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Defense Budget Reflects Shifting Priorities

Budget-cutting meets new geopolitical and fiscal realities in the Defense Secretary's proposed spending plan

U.S. military spending cuts urged by Defense Secretary Robert M. Gates on Apr. 6 represent a fundamental shift in military priorities and strategy that could save large sums of money for the government. But even though a number of high-priced weapons programs are being pegged for the scrap heap, investors seemed relieved that cuts had not gone deeper. They also seemed heartened by the prospect of gains on other projects—and possible restoration by Congress of at least some of the money for programs such as the F-22, whose builders astutely spread production across 44 states.

Gates aims to slash elements of many weapons programs in a manner not seen in Washington for decades. Among them: the Future Combat Systems program, the F-22 Raptor, an $11 billion satellite network for the Air Force, and the nation's missile defense program, refocusing the latter on the "rogue state and theater missile threat." Many of the programs have faced substantial cost overruns, and military strategists now question their necessity.

Other systems were terminated entirely, including the Multiple Kill Vehicle, the Transformational Satellite program, and a second airborne laser prototype aircraft.

Corporate Cuts

Yet in some programs, meanwhile, Gates is calling for increases in spending, and he tried to counter concerns about the economic impact of cancellations of some big programs—such as Lockheed Martin's (LMT) F-22—by emphasizing increased employment in others. He said, for instance, that Lockheed's F-35 Joint Strike Fighter, which employs 38,000, is expected to increase to 82,000 people by 2011.

The nation's big defense contractors—including Lockheed, Northrop Grumman, General Dynamics (GD), and Boeing (BA)—are expected to face significant impacts from the paring of the military's budget, expected to total around $534 billion in 2009. Anxiety at some companies has prompted both visible and behind-the-scenes efforts in recent weeks to head off cuts that could affect them.

Overall, Gates said he was taking an "unorthodox approach" to Pentagon spending by focusing on Pentagon expectations of "irregular" conflicts involving smaller, unpredictable adversaries, rather than simply conventional war with larger enemies.

The budget blueprint, if kept intact in Congress, would deal some major blows to Lockheed, the world's largest defense contractor, though the company also stands to gain on other increases, and Wall Street seemed rather dismissive of any major downside. Lockheed shares rose 6% in unusually heavy trading. Boeing, Northrop, and General Dynamics shares also gained.

Fighter Jets at $354 Million Apiece

For Lockheed, based in Bethesda, Md., one blow involved the F-22. The Air Force has said it wants 56 more than the 187 in Gates' budget, and the company had hoped it would keep making them until the F-35 fighter was ready for full production. Perhaps more than any other program in recent history, the F-22 lay at the heart of publicity and lobbying efforts by Lockheed, and its subcontractors centered on an estimated 95,000 jobs said to hang in the balance.

Like many large military programs, the F-22 has grown since it was first envisioned and now has a network of subcontractors with employees in more than 40 states—usually a fairly good inoculation against a military program's rejection on the budget-cutting block. But the F-22, at $354 million apiece, is also astonishingly expensive, costing more than any other fighter jet.

Another blow involved Lockheed's VH-71 program for building a fleet of 23 Presidential helicopters, a program that has doubled in cost to $13 billion in little more than four years. Lockheed has said that significant cuts could lead to layoffs.

Regarding the F-22, Gates told a Pentagon press conference what has been obvious to some strategists if not members of Congress from the 40-plus states in which it is made: "There is no military requirement" for more than 187 F-22s, he said, stressing that he was eliminating further purchases, not existing ones. "It's not like we're killing the F-22," he said.

Endless Delays

On another much-watched weapons project, Gates said he wanted to move forward on bids for the long-delayed aerial refueling tanker aircraft this summer. The replacement of antiquated Air Force tankers has been tied up in seemingly endless delays because of politics, flawed decisions by Pentagon contracting personnel, and intense competition between Boeing and a Northrop Grumman/EADS consortium.

But Gates explicitly rejected a much-discussed alternative, a "split buy" between Boeing and Northrop, as "not the best deal for the taxpayer." He noted it had been discussed only because of the challenge of getting support on Capitol Hill for one contractor or the other. The correct approach, he said, was to "do this right"—ask the competitors to bid in a process that adheres closely to Pentagon acquisition rules, so that no formal protest by the losing bidder could prevail.

Gates also resisted notions the Pentagon might be undercutting its conventional capabilities. "This is not about irregular warfare putting conventional capabilities in the shade" but of a shifted emphasis, he said.

Meanwhile, Gates said he was open to starting some new programs, such as one for a search-and-rescue helicopter. Gates wants to move ahead with buying three DDG-1000 destroyers made by General Dynamics, and to cancel the satellite communications program for the Air Force, which had been expected to cost up to $11 billion. Lockheed, Boeing, and Northrop all were vying for the contract, which would have used laser beams to send data and messages between ground forces through a separate network of satellites and ground stations.

Low-Intensity Conflict

Gates' budget blueprint—likely to be altered when it gets to Congress—aims to reshape military capabilities as it considers reorienting U.S. war fighters to insurgencies and low-intensity conflicts rather than traditional large adversaries such as China.

Many of the nation's biggest weapons contracts, involving unproven technology or engineering, or subject to evolving requirements over many years, have sapped military budgets in recent years; the Government Accountability Office, for instance, has found that 96 of the largest weapons systems were nearly $300 billion over budget.

While overall military spending is expected to continue to rise, its pace has slowed amid the Obama Administration's redirection of federal resources to the financial crisis and stimulus.

In addition, members of Congress are likely to push back on Administration wishes as they defend their favorite projects. But while the details of the ultimate shape of the military will not be decided for some time, the outlines are becoming plain: a leaner, less grandiose military machine that is designed to deal with insurgencies and smaller conflicts rather than major wars with traditional adversaries.

Some defense watchers and analysts were surprised by the cancellation of some programs. Even so, there's plenty of time for contractors such as Boeing and Lockheed to take their cases to members of Congress.

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