Monday, December 12, 2016

Trump Attack on Lockheed Martin Foreshadows War on Defense Industry

Donald Trump on Monday widened his attack on defense contractors, slamming Lockheed Martin’s F-35 fighter jet program as too expensive as aides to the president-elect said he intends to keep pushing to cut the costs of military hardware.

Trump’s latest Twitter broadside sent defense shares tumbling and fanned concerns that the incoming administration will reduce defense contractors’ profit margins and cut broader federal spending, threatening U.S. factory jobs even as Trump promises to boost manufacturing employment.

“The F-35 program and cost is out of control,” Trump said on Twitter, echoing campaign promises to cut waste in federal spending. “Billions of dollars can and will be saved on military (and other) purchases after January 20th.”

Last week, Trump targeted Boeing with tweets for “out of control” costs on new Air Force One planes, urging the federal government to “Cancel order!”

The new administration’s focus is likely to be “wide-reaching and impact all of government as we look to come up with better deals,” Trump transition spokesman Jason Miller said. “We’re going to look for opportunities to go back through and make sure that we’re not getting taken advantage of.”

FILE - Senate Armed Services Committee Chairman Sen. John McCain, R-Ariz. speaks on Capitol Hill in Washington.

FILE – Senate Armed Services Committee Chairman Sen. John McCain, R-Ariz. speaks on Capitol Hill in Washington.

Trump’s F-35 tweet drew support from U.S. Senate Armed Services Committee Chairman John McCain, who has voiced support for the fighter jet in the past. While a president cannot cancel a program after funds have been allocated, it can purchase less.

“He can reduce the buy over time, next year, as we look at it again,” McCain told Reuters.

But Trump’s off-the-cuff remarks bristled others in Congress. Senator Richard Blumenthal, a Democrat from Connecticut, home to F-35 engine maker Pratt & Whitney, said the program supports 2,000 Pratt jobs and thousands more at suppliers.

“The suggestion that costs are out of control is just plain wrong,” he said. Trump should “learn more about the facts” before discussing “arbitrary cuts in the program,” he added. “He’s the president-elect. What he says matters.”

Lockheed shares fell 2.5 percent after being down 5.4 percent earlier. Shares of General Dynamics, Northrop Grumman, BAE and Raytheon also fell, while United Technologies and Boeing shares were slightly higher.

‘Acquisition Malpractice’

The F-35 has been dogged by problems, with the Pentagon’s chief arms buyer once describing as “acquisition malpractice” the decision to produce jets before completing development.

That led to retrofits and helped escalate costs to an estimated $400 billion, prompting the F-35 to be described as the most expensive weapon system in history.

FILE - An aerial view of the Pentagon building in Washington, June 15, 2005.

FILE – An aerial view of the Pentagon building in Washington, June 15, 2005.

The Pentagon’s chief weapons tester has continued to criticize it, but the jets are now in use by the U.S. Marine Corps and Air Force, and by six countries: Australia, Britain, Norway, Italy, the Netherlands and Israel. Japan took delivery of its first jet last week, according to a program spokesman.

Lockheed’s F-35 program leader, Jeff Babione, said Monday the company had invested millions to reduce the jet’s price by 60 percent from original estimates.

“We project it to be about $85 million in the 2019 or 2020 timeframe,” he told reporters in Israel.

The Pentagon is now paying about $102 million each for the conventional takeoff A-model, according to sources familiar with the program. The savings reflect larger quantities and the ironing out of technical issues.

As a practical matter, it was unlikely the U.S. would unwind such a large program involving contractors in nearly every U.S. state and eight partner nations, Baird Equity Research analyst Peter Arment wrote in a note Monday.

“But what is likely … is the message to the industry of potentially more risk-sharing on costs,” he said. “This is potentially a new paradigm for the industry.”

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