By Roxana Tiron - 10/24/10 07:17 PM EDT
The Obama administration’s decision to sell $60 billion worth of weapons to Saudi Arabia is a boost for several defense companies that are bracing for tight Pentagon budgets.
Defense giants Lockheed Martin, Boeing and Raytheon have been looking to bolster their international sales to make up for a possible loss of business in the United States. The Pentagon is moving to cut spending and cancel weapons programs in a push to reduce costs.
The immediate impact the deal would have on defense companies is difficult to quantify until Saudi Arabia begins placing orders. Nonetheless, the proposed weapons sale — which would require two decades of delivery and production — could help defense companies and their suppliers keep their production lines humming.
“Every dollar that comes into a company, and particularly if it comes in from the international market place buys time — especially if we look at defense cuts in this country — to keep going and maybe keep growing until the next opportunity comes around,” said Remy Nathan, assistant vice president for international affairs at the Aerospace Industries Association. “You need to make things to maintain the capability to innovate and manufacture.”
The arrangement with Saudi Arabia isn’t a done deal, because Congress has until Nov. 20 to endorse or oppose the sale. Pentagon and Department of State officials on Wednesday indicated the Obama administration is not expecting Congress to block the agreement, though several lawmakers have already voiced their opposition.
The proposed sale would include Boeing Co.'s F-15 fighter jets and Longbow Apache helicopters, Raytheon’s advanced radar and Blackhawk helicopters built by Sikorsky, a unit of United Technologies Corp. The sale also would benefit General Electric, ITT Aerospace and small-aircraft maker MD Helicopters.
Selling at such a large volume to Saudi Arabia could make the U.S. defense companies more competitive on the export market, according to Richard Aboulafia, vice president of analysis at the Teal Group. He said the long timeline for the weapons deliveries gives prospective buyers a “guarantee” that the systems will be upgraded and sustained for years to come.
Aboulafia said constructing large batches of weapons systems also brings down costs, allowing companies to lower their prices in future contract competitions.
The stakes in the proposed sale are high for several states, including Missouri, Arizona, Florida, Ohio and New York.
One of the biggest winners from the Saudi arms sale would be Boeing. With the help of the Missouri congressional delegation, the defense giant fought for more than a decade to keep alive the production line for its F-15 fighter jet in hopes of selling the aircraft internationally.
Sen. Kit Bond (R-Mo.), a retiring senior defense appropriator, was quick last week to point out the economic benefits to St. Louis if Saudi Arabia buys as many as 84 new F-15 fighter jets. The purchases would ensure the F-15 production line remains open and would protect the more than 14,000 jobs in the state that are tied to the aircraft. Bond pressed the Obama administration to go through with the F-15 sale to Saudi Arabia.
In a third-quarter earnings call with investors this week, Boeing Chief Executive Office Jim McNerney said his company has a “clear window of opportunity” to sell its fighter jets and other weapons systems internationally. He referenced the pending Saudi deal as “one example of the near-term potential in the international defense marketplace.”
AIA’s Nathan noted that, while foreign sales are “beneficial” to the U.S. defense industrial base, the U.S. companies are “not the only game in town” and face strong competition from European companies whose governments cooperate with them to back foreign sales.
“It behooves the administration and Congress, when they identify opportunities consistent with U.S. national security and foreign policy, to allow them to happen and support them,” Nathan said. “All too often, we view these international sales as an afterthought or as a nice added benefit.”
Nathan said the White House and Congress should consider starting “the thinking process of international sales sooner in our foreign policy and national security planning.”
The proposed arms sale is intended to help Saudi Arabia counter threats from Iran, but also protect the Saudi kingdom from regional terrorism threats.
The U.S. weapons are intended to protect Saudi Arabia “in a dangerous neighborhood,” Assistant Secretary of State for Political-Military Affairs Andrew Shapiro said at a State Department press briefing last week.
He also said the sale would enhance “regional security” rather than destabilize it.
Alexander Vershbow, the assistant secretary of defense for international security affairs, said the arms sale is intended to strengthen the United States’ relationship with Saudi Arabia. It would also allow the Saudi Arabian military to better operate with U.S. forces.
The upper limit of the deal would be $60 billion, U.S. officials said Wednesday. Saudi Arabia might end up spending less than that, Vershbow and Shapiro indicated.