WASHINGTON (Reuters) - Mounting budget pressures worsened by the global financial crisis are giving new urgency to calls for the Pentagon and its top suppliers to rein in the runaway costs of nearly every major arms program.
Top corporate executives, military officials and analysts told the Reuters Aerospace and Defense Summit this week that seven years of sharp growth in U.S. defense spending were ending and future budgets would flatten out at a high level.
But they said the incoming administration of President-elect Barack Obama had already emphasized its intent to scrutinize major weapons programs closely and make reforms.
Defense Secretary Robert Gates told U.S. troops in Kyrgyzstan last week there would be no major cuts in the defense budget for the "next year or two," but "the significant increases that we've seen in recent years are likely to come to a screeching halt."
Gates, asked to stay on by Obama, said the Pentagon would clearly face "tougher expectations of us in terms of how we spend what we get."
Jim Albaugh, head of Boeing Co's (BA.N: Quote, Profile, Research, Stock Buzz) $30 billion-plus a year defense business, said some of Boeing's biggest programs, including the U.S. Army's $160 billion Future Combat Systems modernization and missile defense, would face tough reviews.
Boeing's challenge was to ensure its programs remained healthy and on schedule, since troubled programs would be particularly vulnerable to cuts, he told the summit.
To hit its growth target, Boeing needs to extend current production programs, win contracts to replace Boeing weapons already in service and increase international sales, while reducing its own cost structures and offering the Pentagon cheaper alternatives to new programs, Albaugh said.
BRIDGING TO NEW
For instance, Boeing is offering the Navy more F-18 fighter jets for less than $50 million a piece to help bridge an expected "fighter gap" on its aircraft carriers, especially if work on the new F-35 Joint Strike Fighter runs into delays.
Similarly, the Air Force could buy more of the communications satellites already being built instead of launching the costly new Transformational Satellite (TSAT) program, Albaugh said.
"We're working very hard to drive down our cost of doing business," he said. "We're looking at: are there ways to provide our customer an 80-percent solution at a much lower cost?"
Robert Stevens, chief executive of Lockheed Martin Corp (LMT.N: Quote, Profile, Research, Stock Buzz), the Pentagon's No. 1 supplier, said affordability would take on even more importance for contractors in coming years, but military officials also needed to stop adding requirements to weapons systems once they began.
Tom Captain, who heads aerospace and defense analysis for Deloitte LLP, said cost overruns on the Pentagon's biggest weapons programs totaled $295 billion or 26 percent since 1993. If current trends continued, major weapons programs would be 46 percent over budget by 2018, he said.
"The big squeeze means that we can't pay for everything that we want or need," Captain told the summit. He said the worldwide economic crisis would exacerbate pressures already facing the Pentagon, including the high cost of adding 92,000 troops and paying for their health care. Continued...
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