Boeing Sees ‘High Water Mark’ in Defense Spending

(Bloomberg) -- Boeing Co. is making acquisitions and refreshing older product lines to prepare for what may be a peak for military purchases next year as U.S. President Barack Obama shifts priorities, the company’s top defense executive said.

“It’s possible that 2010 could be the high-water mark as far as defense spending” on new weapons, Jim Albaugh, president of Boeing’s Integrated Defense Systems, said in an interview.

Boeing, the second-largest defense contractor and commercial-plane maker, had four of its main weapons programs pared or canceled in the Pentagon’s 2010 budget proposal last month. Obama and Defense Secretary Robert Gates want to focus on conflicts like those in Afghanistan and Iraq while curtailing programs such as Boeing’s Future Combat Systems for the Army and the F-22 jet, which was designed to fight a Cold War adversary. The military generated 52 percent of Boeing’s $61 billion in revenue last year.

Chicago-based Boeing anticipated a slowdown in traditional defense spending and bought six companies last year to boost offerings of unmanned vehicles, cyber-security systems and logistics, Albaugh said. Boeing also is shifting more work in- house, such as building some electronics instead of buying them, moving away from a model of integrating parts made by suppliers.

“We know that being vertically integrated today makes your programs somewhat less vulnerable in the future,” Albaugh said in yesterday’s interview in New York. The Defense Department became “a little disenchanted” with having private companies oversee integration of all the parts made for weapons systems.

Extending Older Programs

Boeing also is trying to extend older programs, such as by offering a stealth version of its 34-year-old F-15 fighter, and developing other uses for products like the experimental X-45 drone aircraft that was terminated in 2006, Albaugh said.

“It is simply not reasonable to expect a defense budget to continue increasing at the same rate,” Gates told the Senate Armed Services Committee on May 14. The Pentagon is seeking $664 billion for fiscal year 2010 including $130 billion for wars. The base budget of $533.8 billion represents a 2 percent increase when adjusted for inflation, half the average of the previous eight years.

Boeing bought six companies in 2008 including drone-maker Insitu Inc. of Bingen, Washington, and Digital Receiver Technology Inc. of Germantown, Maryland, a maker of wireless communication equipment for the U.S. intelligence services. The value of the deals wasn’t disclosed, and Albaugh declined to identify targets or say how much he might spend this year.

‘Driving Cash’

The planemaker’s cash depletion in the past year, due in part to a strike at the commercial side of the business and higher pension costs, shouldn’t hamper expansion, Albaugh said. Chief Executive Officer Jim McNerney and Chief Financial Officer James Bell are “driving cash pretty hard” and have been supportive of acquisitions, he said.

Boeing lost 49 percent of its market value in the past year, the most among the dozen members of the Standard & Poor’s 500 Aerospace & Defense Index. The company, which trails only Lockheed Martin Corp. in defense, gained 25 cents to $44.62 at 4 p.m. in New York Stock Exchange composite trading.

Boeing’s new vertical-integration approach will be limited because not all of the technologies needed to build a weapon can be brought in-house, said Howard Rubel, an analyst at Jefferies & Co. in New York.

Companies will have to continue to collaborate to deliver the weapons the Pentagon needs, Rubel said. Boeing doesn’t make enough of its own sensors to outfit its airplanes, and will depend on Northrop Grumman Corp. and Raytheon Co. for some of those products such as airborne radar, he said.

‘Gild the Lily’

“They know they’re not in the best shape and it’s hard to see how they can gild the lily when a number of their programs are challenged,” Rubel said.

Some of Boeing’s current military programs may get a boost from the new budget plan, including a “great helicopter portfolio” that will benefit from Secretary Gates’s focus on counterinsurgency missions, Rubel said.

“As we’ve gotten more visibility into the 2010 budget, we see some real positives,” Albaugh said. “Special Forces is going to be a real focus; that means more helicopters.”

Unmanned vehicles and tactical reconnaissance systems probably will also be in the Pentagon’s spending plan, he said.

Read more here