Defense Cuts Would Strike Lockheed, Northrop

Contractors Stand to Lose Billions of Dollars in Orders As Pentagon Tightens Belt

The Wall Street Journal 01/04/05
author: Jonathan Karp
(Copyright (c) 2005, Dow Jones & Company, Inc.)

Big defense contractors Lockheed Martin Corp. and Northrop Grumman Corp. stand to take the biggest hits from $30 billion in proposed budget cuts as the Pentagon tightens its belt amid the rising cost of the war in Iraq.

Under the proposed cuts, outlined in a recently prepared Pentagon document, Lockheed stands to lose $18 billion of business over the next six years, mostly because of reduced Air Force purchases of the F/A-22 fighter jet. Northrop would lose some $8 billion over the same period as the Navy retires ships and scales back its next-generation fleet.

Lockheed expects overall 2004 sales of $34 billion, while Northrop expects 2004 sales of $29 billion.

The document itemizing the proposed budget cuts was approved Dec. 23 by Deputy Defense Secretary Paul Wolfowitz and reviewed by The Wall Street Journal yesterday.

The proposals are part of a sweeping effort ordered by President Bush to cut the federal deficit. Cuts proposed during wartime could underscore to Congress, which must approve defense spending, the administration's determination to reduce the Pentagon's budget.

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The Pentagon's proposal includes cutting some $55 billion in spending, mostly in the Air Force and Navy, but adding more than $25 billion, mostly in the Army. The proposal was reported yesterday by InsideDefense.com.

Besides cutting a range of weapons programs, the Pentagon proposes slashing $12 billion in contracting support services, even as its contracting practices have come under increased scrutiny.

The proposed budget cuts would take effect in fiscal 2006, which starts Oct. 1, and continue through fiscal 2011. The Pentagon proposes to cut the purchase of Lockheed's F/A-22 fighter by 96 airplanes, or a third of the program, shaving $10.5 billion in costs.

The F/A-22 is a stealth fighter with a longer range at supersonic speeds than current tactical fighter planes. Critics say it is too expensive -- currently around $250 million per plane, including development costs -- and a holdover from Cold War planning to fight the former Soviet Union.

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The Pentagon proposal included some surprise reductions, also at Lockheed's expense. These include $5 billion from the proposed termination of the C-130J cargo plane and $2.3 billion from scrapping the Joint Common Missile, an air-to-surface weapon for which Lockheed won a contract just last year. Much of the work on F/A-22 and C-130J is done at the company's Marietta, Ga., plant.

Lockheed did receive some consolation: The proposed cuts spare the F-35 Joint Strike Fighter, which at more than $200 billion is the Pentagon's single largest weapons program.

Los Angeles-based Northrop faces reduced purchases of its DDX destroyer, a new type of amphibious ship and Virginia-class nuclear submarines. Instead of two submarines a year, the Navy would buy just one a year during the six-year span. Such a move also would harm General Dynamics Corp., which divides the submarine production with Northrop.

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Many of the cuts in the Air Force and Navy are being proposed to relieve pressure on the Army, which has borne the brunt of expenses -- and wear and tear -- in Iraq. Under the Pentagon's proposed budget plan, the Army could get $25 billion in extra funds over the next six years, but it isn't guaranteed. The Army's centerpiece program, Future Combat Systems, has been delayed to shift funding to current operations.

Under the newly proposed budget cuts, Boeing Co. would be hit by $5 billion in reductions for missile defense. Boeing leads a team of industry partners in the ground-based portion of the system to intercept enemy missiles. The Chicago-based aerospace giant and its joint-venture partner, Textron Inc., also would lose $1.2 billion in their tilt rotor V-22 Osprey aircraft program, the document says.