Boeing is paring its workforce, consolidating facilities and cutting overhead to prepare for the “distinct possibility” that U.S. defense spending will be cut by a total of $1 trillion over the next decade, the head of the company’s defense business said May 15.
The defense division has already shed about 8,000 of 60,000 jobs over the past 18 months, but most of those people had shifted to positions in the commercial sector, where revenues are still rising, Dennis Muilenburg, president and chief executive officer of Boeing Defense, Space and Security, said on a webcast of the company’s annual investor conference.
He said Boeing’s defense business has already cut the number of executives by 15% and lowered overhead costs by 20% as part of a drive to improve productivity.
That should allow Boeing’s defense business to maintain profit margins in the high single-digit range, he said, even if $500 billion in further budget cuts are piled on top of $487 billion in cuts that are already set to take effect in fiscal 2013 and the following nine years.
Muilenburg said the Obama administration’s fiscal 2013 budget plan cut Pentagon programs by 13%, but Boeing programs were cut by only about 4%. If $500 billion in additional spending cuts took effect in January as planned, Boeing expected to see about double that impact, he said.
“A $1 trillion defense-budget reduction in the U.S. over the next 10 years is a distinct possibility, and we are sizing our cost structure actively to prepare ourselves for such a scenario,” he said, adding that it was more important than ever for the company to deliver weapons programs on time and on cost.
PREPARING FOR WORST-CASE SCENARIO
Boeing Chief Executive Jim McNerney said earlier in the day that the company still believed lawmakers could take action to avert the additional spending cuts known as “sequestration,” but felt it was prudent to prepare for them just in case.
Boeing and other U.S. weapons makers are bracing for the fallout from further, automatic spending cuts that are due to take effect in January 2013 after Congress failed last year to find $1.2 trillion in other deficit-reducing savings.
In January, Boeing said it was closing its Wichita, Kansas, plant, eliminating more than 2,100 jobs.
Over 2,300 workers in the aerospace and defense sector lost their jobs in April, bringing the total for the year to date to 10,102, according to the most recent data from Challenger, Christmas & Gray, a Chicago-based consulting firm that helps displaced workers find new positions.
Muilenburg cited a “general slowdown and murkiness” in the government budget process, noting that some contracting officers were holding off on orders until the future outlook was clearer, while others were accelerating orders while they still could.
“In the face of all of that uncertainty, to manage our risk as a business, our position is to assume that sequester will happen ... and size our cost structure to accommodate that so we can meet our margins,” Muilenburg said.
He noted that Boeing, which reported a profit margin of 9 percent in the first quarter, found its margins under pressure every time it negotiated a fresh multiyear contract with the government.
Overall, he said Boeing was well positioned in areas such as unmanned vehicles, cyber security and military satellites that were expected to see continued growth and investment even as the total level of military spending declined.
He said Boeing defense had a backlog of $72 billion at the end of March.
Last week, the U.S. House of Representatives passed a Republican measure to halt the automatic cuts by cutting social safety net programs instead.
No Democrats supported the measure, which would be unlikely to pass the Democratic-controlled Senate and is facing a veto threat from President Barack Obama.
Defense Secretary Leon Panetta warned at a news conference that Congress was headed toward a stalemate on the issue that could result in a failure to stop the looming cuts....
What's the worse case scenario ..... at this rate I can see us buying all of our military equipment from China. LOL
By Philip Ewing Friday,
Posted in Land
As you’ve read here so many times, today’s official line from the Army is: We get it.
All that stuff you need to do to successfully buy complex weapons and equipment? They’re going to do it: Control requirements. Play hardball with vendors. Test before buying — have you heard about the fantastic Network Integration Evaluation we do out west? Oh, you have.
Anyway, what else — oh yeah: Go evolutionary, not revolutionary. Don’t be afraid to pull the plug. Make “tough choices.” Say to the general: General, y’know what, sir? This is jacked up and I don’t think we should do it.
In short, the Army acquisitions we used to know were gone. Going forward, it was going to be a new ballgame, with a fresh set of test cases with which its leaders in and out of uniform were going to prove their new skills: Network modernization. The Ground Combat Vehicle. The Joint Light Tactical Vehicle. And eventually, so far down the chart you almost got to your own doodles in the margin — a new helicopter for the long-suffering aviators.
But defense commentator Loren Thompson, an industry advocate with no great love for the Army, does not buy today’s leaders’ rosy outlook about their new chapter. In a column for AOL Defense, he took direct aim at the prospects for the Army to redeem itself with its next set of high profile programs:
[W]ith the Army now extricated from one conflict and beginning to wind down its role in the second, service leaders need to give more thought to how they will modernize their fleet of combat vehicles and weapons systems. Unfortunately, there isn’t much evidence they have learned from past mistakes.
Their program to buy a next-generation troop carrier called the Ground Combat Vehicle is certain to falter, because it proposes to counter hundred-dollar IEDs with super-heavy vehicles that will cost over $10 million each. Their pricey next-generation jeep, the Joint Light Tactical Vehicle, has recently suffered a near-death experience on Capitol Hill. And a plan to modernize battlefield communication networks — supposedly the service’s top modernization priority — is coming unraveled due to the meltdown of a joint radio architecture and pressure from policymakers to reprogram half the funding for the backbone of the warfighter network.
So there is reason to suspect the Army’s latest modernization initiatives won’t fare much better than earlier projects did. You’d think service leaders would draw the obvious conclusion and hedge their bets by preserving the handful of programs that are going well, but in fact they are proposing to shut down much of the Army’s remaining industrial base in order to generate money for new initiatives.
Ah yes, there it is — the other shoe dropping. Thompson is miffed at the Army’s desire to idle the manufacturing lines for its Bradley Fighting Vehicle and M1 Abrams tanks, as we’ve talked about here before. Given that we know the Army will never get this right, he argues, why not at least keep doing what it knows works now and get the maximum benefit? The risk is that it will lose its industrial base forever:
For all the Obama Administration’s talk about revitalizing the manufacturing sector and sustaining a robust defense industrial base, there just isn’t much evidence that military planners give the subject any thought. There always seem to be a dozen more pressing concerns facing Army leaders before the subject of the industrial base comes up. But after a dozen years of bad decisions and mismanagement in modernization programs, the Army has finally brought its supplier community to a point where it could atrophy quickly once spending on overseas conflicts ends. If the service can’t start thinking coherently about what it must have for the future, it may soon find itself unable to obtain much of anything in a timely or affordable fashion.
The Army brass, for its part, thinks it can bring off the stoppages without permanently losing its vendors, and save money to boot. Whatever happens, everyone will be watching....
Americans Favor Military Cuts -- David Axe, The Diplomat