Bloomberg News

Floating Base to Subs Among Billions Idled by Budget Fight (1)

December 03, 2013

Floating Base to Submarines Among Billions Idled by Budget Fight

A U.S. Naval vessel receives repairs in the Speede General Dynamics Corp. dry dock at the Norfolk Naval Shipyard in Virginia, on Feb. 28, 2013. Photographer: Joshua Roberts/Bloomberg

The Navy wants to buy a ship that serves as a floating base, an asset when allies won’t welcome U.S. troops on their turf or a natural disaster prevents operations ashore.

General Dynamics Corp. (GD:US) and its San Diego shipyard are waiting for the contract. It won’t come until Congress approves a budget with more than $560 million in funding for the project -- and that isn’t likely to happen anytime soon.

Billions of dollars in helicopter to submarine construction are in limbo because lawmakers have failed to pass a budget for the fiscal year that began Oct. 1. As long as the Pentagon operates under a temporary spending bill, it can’t start new programs or boost production levels.

The paralysis has slowed the military’s investments in national-security priorities and delayed work to contractors whose sales and staffs already are shrinking due to federal spending reductions. The companies may be forced to cut more jobs if Congress doesn’t pass a budget.

“My crystal ball is fogged,” Mike Petters, chief executive officer of Newport News, Virginia-based Huntington Ingalls Industries Inc. (HII:US), said in an interview. “I don’t yet see a path that makes any sense to me. If you’re fighting these crises every two or three or four months, how does the nation ever make more strategic decisions?”

‘Ripple Effect’

House and Senate negotiators are trying to come up with a spending bill for the remainder of the year that may ease some of the automatic spending cuts known as sequestration. Their deadline for an agreement is Dec. 13.

The stopgap funding measure expires Jan. 15. If there’s no agreement, the government might shut down for the second time in less than four months, leading to more contracting delays.

“The ripple effect seems to go on and on,” said Mark Amtower, who runs Amtower & Co., a government contracting consulting firm in Clarksville, Maryland.

Amtower said he didn’t expect things to return to normal until early next year -- and that prediction assumes that Congress will pass legislation to fund the government for the remainder of the year.

While the current temporary spending bill reopened the government after a 16-day partial shutdown in October, it is a budget bandage that generally prohibits agencies from starting programs and increasing production levels during the prior year.

Labor Force

Companies face higher costs because they need to keep skilled workers on their payrolls while waiting for the contracts, said Wes Bush, chief executive officer of Falls Church, Virginia-based Northrop Grumman Corp. (NOC:US) If they don’t retain those employees, they lack the expertise when the government wants the work done, he said.

“This silliness intended to save money ends up costing the taxpayers more,” Bush said in an interview.

The Defense Department is disproportionately affected because the agency represents more than two-thirds of the roughly $500 billion federal contracting market.

The delays have affected contractor Huntington Ingalls, which is building nuclear-powered Virginia-class attack submarines with Falls Church, Virginia-based General Dynamics.

Attack Submarines

A contract to build the next 10 subs is on hold because the continuing resolution prevents the Navy from beginning new projects, Petters said. Each submarine costs about $2.7 billion, according to the Congressional Research Service.

Also postponed is the floating base. For the Navy, the ship is a low-cost way to support special operations forces, mine-sweeping efforts, and disaster-relief responses without tying up a more expensive aircraft carrier or stationing troops where a U.S. presence might spark unrest or terrorist attacks, said Loren Thompson, a defense analyst with the Lexington Institute, an Arlington, Virginia-based research organization.

The ship could even be used to ferry troops into combat zones, said Thompson, who also consults for companies.

“In major combat operations, this could be a cheap way of keeping troops offshore until they hit the beaches,” he said. “This is an alternative to sending Marines crashing through the waves onto hostile beaches.”

With accommodations for 250 personnel and “a huge helicopter flight deck,” the ship “will provide a highly capable and affordable asset to the Navy and Marine Corps,” according to a General Dynamics description of the program.

Border Surveillance

The delays aren’t limited to the Pentagon.

The Department of Homeland Security has pushed back the award of a border-surveillance contract valued at as much as $1 billion because of the shutdown and the temporary spending bill, according to an agency notice posted on a federal website.

Both General Dynamics and Blagnac, France-based European Aeronautic Defence and Space Co. are interested in the work, according to Brian Friel, a Bloomberg Industries analyst.

Rob Doolittle, a spokesman for General Dynamics, declined to comment on the contracting delays.

For many companies, it’s a waiting game. On the defense side, EADS (EAD) wants to know how many new UH-72 Lakota helicopters it can build for the Army and National Guard. While the original multiyear acquisition plan called for 31 helicopters at an estimated cost of $231 million for the current fiscal year, Obama’s budget proposed spending $96 million on 10.

The House voted to fund all 31, and the Senate is discussing money for no more than 20.

EADS won’t be able to plan ahead until lawmakers agree.

Small Business

The choppers are being built at a plant in Columbus, Mississippi, about 60 miles west of Tuscaloosa, Alabama. The long-term future of the plant and its 300 employees -- more than half of them military veterans -- hinge on how many helicopters will be built, said James Darcy, an EADS spokesman.

“Absorbing that uncertainty at the corporate level is one thing,” Darcy said. “But there are individuals having to deal with that uncertainty. This is on your mind every night when you go home.”

The budget squeeze weighs heavier on smaller companies, which often don’t have the cash and credit lines of big contractors. They want to know in advance whether they need to buy equipment and hire employees for their share of major contracts, said Anne Shybunko, president of closely held GSE Dynamics Inc., based in Hauppauge, New York.

“You need to keep us steady with work,” said Shybunko, whose company makes parts for aircraft such as Boeing Co. (BA:US)’s KC-135 refueling tanker and Lockheed Martin Corp. (LMT:US)’s C-5 cargo plane. “Right now, the supply base is diminishing.”

F-35 Jets

Navy officials have said the continuing resolution is likely to limit or delay purchases of the F-35 jet and a military transport plane made by Bethesda, Maryland-based Lockheed.

The worst will come if Congress can’t pass a bill to fund the government after Jan. 15 and instead enacts another continuing resolution at lower spending levels, Admiral Jonathan Greenert told the Senate Armed Services Committee on Nov. 7.

Under that scenario, the Navy won’t award contracts for the floating base or the Virginia-class submarine during the fiscal year, Greenert said.

The Navy also would have to cancel some purchases of F-35s, Northrop’s E-2D Hawkeye aircraft, and United Technologies Corp. (UTX:US)’s MH-60 Seahawk helicopters, Greenert told lawmakers.

Job Cuts

Any future continuing resolution will have to include a clause allowing new projects, said Robert Levinson, a Bloomberg Government defense analyst. Otherwise, the government risks breaking contracts only to renegotiate them at higher prices.

Defense cuts may accelerate a decline in revenue for contractors as long-term procurement contracts end and aren’t renewed at the same levels. Lockheed Martin, the biggest (LMT:US) U.S. contractor, announced Nov. 14 it was cutting its workforce by 4,000 positions in response to decreased federal spending.

“The trajectory here is one where the defense budgets overall will contract,” said Roger Zakheim, former general counsel for the House Armed Services Committee and now at the law and lobbying firm Covington & Burling LLP. “You’re going to see workforce reductions as one way for industry to try to cope and return a value to their shareholders. That trend will continue.”

To contact the reporter on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • GD
    (General Dynamics Corp)
    • $123.59 USD
    • 1.78
    • 1.44%
  • HII
    (Huntington Ingalls Industries Inc)
    • $102.79 USD
    • 0.00
    • 0.0%
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