U.S. arms makers emerging hopeful in face of budget cuts

PARIS (Reuters) – The fallout of U.S. defense budget cuts was plain to see at this week’s Paris Airshow in a range of scaled back displays that in the past were packed with a crowd-pleasing array of U.S. military hardware.

Lockheed Martin Corp , whose F-35 radar-evading jet is the biggest weapons program ever, conspicuously left the mockup of the fighter which normally graces Europe’s premier industry meeting at home in favor of a billboard picture.

Yet there was also further evidence of a shift towards previously neglected markets in Asia and the Middle East, where economies and defense budgets are still growing strongly, which the industry says will allow it to weather the downturn.

The talk of the show among its U.S. participants was about how well they seem to be riding out the biggest defense cuts in a generation – and how next year’s federal budget may prove more forgiving than had been feared.

“The other shoe hasn’t dropped yet,” said Tom Captain, head of aerospace and defense at the Deloitte consulting group, told Reuters at the air show. “The question is, will it ever?”

U.S. defense budgets are being cut by hundreds of billions of dollars after more than a decade of strong growth, but the top 20 global defense companies reported only a 1.3 percent drop in combined revenues in 2012.

The uncertainty over revenues at home is taking a toll on investments, but executives also say big backlogs, strong international demand and commercial orders have alleviated the worst effects of the sequestration that kicked in in March.

Some companies like Northrop Grumman Corp skipped the show entirely, a reflection, some argued of the industry’s shift in geographical priorities.

Lockheed Martin Corp , Boeing Co , Raytheon Co and others are rapidly building up offices in countries including Saudi Arabia, Brazil and India, where military spending is increasing.

Lockheed made about 17 percent of its $47 billion of revenue abroad in 2012, or $8 billion, and the company’s senior vice president for corporate strategy and business development, said it will “absolutely” exceed this year’s goal of 20 percent.

“We’re moving much more aggressively in the international domain,” Pat Dewar told Reuters at the airshow. “We’re going global in a much bigger way.

FOCUS SHIFT

Industry executives are growing impatient about the inability of U.S. lawmakers and the Obama administration to resolve their differences over future budget levels but Captain said lawmakers were proceeding with fiscal 2014 budget plans as if further cuts would be avoided.

He said companies specialized in next-generation precision strike and intelligence, surveillance and reconnaissance would perform better in coming years than those that saw big gains from ground vehicle demand in the Iraq and Afghanistan wars.

But Marion Blakey, president of the Aerospace Industries Association, which led an intense, but unsuccessful campaign to avert the $500 billion in across-the-board budget cuts, said many companies were scaling back investments because they still did not know how deep the cuts would finally go.

The first batch of cuts under sequestration took effect on March 1, but many lawmakers and government officials still hope to avert or reduce those planned over the next decade.

“Companies continue to hold back on investment. The uncertainty makes it impossible to move ahead in as aggressive and robust a way as they normally would,” Blakey told Reuters.

Mark DeYoung, chief executive of Alliant Techsystems Inc , said the sequestration cuts and lack of clarity over funding made companies more cautious about investing in new technologies, which could have a rippling effect across the economy, limiting jobs and growth in coming years.

ATK reduced its investment plans by 10 to 15 percent during the most recent planning cycle, and further reductions may follow, depending on what happens this year, DeYoung told Reuters at the air show.

“There’s uncertainty about making investment and having a return on that investment, so it makes you be more cautious,” he said. “As we get through this year and see how sequestration is actually going to be implemented, it may help — or it may make companies feel the need to pull back even further.”

William Swanson, chief executive of Raytheon Co , said he remains focused on things he can control, including delivering weapons on time at the promised cost.

But he can’t hide his frustration about what he considers an unprecedented level of uncertainty about U.S. budget levels.

“Every meeting I have, people want to talk about sequestration. That’s what sucks all the oxygen out of the room,” he said.