Published on March 5, 2008
GLGi: The U.S. Defense Budget Outlook : GLGi: The U.S. Defense Budget Outlook Slide2: Council Member Biography John J. Kenkel is the Senior Director at Jane’s Strategic Advisory Services (JSAS), the consulting division of Jane’s Information Group. Mr. Kenkel is responsible for managing more than 20 defense and aerospace professionals around the world actively assisting both government and industry in a wide variety of strategic and intelligence efforts. Mr. Kenkel also manages JSAS offices in Washington DC, London and Singapore. He is recognized as an expert in the defense and aerospace market by a number of media outlets, including television, radio and print. Mr. Kenkel is an active advisor to the international financial community on issues related to global defense trends. Additionally he has been an invited speaker at events around the world on such topics as international defense market access, global defense budgets and mergers & acquisitions activities. Prior, Mr. Kenkel spent several years in the industry assisting foreign entities access the US defense market. Slide3: Table of Contents DoD Budget Authority DoD Investment Spending Investment Budget Trends: RDT&E vs. Procurement O&M Spending Future Technologies Army Navy Air Force Programmatic Investment Strategies The FY08 Presidential Budget Request Conclusions Current spending levels are in-line with those of the Reagan Administration on the mid-80s: Current spending levels are in-line with those of the Reagan Administration on the mid-80s DoD Budget Authority The difference between the Bush and Reagan budgets is best evidenced in the investment budgets $0 $100 $200 $300 $400 $500 $600 Billions FY07$ Source: DoD, Jane’s Analysis We are in the midst of the longest planned defense investment growth in US history: We are in the midst of the longest planned defense investment growth in US history Current and projected RDT&E growth will place downstream pressures on topline investment budgets Korea Billions FY07$ Vietnam Drawdown Reagan Buildup Procurement Holiday Bush Transformation $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 RDT&E Procurement Source: DoD, Jane’s Analysis DoD Investment Spending Based on the need to recapitalize following a lengthy procurement holiday the Administration has invested heavily in its Transformation agenda: Based on the need to recapitalize following a lengthy procurement holiday the Administration has invested heavily in its Transformation agenda Investment Budget Trends: RDT&E vs. Procurement The Administration’s bump in RDT&E funding will drive an impending bow wave in out year investment spending, placing major programs at risk Ratio of RDT&E Budget to Procurement Procurement Share of Total Budget Traditional Recapitalization Cycle Implementation of the Transformation Agenda FY07 FYDP Ratio of RDT&E to Procurement Procurement Budget Share Source: DoD, Jane’s Analysis Historically, continued rising costs have forced O&M budgets to grow faster than previously planned: Historically, continued rising costs have forced O&M budgets to grow faster than previously planned O&M Spending The Bush Administration has budgeted higher increases in O&M spending than have previous administrations In the past few budget cycles, supplemental spending has provided significant O&M relief , masking true spending CBO has reported O&M increases are driven by: Continuing long-term trends of rising O&M costs per active-duty service member in the Army and Marine Corps ground forces Increased O&M costs for aging weapon systems New weapon systems that are more complex and have higher O&M costs than the systems they replace Rising costs have refocused defense firms towards professional services and support work Trends Historic O&M Funding $80 $90 $100 $110 $120 $130 $140 $150 $160 $170 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY05-09 FYDP FY03-07 FYDP FY01-05 FYDP FY00-05 FYDP FY99-03 FYDP Current $ Billions FY04-09 FYDP* FY10 FY11 $180 $190 FY07-11 FYDP FY06-11 FYDP Source: DoD, Jane’s Analysis The war in Iraq has impacted the Army’s budget the most, with funding pulled from other programs to pay for wartime needs: The war in Iraq has impacted the Army’s budget the most, with funding pulled from other programs to pay for wartime needs Future Technologies – Army Trends The war in Iraq has placed a significant strain on the Army’s budget To fund the war, money has been diverted from other programs including FCS Recapitalizing equipment from the war zone could drain money from programs into the future FCS is behind schedule and the future of the program has been called into question Support technologies that can be integrated with current forces, such as UAVs and sensors, have the highest likelihood of surviving without FCS The vast bulk of the budget cuts, perhaps 80%, have fallen on FCS accounts in FY12 and FY13 Tactical wheeled vehicles are another area receiving significant funding at present Joint Light Tactical Vehicle (JLTV) project to develop a more capable light TWV is underway Efforts to improve survivability and mobility will continue to see funding into the future, regardless of the success of JLTV or other projects Army Funding FY05-FY11 Millions FY07$ Procurement RDT&E Source: DoD, Jane’s Analysis The Navy has embarked on a significant transformational plan that may threaten full development of all planned vessels: The Navy has embarked on a significant transformational plan that may threaten full development of all planned vessels Future Technologies – Navy Trends Millions FY07$ Procurement RDT&E Navy Funding FY05-FY11 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 FY05 FY06 FY07 FY08 FY09 FY10 FY11 CBO estimates that if costs grow in a historical pattern investment spending could rise to a peak of about $72 billion in FY14, average $60 billion a year between 2012 and 2024, and then fall back to about $49 billion annually Significant transformation is occurring in the USN investment budget New surface combatants: DDG-1000, LCS, CG(X) New strategic deployment: Sea-basing, LHA(R) CBO estimates pending for TACAIR procurement at $3.9 billion a year from 2006-2024 FY08-FY11 spending will be highest due to simultaneous acquisition of F/A-18E/F, EA-18G, and F-35 systems Under the President’s budget, the Navy’s planned annual shipbuilding would grow from four to 12 ships between 2006 and 2011 The FY05 FYDP planned for 48 ships in FY05-FY09, the FY06 FYDP plans for 49 vessels FY06-FY11 Source: DoD, Jane’s Analysis The Air Force is focusing on securing near-term procurement while planning for long-term technologies: The Air Force is focusing on securing near-term procurement while planning for long-term technologies Future Technologies – Air Force Trends Air Force Funding FY05-FY11 Millions FY07$ Procurement RDT&E Acquisition of TACAIR systems will remain stable with disruptions to the current plan unlikely The B-3, a planned long-range bomber, appears delayed to at least 2020 or beyond The USAF has started planning for a new medium-range bomber DoD will end the production of C-17s at 180 aircraft without Congressional mandates USAF would like to institute a SLEP (Service Life Extension Program) for the C-5s which include new engines Analysis of Alternatives currently underway for new tankers KC-767 still likely choice despite issues surrounding planned lease program E-10A program in jeopardy, although radar systems and other sub systems will likely survive Source: DoD, Jane’s Analysis The FY07 budget saw the first stages of adjusting the transformational agenda to focus on a smaller number of requirements: The FY07 budget saw the first stages of adjusting the transformational agenda to focus on a smaller number of requirements Programmatic Investment Strategies Recapitalization Cost Realities Transformation Capability Needs DoD adjusted previous budget plans to support Transformational systems at the expense of legacy programs LCS Missile Defense Falcon/ORS CSAR-X Joint Air to Ground Missile (JAGM) SBIRS-High TSAT Long range strike R&D Funding was increased due to a need to speed deployment of replacement systems JLTV Advanced Hawkeye C-5 Upgrades KC-X Support Outsourcing/ Professional Services Re-engine Joint STARS/AWACS GPS-III AEHF Programs with additional buys based on unanticipated capabilities Global Hawk Predator C-130J Large Aircraft IR Countermeasures Stryker HMMWV Advanced Training and Simulation Systems F/A-18 Programs cut or scaled back due to overambitious requirements or budget constraints VH-71A LHA(R) JSF FCS Land Warrior Non-essential materials and equipment Advanced Precision Kill Weapon System II missile Army Tactical Missile System Across all of these areas, the primary objective has been to shore up existing priorities rather than set new directions in the modernization program While budgets are growing significantly more burden is being placed on supplemental budgets which may disappear over the FYDP: While budgets are growing significantly more burden is being placed on supplemental budgets which may disappear over the FYDP The FY08 Presidential Budget Request FY07 Supplemental Highlights FY08 Investment Budget Highlights The FY08 budget requests $481.4B, an 11.3% increase over the projected level for FY 07, for real growth of 8.6% $93.4B requested to cover operations in the Global War on Terror and is in addition to the $70B previously provided $10.4B for force protection and IED Defeat Includes improved armour for personnel and vehicles Includes $2.4 billion for the development and fielding of counter-IED measures $3.8B to train and equip Iraqi Security Forces and $5.9B to train and equip Afghan Security Forces $2.7B for military intelligence $1.1B for critical military construction projects in direct support of deployed troops $13.9B to repair or replace equipment lost or damaged in combat $1.7B to support the permanent end strength increases for the Army and Marine Corps $3.7B projected for the Army’s Future Combat System Major areas of investment include UAVs, manned and unmanned ground vehicles, NLOS systems, and battlefield C3 systems $14.4B for shipbuilding, an increase of about $3.2B over FY07 $27.0B for air systems, an increase of about $4.1B over FY07 plans 20 F-22As, 18 EA-18Gs, 24 F/A-18 aircraft, 26 V-22 aircraft, UAVs, development and procurement of 12 F-35s, and upgrades to existing aircraft $6B for continued space-based systems, an increase of about $1.2B over FY07 The FY08 budget continues development of the SBIRS – High, TSAT, the Advanced EHF, Environmental Satellites, and the next generation NAVSTAR GPS Despite budget growth the buying power of DoD has declined significantly: Despite budget growth the buying power of DoD has declined significantly Conclusions The Administration’s FY08 defense budget request represents a continuation of the previously established priorities Growth remains strong, with procurement continuing to show increases Transformational programs transfer into procurement over the FYDP creating an out year bow wave which threatens investment accounts The topline FY08 defense budget request is more than double that of the FY01 request Outyear threats to the defense spending have been building since the Bush Administration came to power A number of budgetary issues may undermine modernization spending with major weapons programs likely to see delays and cancellation (FCS, JSF, E-10A, etc.) In 2001, the Defense Department reported 71 major weapon programs that cost $790M, by the end of 2005, there were 85 programs costing $1.6B This has led to cannibalization of non-essential procurements to fund major programs Given the outyear risks to investment budgets, industry is developing strategies to position themselves to take advantage of the demand for off the shelf systems, moving into foreign markets and moving into tangential (security, IT, etc.) markets Despite rising budgets, operational demands, rise in procurement costs, and outsourcing of non-combatant roles will limit DoD’s buying power for new and non-essential materials and equipment Slide14: About GLG Institute GLG Institute (GLGiSM) is a professional organization focused on educating business and investment professionals through in-person meetings. 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