Pentagon Aims To Keep Top Aerospace, Defense Firms in Good Health

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WASHINGTON — The top 20 global aerospace and defense companies are in good fiscal health, and the U.S. Defense Department plans to help keep them that way, Pentagon acquisition chief Ashton Carter said.

Wall Street continues to exhibit confidence in the industry, Carter said May 24 at a luncheon held by the U.S. Senate Aerospace Caucus and the Aerospace Industry Association.

Aerospace and defense stocks are trading at levels higher than many other sectors, including global information, automotives, steel, energy, telecoms and information technology systems, he said.

“In looking forward at the five­year earnings-per-share consensus, growth estimates for the top 20 aerospace and defense firms is 11 percent, which is moderate but respectable and augurs well for the future,” Carter said.

The companies also have “a good cash situation,” holding about $52 billion in cash and cash equivalents, he said.

They have about a year-and-a-half of solid backlog, he said, “which is good by industry standards.” Carter said the Defense Department will rely on normal market forces to make the most efficient adjustments to the defense industrial base.

“We will examine all contemplated transactions, because we would not want to see happen to our industrial base what has happened to other sectors of the economy where poor business management, unnecessary leverage and excessively short-term behavior at the expense of long-term health has damaged those industries,” he said. His remarks reiterated themes introduced in previous speeches by him and Defense Secretary Robert Gates.

Having canceled a handful of large weapons programs, the Pentagon is getting to the point where it is left with programs and platforms it wants and needs, Carter said.

“The job then becomes getting those things for the amount of money we’re going to get, and that is where targeting affordability comes in,” he said.

With new starts, the Pentagon will try to build affordability into a program from the outset. Carter cited the Air Force’s new bomber, the Navy’s SSBN-X ballistic missile submarine, the Army’s Ground Combat Vehicle and the new presidential helicopter effort.

With ongoing programs, the Pentagon has fewer options, but it will try to “manage the cost out of them,” Carter said. For example, the F-35 Lightning 2 Joint Strike Fighter, the Pentagon’s most expensive program, needs to be made more affordable, he said. “We cannot afford to start it all over again,” Carter said.

One of the ways to improve affordability is to continue to push competition, he said. This does not always have to mean head-to-head competition, and it does not mean what Gates calls “Washington competition, where everyone wins,” Carter said.

The Pentagon views the second engine for the F-35 as an example of this.

It recently canceled the program, but several lawmakers say they support development of the second engine because it promotes competition.

General Electric and Rolls-Royce said they are willing to spend $100 million to fund the second engine’s development through 2012. The companies hope their engine will eventually have the chance to compete against the Pratt & Whitney F-35 engine, which is now in low-rate initial production.

A May 24 Statement of Administration Policy from the Office of Management and Budget said the president’s senior advisers would recommend a veto “if the final bill presented to the president includes funding or a legislative direction to continue an extra engine program” for the F-35.

Carter said it would cost $480 million to continue the second engine over the next year. “That’s not money that we can spare,” he said.