Long-term work shields Newport News shipyard from US defence cuts

It is hard, when visiting the Newport News shipyard, in the Virginia town of the same name, to square the scene with the gloom widely predicted for military contractors following the start of deep, indiscriminate defence spending cuts earlier this year.

The streets in the shipyard – so big it has its own railway, fire brigade and road names – teem with vehicles and workers going to and from the scores of buildings. The site, owned by Huntington Ingalls, remains Virginia’s biggest industrial employer, with 22,000 workers, well above its post cold war lows.

But, from the office of Mike Petters, Huntington Ingalls’ chief executive, overlooking the yard, it becomes clear why the company and a handful of other key US military contractors are relatively unconcerned about the effects of sequestration, which mandates that nearly all US defence budget items must be cut by about 10 per cent.

At one end of the yard, employees are still working on an aircraft carrier – the USS Gerald R Ford – on which work started in 2005. Further down, work is under way to “inactivate” the 52-year-old USS Enterprise, the country’s first nuclear-powered aircraft carrier, which needs its nuclear reactor and other sensitive equipment removed. Next to it, work is under way to overhaul and refuel the USS Theodore Roosevelt, a Nimitz class aircraft carrier built in 1986.

The long planning horizons for such work mean that Huntington Ingalls and a few other key companies on big, sophisticated, long-term projects are still working with money set aside by the US Congress as much as eight years ago.

“It’s not a this year effect,” Mr Petters says of sequestration. “It’s not even a this year or next couple of years effect. It’s more of a medium to long-term effect.”

However, the question that looms over Huntington Ingalls as surely as the vast crane over the Gerald Ford is whether the tougher budget environment will eventually catch up with its work. It remains unclear whether military services will seek to make cuts solely in less high-profile programmes and spare aircraft carriers and other key programmes – or cut 10 per cent from all procurement programmes across the board.

“The question is, ‘How does the navy buy 90 per cent of a ship?’” Mr Petters says.

Even before sequestration, spending was falling following the US’s withdrawal from Iraq and Afghanistan, which many analysts expect to hit sales of some types of ground-fighting vehicles – a speciality of BAE Systems and General Dynamics. Some programmes might, however, be boosted by the US’s shift in strategic focus towards being able to fight a war in the Pacific, which is expected to ensure continued demand for the warships that Huntington Ingalls, General Dynamics’ Bath Iron Works and others manufacture.

All the decisions, meanwhile, are being taken against the background of continued political disagreements over budgets in Washington. Arrival at Newport News of the Abraham Lincoln, an aircraft carrier due to undergo $2.6bn of refit and refuelling work, was delayed because of Congress’s initial failure to agree a federal budget for 2013, which meant the money for the project was at first unavailable.

“We did find ourselves in a predicament,” says Mr Petters, who adds that the stand-off was eventually resolved – and the vessel delivered – in time for the issue not to affect the shipyard’s revenue for the year.

The key to understanding the future impact of the myriad budget changes under way is that sequestration – introduced in legislation that ended the crisis over the US’s debt ceiling – was intended to be so irrational that all involved would find an alternative means of putting the US’s public finances back into order.

The Pentagon is consequently faced with trying to make rational procurement choices based on a law intended to be irrational.

“There continues to be a great deal of uncertainty around US defence spending and the impacts of sequestration,” says Northrop Grumman, another significant contractor, which declines to speculate on how its programmes might be affected.

Huntington Ingalls executives expect the Pentagon to protect the key programmes and relegate other equipment to what it calls “the scrum” of less strategically important equipment. Huntington Ingalls could suffer from cuts to programmes to build amphibious assault ships, which it makes at the second of its two shipyards in Mississippi. But continued protection for the most strategically sensitive ships would leave it in an unusually strong position compared with rivals.

It is “quite possibly true” that the company will continue to evade serious cuts in its biggest programmes, says Loren Thompson, defence analyst at the Virginia-based Lexington Institute.

“Huntington Ingalls is the only major defence contractor that’s currently talking about margin expansion,” he says.

However, Mr Thompson predicts there will, if sequestration continues, eventually be slowdowns even to the highest-profile programmes. Mr Petters agrees there could be slippage.

“Sequestration might cause a programme to move from 2014 to 2015 or 2015 to 2016,” Mr Petters says.

For the moment, however, the flow of work for the yard looks likely to remain strong.

Next to the Gerald Ford’s dry dock, cut steel and other early components for the USS John F Kennedy, its sister ship, lie waiting. Work on that vessel started, with congressional funding, in 2011, even though no formal contract has yet been signed. Once the contract is signed, Newport News workers are expected to be busy with that vessel until at least 2021.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.