Contractors Are Warned: Cuts Coming for Weapons
December 27, 2005
By LESLIE WAYNE
nytimes.com
Everyone at the conference was hanging on the words of Ryan Henry, and it was not difficult to figure out why.
Mr. Henry, a top Pentagon planning official, was giving an early glimpse of the Defense Department's priorities over the next four years to an industry gathering in New York of executives of Lockheed Martin, Boeing, General Dynamics and other leading military contractors.
For his listeners, there was one question hanging in the air: What will the impact be on me - and on my company?
Some of the answers were already clear, even if there were few details. Mr. Henry, whose official title is principal deputy under secretary of defense for policy, said the Pentagon's spending binge of the last several years - its budget has increased 41 percent since 9/11 - cannot be sustained. "We can't do everything we want to do."
It was a message that the industry has been bracing for. The Pentagon budget, James F. Albaugh, chief executive of Boeing's $30 billion military division, said at the conference, has "been a great ride for the last five years." But, he added: "We will see a flattening of the defense budget. We all know it is coming."
The issue, however, goes beyond tightening budgets. Mr. Henry told the contractors that the Pentagon was redefining the strategic threats facing the United States. No longer are rival nations the primary threat - a type of warfare that calls for naval destroyers and fighter jets. Today the country is facing international networks of terrorists, and the weapons needed are often more technologically advanced, flexible and innovative.
But one big question, analysts say, is whether the Pentagon and Congress have the desire, and will, to kill weapons programs where hundreds of billions of dollars - as well as the careers of powerful generals and admirals - are invested.
In the years ahead, Mr. Henry said, the Pentagon would like to move "away from massive force." This would mean, for instance, that fewer fighter jets would be needed because the upcoming Joint Strike Fighter F-35 has more capabilities than the existing F-16's.
He noted that special operations forces played a big role in the early days of the Iraq war - once controlling up to two-thirds of the country - and are expected to be used in greater numbers in the future. This would mean the Pentagon would want to buy more of the highly agile and high-technology weapons that they need. Specialized skills like language, intelligence and communication are also becoming top priorities.
As for aerospace, he said the Pentagon would be looking for aircraft with longer ranges, and, therefore, did not need ships or nearby bases for them to land. Increasingly, the Pentagon will be depending on unmanned aerial vehicles, which can work longer hours than piloted craft and do not put Air Force lives at risk. In the future, he said, unmanned craft will be used not only for surveillance, as they are in Iraq, but for combat as well.
To illustrate what the Pentagon envisions as the future, Mr. Henry showed the group a copy of the photograph that is one of Defense Secretary Donald H. Rumsfeld's favorites. It shows American troops on horseback in Afghanistan, calling in air strikes and armed with global positioning devices.
"In terms of our strategic environment," Mr. Henry said, "we are at an inflection point." He argued that the world was vastly different from the world that existed the last time the Pentagon was required to conduct a top-to-bottom review of the military and national security strategy - what is known as the Quadrennial Defense Review - in early 2001.
He outlined these top strategic priorities that will be at the core of the review: defeating global terrorism, defending the nation against terrorist attacks on American soil, preventing other nations from acquiring weapons of mass destruction and influencing countries that Mr. Henry described as at a "strategic crossroads."
The quadrennial review is scheduled to be released in February, the same day as the Pentagon's 2007 budget request, and Mr. Henry said that many of the review's new priorities would be reflected in that budget plan.
But already there are signs of trouble ahead. In the last few years, Mr. Rumsfeld has tried to kill some weapons systems he saw as Cold War anachronisms and to push a military modernization plan. But his efforts were thwarted by what Washington calls the Iron Triangle of Congress, the uniformed military command and military contractors.
Many military experts said the same fate could be in store for this review, although Mr. Henry, and some military analysts, argued that this round could be different.
Loren Thompson, a military analyst at the Lexington Institute, a free-market policy lobbying organization based in Arlington, Va., said, "The war in Iraq has not been as successful as expected." He went on: "Rumsfeld's notion of transformation is firmly rooted in the Pentagon and it calls into question previous spending plans. While thematically, this may sound like what we have heard before, that was before Iraq and there was not as much urgency as now."
In addition, there is now greater attention in Washington, both in Congress and at the Pentagon, on out-of-control spending on some weapons. The Pentagon currently has $1.3 trillion of weapons program in its portfolio - with $800 billion of the bills for them still to be paid. The Pentagon has commissioned a major study to make recommendations on curbing these runaway costs.
But given the difficulty the Pentagon has had in getting Congress to kill politically popular weapons systems, many analysts raised questions about whether the Pentagon's efforts will succeed. "There is a big chasm between rhetoric and the budget process," said Winslow T. Wheeler, a military analyst at the Center for Defense Information in Washington, the analytical and research arm of the World Security Institute, which describes itself as an "authoritative and impartial monitor of security issues."
"Osama is happy for us to spend billions on and F-22A fighter jet systems that can do him no harm," Mr. Wheeler said. "It's hard to conceive of a larger gap between words and decisions."
Mr. Wheeler, a former adviser to Congressional Republicans on military issues, said that while civilian leaders, like Mr. Ryan, talk of transformation, they often cave in to the Pentagon's top military officers and their career concerns.
"It is true that programs are going to be hunting for dollars," Mr. Wheeler said, "and it is true there are more programs than dollars. But the civilian leaders are doing nothing to bring the budget in line. Even though we are hearing a lot of rhetoric from the office of the defense secretary, we see they are going along with what the services want. It shows who is running the Pentagon."
Specifically, Mr. Wheeler criticized the Pentagon's decision to continue financing many weapons systems that some say are ripe for cuts. Among them are the next generation destroyer, the DD(X), which is projected to cost more than $1 billion each; the costly F-22A, which has a total program acquisition cost of $361 million each; and the V-22 Osprey, a Marine aircraft that has had numerous problems in test flights.
Richard Aboulafia, an analyst with the Teal Group, a northern Virginia aerospace business consulting company, said there was "a huge difference between this quadrennial review and the last." He went on: "The last time we had a quadrennial review, it was followed by double-digit upward budget growth. If we are lucky, there will be a flat budget and a lot of programs that still need care and feeding."
And that is exactly what industry executives at the conference said they were grappling with.
The future, Mr. Albaugh of Boeing said, "will be less about innovation and more about cost control. We will see a competition for resources, and cost control will be more of an issue."
Boeing has already taken some hits. The Air Force has said it does not want any more of Boeing's C-17 Globemaster cargo planes once it receives those already on order, although the program is so popular in Congress, it may be difficult to kill.
In addition, a $20 billion aerial refueling tanker program collapsed in a procurement scandal and its future is uncertain. Even if the program is revived, the Air Force will probably be buying 15 or so tankers a year, not leasing 100 as originally planned.
"Because of budget pressures, programs that are not transformational will be scrutinized," Mr. Albaugh said. He added that "all big programs because of their size" were at risk and that weapon systems currently in development "with performance problems could be in jeopardy."
Mr. Albaugh's views were echoed by other industry executives.
"We're not going to have the flush years of past Pentagon budgets," said Daniel J. Murphy Jr., a former admiral and chief executive of Alliant Techsystems. "We are going to be cutting costs, even on cost-plus contracts. We will produce at cost-plus, but at a lower cost."
Mark H. Ronald, chief executive of BAE Systems, the British based military supplier, said that given the lack of growth in future Pentagon budgets, "the name of the game going forward is taking market share" from other military contractors.
To prepare the industry for this change, Gordon R. England, the Pentagon's No. 2 official, was the host of a dinner earlier this month with chief executives of the largest military contractors - the first such meeting since the Bush administration took office. One message that emerged was that the Pentagon would frown on contractors who ran to Congress to undermine its cost-cutting efforts.
Still, some military analysts remain skeptical. "Congress equates weapon systems with jobs and votes," Mr. Thompson said. "It's hard to convince them of anything that will lead to less jobs and fewer votes."
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