US defence sector looks nervously at budget cuts

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Military aircraft programmes have emerged as a prime target in a political deal to raise the US debt ceiling, at the expense of finding at least $2 trillion in spending cuts over the next 10 years.

Moodys Investors Service has warned in a new report that the Lockheed Martin F-35 Joint Strike Fighter and Bell Boeing V-22 Osprey are among the most vulnerable budget-cutting targets.

Moodys' report echoes austerity proposals published over the last year by a diverse group of think-tanks and policy commissions, including the White House-sponsored National Commission on Fiscal Reform and Responsibility.

lockheed martin f-35 jsf pair, lockheed martin
 © Lockheed Martin
 A new report states that the Lockheed Martin F-35 and the Bell Boeing V-22 Osprey are among the most vulnerable budget-cutting targets

A review of eight such proposals issued since last June reveals that only the F-35 and V-22 were singled out for cuts among military aviation programmes.

Only one proposal issued by the Sustainable Defense Task Force suggested also deferring the KC-X tanker programme.

The V-22 may be in a particularly vulnerable position. A five-year production contract expires in January 2013, allowing the Department of Defense the option of signing a new multi-year deal, converting the contract to annualised awards or even cancelling the programme.

It is likely, however, that more aviation programmes than just the F-35 and V-22 could face budget cutbacks if the most severe scenario created by the debt ceiling deal is implemented.

That deal creates two rounds of budget cuts - the first is a set of mandatory spending caps on discretionary spending, with the DoD's budget slashed by $330 billion over 10 years, according to analysis by the Centre for Strategic and Budgetary Affairs (CSBA).

Those cuts had been anticipated by the DoD's ongoing strategic review, said Secretary of Defense Leon Panetta.

Earlier this year, the DoD had already adopted an "efficiencies initiative" aimed at slashing costs by $178 billion over the next five years.

But the real concern for Panetta and defence contractors alike is if the second round of budget cuts is implemented.

v-22 osprey, usaf
 © USAF

If that round fails to yield at least $1.2 trillion in spending cuts by January 2013, the budget is automatically reduced by that amount over 10 years.

The so-called "sequester mechanism", if adopted, would wipe more than $900 billion off the defence budget over 10 years - a 16% cut compared to current plans, according to CSBA.

In fiscal year 2013 alone, the base defence budget would plummet by $99 billion to $472 billion.

Some defence experts have observed that such a cut merely reduces the base defence budget to the spending levels of four years ago.

"I do not recall anyone declaring our national security being 'imperilled' at that spending level in 2007," said Winslow Wheeler, director of the Straus Military Reform Project of the Centre for Defense Information.

However, top DoD officials are less sanguine about the effects if the trigger mechanism is enacted.

Panetta, a former White House budget director, called it a "doomsday mechanism".

"If it happened and God willing, that would not be the case but if it did happen, it would result in a further round of very dangerous cuts across the board, defence cuts that I believe would do real damage to our security," Panetta said.

The sequester mechanism is so harsh that it is seldom used. A similar device was embedded in previous deficit-slashing legislation in the mid-1980s, but lawmakers were never forced to trigger the sequester mechanism.

On the other hand, political dysfunction in Congress now runs high, with a series of forced crises required to pass a budget and raise the debt ceiling.

The CSBA analysis recommends that the DoD start contingency planning for the possibility that the sequester mechanism is triggered in January 2013.

Even if Panetta's worst-case scenario is avoided, the DoD still faces even deeper spending cuts if the joint committee can strike a deal on at least $1.2 trillion in additional budget reductions.

Most likely to be spared, according to Moody's, is the unmanned aircraft systems market, which could even be accelerated by the spending reductions.

For all programmes, the key to survival will be avoiding cost increases and schedule delays, the research service added.