Firms split on danger of Defense cuts

Boeing, General Dynamics, Raytheon and Northrop Grumman have begun to break ranks with other top-tier defense firms warning that $500 billion in automatic defense cuts would hurt national security and lead to devastating job losses. 

While these companies remain firmly against the cuts, they are not offering doomsday scenarios of what sequestration would mean to their industry in closed-door meetings with senior decision-makers on Capitol Hill, according to an industry source.

They are also sounding a different note in public. 

{mosads}“When you look at this situation, I understand the danger, but there’s also an opportunity. And the smart companies, smart leaders, smart businesspeople know how to take advantage of opportunities,” Raytheon CEO Bill Swanson told Defense News this week. 

“We know how to do this; we know how to do it in a rational way,” Northrop Grumman chief Wes Bush commented last week on implementing the cuts. 

Their tone contrasts with public comments at a congressional hearing last week by the CEOs of Lockheed Martin, EADS North America and Pratt & Whitney, who all offered stark warnings about the cuts. 

Lockheed Martin CEO Bob Stevens said his company could lay off as many as 10,000 workers because of sequestration, and that those layoffs could begin by November. Boeing, in contrast, has said nothing about layoffs that could be implemented before a decision is made on sequestration.

The different messages reflect worries among some companies that they could see their stock values plunge if investors grow panicked over the possible cuts, according to industry and congressional sources. Sounding the alarm over sequestration too loudly could scare off potential investors and result in millions in lost value, the industry source said.

 The problem in balancing opposition to the sequester with the interests of stockholders is something House Armed Services Committee Chairman Buck McKeon (R-Calif.) recognizes, his office said. But McKeon, who is pushing the administration to stop the cuts, is unconcerned. 

“This is the dynamic that sequestration has put the companies in,” committee spokesman Claude Chafin said. 

Boeing spokesman Dan Beck on Wednesday vehemently denied the company was backing off its anti-sequestration stance in any way. 

“Boeing strongly urges elimination of both defense and non-defense sequestration within the context of a balanced agreement that addresses the broader fiscal issues facing the nation,” he said in a statement to The Hill. 

Beck declined to comment on the issue of early termination notices, saying it was “too early for us to speculate on what deep defense cuts might mean for individual programs or the employees and facilities supporting them.” 

Northrop Grumman spokesman Randy Belote reiterated that point, saying defense cuts under sequestration would lead to “serious negative consequences for national security, the defense industrial base, and our shareholders … and all of the communities that rely on the defense industrial base.”

He said there is no question that if sequestration goes forward, it will hurt his company’s bottom line. 

“We expect that as currently provided … sequestration would result in lower revenues, profits and cash flows for our company,” Belote said. 

General Dynamic and Raytheon did not respond to requests for comment by press time.

The $500 billion in cuts to the Pentagon were triggered by last summer’s deal to raise the debt ceiling. 

That deal created a supercommittee of lawmakers charged with reaching an agreement to cut the deficit. 

Sequestration — a process of cutting $500 billion in defense spending and $600 billion in non-defense discretionary spending — was supposed to be the Sword of Damocles that ensured the supercommittee reached a deal. The defense cuts, in particular, were seen as so politically untenable they would force Republicans and Democrats to reach a deal. 

Despite the threat, the supercommittee failed, dropping the sword even closer to valuable federal contracts prized by defense firms, which ever since have been pressuring lawmakers and the administration to reach a new deal to replace sequestration.  

“Some of them have done a good job in making their case,” acknowledged Sen. Tom Carper (D-Del.). Senate Armed Services Committee chairman Carl Levin (D-Mich.), said the industry push has sparked more informal conversations among lawmakers on potential deals to avoid sequestration. 

But there is a fear that the different messages could make it easier for Congress to allow sequestration to go forward, particularly since Democrats and Republicans remain at an impasse over using more tax revenue as a replacement. 

“It is going to be a big lift” to get a deal done, one industry source acknowledged.