Deep cuts in DOD budget

WASHINGTON (AP) — cproposed budget would cut back some of the industry's largest deals, from a big upgrade of Army fighting units to contracts for new cargo planes and stealth destroyers.

Gates said Monday the Pentagon's weapons strategy will focus on equipment that can be used against the insurgencies and irregular threats faced in places like Afghanistan, rather than older programs designed for conventional wars. He also expressed skepticism over some programs with newer, yet unproven technology, like elements of the plan to build a shield from missile attacks.

For the defense sector, which in recent years has posted big profits from a rapid run-up in military spending, the new focus was a mixed message. Big programs appear to be in jeopardy, but others may be built up under Gates' plan.

"This budget represents an opportunity, one of those rare chances to match virtue to necessity, and ruthlessly separate appetites from real requirements," Gates said of his $534 billion spending plan for the 2010 fiscal year.

Many defense stocks jumped Monday even as the broader market fell. Shares of Lockheed Martin Corp. and Northrop Grumman Corp. each rose nearly 9 percent. Analysts said the big gains, which occurred as Gates made his early afternoon speech, were likely because the budget cuts were not as bad as some investors had anticipated.

"People were fearful there was some sort of Armageddon headed for the defense budget," said Carter Copeland of Barclay's Capital.

But some companies would lose big programs, like Lockheed Martin's contract to build a new helicopter for the president, which at $13 billion is way over budget and behind schedule. General Dynamics Corp. could lose out if Gates' plan to cut armored vehicles from the Army's Future Combat Systems modernization program goes through.

Other contractors would see programs halted short of their hopes:

—Boeing would not make any more C-17 cargo planes and saw its missile defense plans pared back as Gates seeks to trim $1.4 billion from the overall missile shield program.

—Lockheed Martin would stop at 187 F-22 fighter jets priced at $140 million each.

—Northrop Grumman and General Dynamics would not make more than three of the new DDG-1000 destroyers for the Navy.

Programs in development also would be scrapped, like plans to build a new search-and-rescue helicopter sought by Boeing, Lockheed and United Technologies Corp. Lockheed and Boeing's competition for the $26 billion transformational satellite, known as TSAT, also will be ended.

While Gates' plan includes plenty of cuts, analysts say it also provides new opportunities for the defense companies.

"The contractors will adapt," said James McAleese, a defense industry analyst.

Lockheed's F-35 Joint Strike Fighter program would be accelerated as the F-22 production line ends. Gates said he would want two more satellites made by Lockheed even though TSAT would be dropped. The Navy would buy more of General Dynamics' and Lockheed's littoral combat warships that operate close to shore.

Other potential gains include:

—Boeing and Northrop again having the chance to bid on the long-delayed $35 billion Air Force refueling plane contract, which Gates wants to reopen this summer.

—Helicopter makers like Sikorsky getting a chance to build the new Marine One presidential helicopter if Lockheed loses it.

—The Army still needs the tanks and armored vehicles General Dynamics makes for the service's Future Combat Systems program.

General Dynamics Kendall Pease would not comment on Gates' budget because he had not yet seen details, but said "there is a page two of everything."

And the budget still has to be approved by Congress. Some lawmakers noted Monday that the Pentagon proposals are just a first step in drafting a final spending plan for the next fiscal year. Many of the proposed cuts, like ending the F-22, are sure to face stiff resistance on Capitol Hill.

"The buck stops with Congress," said Ike Skelton, D-Mo., chairman of the House Armed Services Committee.

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AP Business Writer Stephen Singer in Hartford contributed to this report.

Copyright 2009 The Associated Press.