Raytheon looks like winner in '14 budget

But 'sequester,' like a dark cloud, looms over final spending plans
2013-06-09T00:00:00Z 2014-07-02T12:17:28Z Raytheon looks like winner in '14 budgetDavid Wichner Arizona Daily Star Arizona Daily Star

Tucson-based Raytheon Missile Systems would get healthy orders for most of its weapons in the coming fiscal year under the Obama administration's proposed defense budget.

But that's before the elephant in the room - mandatory federal budget cuts known as sequestration - comes thundering into into the picture.

The proposed Pentagon budget largely reflects analyst opinions that Raytheon - the sole source for Standard Missile-3 ballistic-missile interceptors and an array of front-line combat weapons - is better positioned than many of its peers to weather steep cuts to the Pentagon budget.

However, the 2014 proposal ignores more than $50 billion in mandatory defense-budget cuts under the so-called sequestration plan, which is in effect since Congress failed to enact deep discretionary cuts last year. The Pentagon budget proposed by President Obama's 2014 defense budget of $527 billion is a reduction of only $900 million from fiscal 2013.

That worries Raytheon - the region's largest private employer and one of its economic engines.

"Given our priorities and our products, I think we're in reasonable shape, but I hope they fix sequestration, because that is a concern for next year," Raytheon Missile Systems President Taylor Lawrence said.

And Raytheon Co. CEO William Swanson recently called sequestration "the elephant in the room" that "sucks all the air out of every conversation."

Defense and budget experts have little faith that Congress and the president will act together to head off sequestration.

"It's still as chaotic as it has been the last couple of years," said Winslow Wheeler, director of the Straus Military Reform Project at the Washington, D.C.-based Project on Government Oversight.

"It's too hot of a potato for them to either repeal sequestration or direct how it should be implemented - they are too mentally and morally weak to do it," said Wheeler, an MIT professor and former technology adviser to Congress and the Pentagon.

Though Raytheon avoids discussing budget specifics, Lawrence said the budget uncertainty worries Raytheon, which faces potentially unseen cuts and funding shifts. He likened it someone building a house and finishing the roof and then not having money for its floor - though he could get more money for the roof.

"There's ways to prioritize the budget and make needed cuts without this across-the-board sort of slice that is not a good way to build a budget," he said. "That uncertainty we're still worried about, and we hope that Congress comes together and finds a mechanism to fix that and then also address the budget needs and priorities that we see."

Problem already here

About $40 billion in Pentagon sequestration reductions that took effect this year are still rippling through the military. Defense sequester cuts for the 2014 fiscal year starting Oct. 1 would total $54 billion.

The stakes are high in Arizona, home to major military installations including Davis-Monthan Air Force Base and the U.S. Army Intelligence Center and Fort Huachuca in Sierra Vista, and defense contractors including Raytheon, Honeywell Aerospace, Boeing Co., General Dynamics, Orbital Sciences Corp. and BAE Systems.

A 2011 study by George Mason University estimated that defense sequester cuts could cause the loss of more than 39,000 military and civilian jobs in Arizona and cost the state nearly $2 billion in revenue through 2021.

So far, the local Raytheon unit has survived some initial defense cuts with little effect. Since the company laid off around 200 engineers in 2009 after three of its development programs were canceled, local Raytheon employment has been relatively flat.

If a 10 percent cut in defense spending resulted in a 10 percent drop in employment at Raytheon, the loss of about 1,000 jobs at a reported average annual salary of about $75,000 would translate into a $75 million direct annual loss to the local economy.

And that doesn't include the indirect and induced effects of Raytheon through sales to local suppliers and employee spending rippling through the economy, University of Arizona economist Marshall Vest said.

"I think it would be big enough to see in the aggregate (economic) numbers," Vest said. "It wouldn't be a disaster, but it would be noticeable."

Some programs cut

The budget floated in late April gives some indication of the Pentagon's priorities.

The president's defense budget would maintain or increase funding for most of the local Raytheon's unit's biggest programs, including the Standard Missile-3 missile interceptor, the Advanced Medium-Range Air to Air Missile (AMRAAM) and the Standard Missile-2 and SM-6 ship defense missiles.

On the research and development side of the budget, Raytheon's Small Diameter Bomb II is proposed for an increase in funding as it moves from development to production.

But some Raytheon developmental programs have been cut in recent years. And one potentially multi-billion-dollar program Raytheon is competing for - the next-generation Joint Air to Ground Missile - remains on the equivalent of program life-support with only a small appropriation of $15 million for 2014.

Missile defense

Missile defense stands to remain a priority, particularly with recent ballistic-missile testing and provocative statements by North Korea. Although the nation is not believed to have missiles capable of hitting the continental U.S., it is in range of South Korea, Japan and other U.S. allies.

"Certainly missile defense is a high-visibility priority for a big faction on Capitol Hill, and that includes Republicans who believe in it and Democrats who are afraid to oppose it," said Wheeler, the defense analyst.

Besides the ship-based Standard Missile-3, which is part of the Aegis Ballistic Missile Defense system, Raytheon Missile Systems makes the kill vehicle, or non-explosive warhead, for the Ground-based Midcourse Defense system. Other Raytheon units are involved in Patriot missile systems and key radars for missile defense.

The Pentagon has proposed an overall 2014 budget for missile defense of $9.2 billion, down from $9.7 billion in 2013. Most of that is for the U.S. Missile Defense Agency, along with the Navy.

During a recent visit to Tucson, Vice Admiral James Syring, director of the Missile Defense Agency, said he can live with the proposed budget.

"It's sufficient to accomplish my mission, and I fully support it," Syring told the Star in one of his first media interviews since taking the job last fall.

But a future longer-range missile, known as the SM-3 Block IIB or the Next Generation Aegis Missile, has been scrapped amid budget cuts and some initial problems with the current developmental version, the SM-3 Block IB. The agency is now focusing on developing improved non-explosive warheads, known as kill vehicles, for the missile interceptors.

"It's not coming back," Syring said of the next-gen missile. "The program is not part of the new strategy that was announced, and the focus has been put over on the common kill-vehicle technology development. That's what we're working on."

Raytheon's SM-3 Block IB, which has an improved target-seeker, failed its first intercept flight test in 2011, contributing to the cancellation of the next-generation SM-3. But the SM-3 IB has had three successful intercept tests in a row, including a recent test in which it hit a separating target warhead.

The MDA expects to make a decision on full-rate production of the SM-3 Block IB after additional flight testing in September, Syring told the Star.

The Pentagon's 2014 budget asked for 52 SM-3 Block IB missiles, boosting overall funding for the Aegis system by about 10 percent to $1.5 billion.

The Pentagon also is laying the groundwork to boost the number of longer-range, ground-based interceptors in Alaska and California by 2017, to 44 from 30 now, partly to response to the threat from North Korea.

That program was cut back two years ago after problems developed with a new version of the Exoatmospheric Kill Vehicle, which is made by Raytheon in Tucson.

But the EKV passed a key flight test in January, and the agency will test the older version this summer and the new version in 2014, Syring said.

AMRAAM a winner

One Raytheon program slated for a big increase in the Pentagon's budget request is the Advanced Medium Range Air-to-Air Missile (AMRAAM). The long-range air combat weapon has been plagued by failing rocket motors that prompted the Air Force to halt deliveries and suspend payments to Raytheon.

The Air Force recently qualified new rocket motors from a second supplier, and production is expected to ramp up for the latest AMRAAM version.

The Pentagon is requesting $435 million for the procurement of 253 AMRAAMs in fiscal 2014, up from $332 million and 180 missiles in 2013.

While the Pentagon's budget request may offer some clues, funding for individual programs may look far different by the time the final budget is approved, defense analyst Wheeler said.

Congress recently asked the Pentagon to submit a letter outlining its priorities in the face of sequestration.

As Wheeler noted, "You won't really see what their priorities are until you see a listing of where they'll let sequester hit and where they won't."

Other Raytheon program requests

Here's a look at the Pentagon's fiscal 2014 budget requests for some other major Raytheon Missile Systems programs:

AIM-9X Sidewinder

• Short-range, air-to-air missile used by U.S. Air Force and Navy and about 40 allied forces.

• $237 million for procurement of 450 missiles, up from $204.5 million and 314 missiles in fiscal 2013 ($54 million requested for development)

Evolved SeaSparrow

• Ship self-defense missile used by NATO nations

• $76 million requested for 53 missiles, up from $58.2 million and 37 missiles in 2013.

Javelin anti-tank missile

• Shoulder-fired tank killer produced in joint venture with Lockheed Martin

• $115 million requested for 449 Javelins (including $5 million for development), up from $86 million and 400 missiles in 2013

Joint Standoff Weapon (JSOW)

• Precision-guided, all-weather glide bomb

• $137.5 million requested for 328 bombs, up from $133.3 million for 280 units in 2013

Rolling Airframe Missile

• Small ship-defense missiles co-developed with Germany

• $67.6 million for 66 missiles, up from $66.8 million for 62 missiles in 2013

Small Diameter Bomb II

• Small guided glide bomb for Air Force and Navy

• $211 million request includes $42 million for 144 bombs and $161 million for continued development

Standard Missile-6

• Upgrade of the SM-2 ship-defense missile

• $444 million requested (including $76 million for development) for 81 missiles, down from $463 million and 94 missiles in 2013

Tactical Tomahawk

• Long-range, Navy cruise missile can be launched from ships or subs

• $324 million for development and "minimum sustaining rate" production of 196 missiles, from $320 million for same number of units in 2013.

Source: U.S. Department of Defense, staff research

Did you know?

Raytheon Missile Systems is Southern Arizona's largest private employer, with 10,300 full-time equivalent local employees at the start of 2013, the Star 200 survey of the region's major employers shows.

In 2012, Missile Systems was the largest of six business units of Waltham, Mass.-based Raytheon Co. in terms of sales. It accounted for $5.7 billion, or about 25 percent, of the parent company's revenue last year.

Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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