28 janvier 2021 | International, Aérospatial, Naval, Terrestre, C4ISR, Sécurité

Opinion: Are Flat Pentagon Budgets The New Up Or The New Down?

Byron Callan January 26, 2021

The Biden administration probably will not unveil an outyear spending plan for the Defense Department until the late spring of 2021 at the earliest, and more likely it will come out with the fiscal 2023 budget submission in February 2022. The administration should, however, be commenting on some of the bigger changes as different reviews and assessments are completed before that budget plan is released.

Consensus now is that Pentagon spending will be flat at least in the first term of the Biden administration, though analysts are not clear on what this means. Will the Pentagon's budget be unchanged from the level that was appropriated for fiscal 2021? Will it be flat in inflation-adjusted terms, which means it would rise at 2% annually in current dollars? Or will the budget be flat in current dollars, which would entail a roughly 2% annual decline in Pentagon purchasing power, assuming inflation is 2%? Each would have different outcomes for the spending that would flow to contractors.

Defense optimists could argue that flat budgets historically have not lasted too long. There were periods in which budgets were flat over 2-4 years annually in the late 1950s, early 1960s and mid-1990s. Flat periods, however, were succeeded by growth—usually because of a crisis or a new military contingency.

No one has a working crystal ball that will show what is ahead for the 2020s. There are reasons to believe, however, that the 2020s are different. Although interest rates are at historic lows, the ratio of U.S. debt to GDP is at levels seen during World War II. There is pent-up demand for non-defense discretionary spending—notably for infrastructure, and an aging U.S. population will likely demand more health care and other “social” spending. “Endless wars” in the Middle East may temper Americans' willingness to engage in new overseas missions, unless a major provocation occurs that is akin to the 9/11 attacks. The flat budget period could last longer than the post-World War II era suggests.

Is “flat” good for contractors? That depends. Markets started to digest that U.S. defense spending was flattening in 2020. The largest U.S. defense contractors underperformed the S&P 500 in 2020 and are doing so again in the first days of 2021. The initial market verdict is that flat is not good.

The assessment might be true, but it is going to depend on two factors: how the Pentagon reallocates resources in a flat budget environment and how contractors change their strategies and portfolios.

A flat top-line defense budget could be positive if the Pentagon can successfully cut military personnel and operations and maintenance (O&M) spending. Both are tall tasks. Winding down operations in Afghanistan and the Middle East is not going to free up significant troop numbers, and in any event, both are apt to exert gravitational pulls from which the U.S. cannot easily break free. Global security risks are not going to allow the sort of force structure cuts that occurred at the end of the Cold War and the Korean and Vietnam wars. Readiness and training also will remain a priority in this environment.

Spending on military personnel and O&M that keeps pace with inflation may place even more pressure on investment. If those accounts grow at 1-2% annually, in a flat top-line period, that will put even more pressure on investment. Still, while there has been no indication so far, it is conceivable that the Biden administration will propose reductions in force structure and will attack O&M costs with more vigor. It will take 1-2 years at least to realize those savings, but they could be applied to modernize a smaller military.

For a number of years, the Pentagon attempted to retire older “legacy” weapon systems in order to fund new investment, but Congress has stymied efforts to muster out older Navy cruisers, aircraft carrier refueling systems and aircraft such as the A-10. The Defense Department could renew this line of attack, but it may be reminded of the old adage that repeating the same thing over and over and expecting a different outcome is the definition of insanity. The Pentagon will have to change its approach here by offering more incentives to states and districts that could be affected by the elimination of squadrons or units, and it has to be more forceful in confronting contractors whose net interests are harmed by such moves.

A final thought is how contractors' strategies might change. In 2020 and so far in 2021, outperformance was evidenced by small-to-midsize contractors that appeared better aligned with Pentagon investment priorities in artificial intelligence, autonomy, supply chain resilience and low-cost weapons. The largest contractors may be able to unlock value in a flat top-line environment if they can spin off segments that are stagnant or declining. Sprawling program portfolios are apt to perform more in line with market growth rates, and that is not a recipe for superior performance.

https://aviationweek.com/defense-space/budget-policy-operations/opinion-are-flat-pentagon-budgets-new-or-new-down

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2 décembre 2020 | International, Terrestre

US clears weapon sales for Saudi Arabia, Lebanon, Croatia, Canada, Brazil and South Korea
By: Aaron Mehta WASHINGTON — The U.S. State Department on Tuesday cleared six Foreign Military Sales cases, potentially worth a combined total of $1.55 billion. The six cases, spread across South Korea, Saudi Arabia, Brazil, Croatia, Lebanon and Canada, were announced on the website of the Defense Security Cooperation Agency. DSCA announcements mean that the State Department has decided the potential FMS cases meet its standards, but this does not guarantee the sales will happen in their announced forms. Once approved by Congress, the foreign customer begins to negotiate on price and quantity, both of which can change during the final negotiations. Here are the details on each case: Croatia: The largest dollar value of the announced FMS cases comes from Croatia, which seeks to spend $757 million on refurbishing its 76 M2A2 Bradley Infantry Fighting Vehicles. The NATO ally operates older models dating to Operation Desert Storm, and is looking to upgrade capabilities. In addition to maintenance, upgraded radios, armor and simulators, the package includes 84 M240 machine guns, 1,103 TOW 2A radio frequency missiles, 100 TOW 2B radio frequency missiles and 500 TOW bunker buster radio frequency missiles. Work will primarily be done by BAE Systems' York, Pennsylvania, facility as well as Raytheon Missile Systems in Tucson, Arizona. Canada: America's northern neighbor wants to upgrade its fleet of five C-17 transport aircraft to the tune of $275 million. The package includes “aircraft hardware and software modification and support; software delivery and support; ground handling equipment; component, parts and accessories; GPS receivers; alternative mission equipment; publications and technical documentation; contractor logistics support and Globemaster III Sustainment Program (G3) participation; other U.S. Government and contractor engineering, technical, and logistical support services; and related elements of program and logistical support,” according to the DSCA announcement. Boeing would perform the work. Saudi Arabia: The most unique of the six cases, the Saudi request involved $350 million in support services for five years, covered through the U.S. Military Training Mission to Saudi Arabia, or USMTM, located in Riyadh — an office of roughly 330 service members and U.S. contractors who help train the Saudi military. Services included in the package are “pay and allowances for U.S. Military, U.S. Government, and Foreign National staff members; USMTM communications support costs; local contracting costs; construction and renovation costs of housing area; transportation costs; U.S. Mail services support costs; dependent education (grades K through 12); administrative costs; temporary duty costs for USMTM personnel; Value Added Taxes (VAT) assessed by Saudi Arabia; and future transition costs to move USMTM” to a proposed new housing location in Saudi Arabia, per DSCA. Brazil: The government in Brazil wants to spend $70 million on 22 MK 54 conversion kits, which would convert existing MK 46 Mod 5 A(S) torpedoes to MK 54 Mod 0 lightweight torpedoes. Those would be equipped on the country's fleet of Sikorsky S-70B Seahawk helicopters and its surface ships. Work would be performed at Raytheon Integrated Defense System's Portsmouth, Rhode Island, facility. Lebanon: The country seeks to spend $55.5 million to procure 300 M1152 High Mobility Multipurpose Wheeled Vehicles in two tranches of 150 each. Beirut currently operates more than 1,000 HMMWVs of various designs, according to the DSCA, which are primarily used to “counter violent extremist organizations and to secure its border.” The primary contractor would be American General, with work happening in its South Bend, Indiana, facility. This is the first FMS case cleared for Lebanon since the start of the Trump administration. South Korea: A frequent customer of U.S. weapons, South Korea now seeks to purchase two MK 15 MOD 25 Phalanx Close-In Weapons System Block 1B Baseline 2 systems for $39 million. This anti-missile defense weapon for ships would come along with training and 4,000 rounds. According to DSCA, Seoul plans to use the systems aboard its first KDX III Batch II-class ship “to provide it with effective means of detecting and defending itself against incoming airborne threats.” The primary contractor is Raytheon, with work to be done at its be Louisville, Kentucky, location. All told, the six notifications mean the Trump administration has cleared 23 FMS cases since Oct. 1, the start of fiscal 2021, with an estimated price tag of $58.75 billion. However, that number is inflated by the inclusion of two pre-cleared cases for Finland's fighter competition; while Finland may pick either the F-35 (for $12.5 billion) or the F/A-18 (for $14.7 billion), it would only select one, and may still choose a European bidder instead. https://www.defensenews.com/global/mideast-africa/2020/12/01/us-clears-weapon-sales-for-saudi-arabia-lebanon-croatia-canada-brazil-and-south-korea
25 juin 2020 | International, Naval

Navy buys two used MQ-9A Reaper drones
Nathan Strout The Navy has purchased its first two MQ-9A Reaper drones, awarding General Atomics Aeronautical Systems nearly $27 million on June 22 for the unmanned air systems and associated ground control equipment. The MQ-9A Reaper is a multimission, medium-altitude, long-endurance aircraft that is remotely piloted. According to the June 22 contract announcement, the Reapers will be used for intelligence, reconnaissance and surveillance missions as well as persistent strike efforts. The contract procures two MQ-9A Reapers, one dual-control mobile ground control station, one modular data center and one mobile ground control station. This is the first time the Navy has purchased Reapers, but it's already been using the unmanned aircraft overseas. According to fiscal 2020 fiscal 2021 budget documents, the two MQ-9A aircraft the Navy is purchasing have been used by the Marine Corps in a contractor-operated, contractor-owned arrangement since September 2018 to provide intelligence, surveillance and reconnaissance support to Task Force Southwest in Afghanistan. Because they are used, the Reapers will cost less than brand-new systems. The FY21 budget request estimates the cost of each system as being just under $12 million. Work is expected to be completed by December 2020. https://www.c4isrnet.com/unmanned/2020/06/24/navy-buys-two-used-mq-9a-reapers/
17 juin 2020 | International, Aérospatial, Naval, Terrestre, C4ISR, Sécurité

Les ministres européens de la Défense appellent à plus de coopération
Réunis à Bruxelles, les ministres de la Défense européens ont appelé mardi 16 juin à un redémarrage rapide des missions de défense et de sécurité communes momentanément interrompues par la crise du Covid. Ils appellent à aller de l'avant dans les opérations, à renforcer le fonds européen de défense, à aller vers un outil de financement pour pouvoir équiper les armées entraînées comme au Mali et enfin à affermir la base industrielle et technologique de défense européenne afin de réduire toute dépendance dans les secteurs critiques. « Le terme d'autonomie stratégique, longtemps tabou, est désormais accepté de tous, même si tous les pays n'en ont pas la même interprétation de peur d'opposer leur appartenance à l'Otan et à l'Union européenne », explique un membre de l'entourage de la ministre de la Défense Florence Parly aux Echos. Les Echos du 16 juin 2020

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