Budgetary crises, instability, and conflict were the dominant defence sector topics in 2011, and the coming year is unlikely to provide a deviation from these key themes. With many Western nations in recession or at best experiencing limited and fragile growth, the challenge of balancing the books while meeting operational demands at home and overseas is immense.
Tough choices have already been made in some nations, where governments have chosen to retire aircraft early, reduce the level of training performed or delay ordering much-needed replacements. Reflecting a “Keep calm and carry on” spirit, the UK’s armed forces rebounded from savage spending cuts announced just months before to sustain major combat operations over Afghanistan and Libya through 2011. But with worse equipment reductions to potentially to follow soon, it must be seen whether such a feat could be managed again.
London is by no means alone in facing such issues, with the knock-on effects of global economic turmoil now starting to hit home in even the world’s lone military superpower.
Painful decisions delayed during 2011 will come back to haunt the USA’s aerospace and defence industry over the next 12 months, with Washington’s fiscal choices to become even more difficult and its room to manoeuvre tighter still.
US defence spending peaked in 2010 at $691 billion. After finally being passed in April, the fiscal year 2011 budget came in at slightly below $690 billion. The latter figure was a soft plateau at the summit of the budget chart, but included such painful cuts as the deferral of more than 120 Lockheed Martin F-35 combat aircraft beyond the next five years of production, and the cancellation of the aircraft’s General Electric/Rolls-Royce F136 alternate engine. How much more painful will it be when the budgetary plateau yields to a fiscal cliff?
In February, US President Barack Obama’s Administration proposed a $671 billion defence budget for the fiscal year 2012, under a set of vastly different assumptions. In that halcyon moment, American and European economic forecasts perceived a mighty recovery just starting, but in the recessionary atmosphere of the current moment, the defence budget outlook has grown darker. Industry officials now hope for a best-case scenario where the defence budget would decline only to $645 billion, although this could drop lower still to about $636 billion: a potential decline of $54 billion from the peak only two years before.
Of more concern is the outlook for the fiscal year 2013 budget, which the Obama Administration will unveil in February. The best outcome under current estimates is a $609 billion allocation, or down by $82 billion from the 2010 peak. However, the proposed Budget Control Act, if enacted, could shrink the sum to as low as $555 billion, meaning that in two years the Department of Defense (DoD) budget could be chopped by $134 billion, or 19%.
For perspective, a similar cut in Europe would nearly wipe out the combined defence spending in 2010 of Germany, Italy and the UK, according to the Stockholm International Peace Research Institute.
Today, the US military has 345,000 troops deployed overseas. That number will decline as the withdrawal of forces from Iraq is completed, but the number of troops in Afghanistan will not drop significantly through 2014. Pulling troops out of other locations, such as the Sinai desert and the Balkans, also seems unlikely as viable options.
To reduce expenses in the short term, the US military will be forced to take aim at the personnel and procurement accounts.
The US Marine Corps, for example, has argued that it can accept a reduction from 202,000 to about 185,000 troops, but its leadership is concerned there are proposals to slash the force structure to 150,000. There are also proposals to freeze salaries of military troops and DoD civilians for two years.
For the defence industry, the question remains how procurement accounts will be asked to contribute to the planned cuts, and, of course, which ones. The demand for helicopters and intelligence-gathering aircraft is only likely to increase as troop withdrawals from Afghanistan make their services more critical. Two targets for spending cuts identified by multiple budget reviews are the F-35 and the Bell Boeing MV-22B. There have been calls to eliminate one of the three F-35 variants. In October, Gen Martin Dempsey, chairman of the US Joint Chiefs of Staff, told Congress the cost of developing all three variants was unaffordable, but later retracted his statement. So far, programme officials have only warned there will be further cuts to the production ramp increase as the development phase continues.
The MV-22 also faces a reduction of orders over the next five years. The USMC originally planned to buy 124 from FY2013-17, but that number has already been whittled down to 98 and could fall further.
Some other parts of the world have dodged the economic woes of their trading partners, with China and India continuing to significantly strengthen their militaries. Although described as a training asset, Beijing’s sea trials with the Shi Lang aircraft carrier (acquired from Russian stocks) will have many interested watchers during 2012, as will continued test flights of the Chengdu J-20 fighter.
If its schedule holds true, India could pick a winner for its 126-unit medium multi-role combat aircraft deal before 2011 ends, but with the contest having had many twists and turns, the path to signing a contract for the Dassault Rafale or Eurofighter Typhoon could still become complicated. Likewise, the Swiss government’s aim to wrap up a deal for 22 Saab Gripen NG fighters within the next few months may also encounter severe turbulence from political opponents and a potential public referendum.
However, if Japan and Brazil follow suit with also announcing selections, as has been suggested, 2012 could prove a bumper year for new fighter sales after a long period of anticipation.
The unmanned system sector is also certain to grab headlines, with two ambitious European unmanned combat air vehicle demonstrators set to get airborne: BAE Systems’ Taranis and the Dassault-led Neuron.
A separate planned collaboration between the companies under an Anglo-French defence treaty will also be put to the test, with bilateral resolve to challenged by the meltdown in relations between London and Paris linked to the Eurozone crisis.
After a busy 2011, many militaries will be hoping that the unexpected challenge of mounting a multinational campaign to protect civilians in Libya – a mission which ultimately lasted for eight months – will not have to be repeated in Syria, where the consequences and opposition could be much more severe.
Many manufacturers will also be tightening their purse strings over the coming year, for example by sending fewer executives and equipment to overseas events. Northrop Grumman has already withdrawn from the UK’s Farnborough air show, and any hopes of seeing a Lockheed F-35 there will be dashed by the programme’s demanding test schedule on the other side of the Atlantic.