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WASHINGTON: Declining spending on military programs could lead to a consolidation in the U.S. fixed-wing aircraft industrial base in the future, according to a Pentagon report obtained by Reuters on Wednesday.
Lockheed Martin Corp and Sikorsky Aircraft, a unit of United Technologies Corp had programs that would carry production into the next 20 years, but Boeing Co.'s future outlook was “more problematic,” said the report, which the Pentagon delivered to Congress this week.
“Boeing's future in the fighter/attack and transport segments is questionable,” said the report, which is prepared annually by the Pentagon on the defense industrial base.
“With the recent announcement of the C-17 program shut down, coupled with the end of the F/A-18E/F production in fiscal year 2011, the industrial base infrastructure at Long Beach, California and St. Louis, Missouri, may have insufficient business to continue in place,” the report said.
Boeing said this month it took the first step to end production of the C-17 military cargo plane in 2009.
The Pentagon report said suppliers not associated with future production programs such as the Lockheed F-35 Joint Strike Fighter were among the most likely to face challenges.
“These suppliers will be forced to either exit the business or find new programs for their products,” it said, noting that Pentagon's procurement spending in the aircraft sector would peak in fiscal year 2010 at $25.9 billion.
The report also raised concerns about the ground vehicle sector, despite a current boom fueled by increased emergency or “supplemental” spending for the wars in Iraq and Afghanistan, as well as the Army's Future Combat Systems.
Ground vehicle prime contractors were profitable and currently able to meet their financial obligations, providing value to shareholders and investing back into their companies.
Supplemental funding for ground vehicles reached $15.9 billion in fiscal year 2006, on top of $30.9 billion in the Army budget. The cost of repairing vehicles was estimated at $17 billion to $19 billion annually for several more years, compared to around $3 billion a year before the war.
“Once the supplemental funding ceases, this could be a much more gloomy assessment and is an area that warrants close monitoring,” the report said.
It noted that big cuts in defense spending in the 1990s cut the number of major ground vehicle prime contractors from 11 to two, General Dynamics Corp and BAE Systems Plc.
The military space sector also remained an area of concern, where research and development costs had grown some 69 percent from original estimates and procurement costs were up 19 percent on average, according to the report.
Two programs — Lockheed's Space Based Infrared System and Northrop Grumman Corp.'s National Polar-Orbiting Operational Environmental Satellite System — had faced cost overruns of more than 15 percent over the past year.
All three top space contractors — Lockheed, Northrop and Boeing — faced possible cost overruns, and all seven major space programs faced schedule issues, the report said, adding delivery recovery plans were in place and being implemented.
The report said the shipbuilding industry continued to lack much commercial business, which in turn added to the overhead burden for the U.S. Navy.
Excess plant capacity was another issue, possibly exacerbated by the Navy's decision to build the littoral combat ship (LCS) and other ships in mid-tier shipyards.
“The persistent inability of the industrial base to meet cost targets indicates that the Navy and Coast Guard may not be able to recapitalize fully and portends a continued downward trend in the defense shipbuilding industrial base,” it added.
The submarine design industrial base also could shrink significantly, as did that of Britain during its hiatus from new submarine design work, the report said. The U.S. industry could face large cost overruns and schedule delays, as Britain did, once it needed a new submarine design.
