Ship, including continued research and buying four additional vessels. Lockheed and Austal Ltd. (ASB) based in Henderson, Australia, each would build two.

The price of the ship, which is intended to be a small, speedy vessel for use in shallow waters close to shore, has doubled since 2005 to $440 million apiece. A decision to simultaneously build two versions will add to long-term operating costs. The Pentagon’s chief weapons tester has cited flaws with the ship’s guns and questioned whether the LCS could carry on its mission after being hit in combat.

Among savings cited by the Pentagon was $1.7 billion from termination of an experimental satellite system to detect ballistic missiles made by Northrop Grumman Corp. (NOC:US), based in Falls Church, Virginia.

The Army will save $1.3 billion by delaying the purchase from Chicago-based Boeing Co. (BA:US) of H-64 Apache helicopters and $400 million by reducing its quantity of UH-72 Lakota Light Utility Helicopters made by European Aeronautic Defence & Space Co. (EAD), based in Blagnac, France.

Cutting Costs

An additional $700 million would be saved by reducing support costs for the F-35 and $700 million by purchasing fewer Standard-Missile-6 weapons made by Waltham, Massachusetts-based Raytheon Co. (RTN:US)

The Air Force canceled a supply-chain management program last year after spending $1 billion. Failure of the program managed by Computer Sciences Corp. (CSC:US), based in Falls Church, Virginia, is under review by the Senate Armed Services Committee.

The Pentagon’s budget will drop to about $475 billion if Congress doesn’t roll back sequestration, Todd Harrison, a budget analyst with the non-partisan Center for Strategic and Budgetary Assessments in Washington, told reporters April 5.

Hagel, who will appear tomorrow before the House Armed Services Committee to discuss the budget, should be asked how he would manage “taking another $50 billion in cuts” if sequestration, which began March 1, stays in place, Harrison said.

“You’ve got to at least present something to Congress” that lays out scenarios for cutting force levels and capabilities to meet the budget cap, Harrison said. “Let them see the options.”

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

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


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $190.41 USD
    • 1.12
    • 0.59%
  • NOC
    (Northrop Grumman Corp)
    • $137.27 USD
    • -0.02
    • -0.01%
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