Military firms likely to benefit from airstrikes in Iraq, Syria

By W.J. HENNIGAN

The campaign in Iraq, Syria has cost nearly $1 billion so far, and will cost billions more down the road

Investors expect rising sales of weapons and gear as the Pentagon prepares to fight Islamic State, Al Qaeda 

Three days after U.S. warships fired 47 cruise missiles at Sunni militant targets in northern Syria last week, the Pentagon signed a $251-million deal to buy more Tomahawks from Raytheon Co., a windfall for the military giant and its many subcontractors.

As U.S. combat operations ended in Iraq and Afghanistan, the defense industry braced for protracted budget cuts at the Pentagon. Major contractors have laid off workers, merged with one another and slowed production lines as spending shrank and leaner times loomed ahead.

But with U.S. and allied aircraft now bombing Islamic State and Al Qaeda positions in Iraq and Syria, including 41 airstrikes since Monday, many analysts foresee a boost to bottom lines for munitions manufacturers, weapons producers and other military contractors — including many in Southern California.

There are plenty of reasons to think that defense spending is going to be on the rise again. Defense companies are not being harmed by the current situation.- Wayne Plucker, an aerospace analyst with research firm Frost & SullivanThe daily pounding by U.S. bombers, fighters and drones, and the resupply of European and Arab allies that have joined the effort, has cost nearly $1 billion so far, analysts say, and will cost billions more down the road.

Ironically, dozens of the U.S. airstrikes have targeted American-made Humvees, mine-resistant ambush-protected vehicles and other armored vehicles that Islamic State fighters captured as they overran Iraqi military bases and airfields during their blitz across northern Iraq this year. The new government in Baghdad is scrambling to rebuild its battered army and will need to buy replacement vehicles.

Wall Street is paying attention. Shares of major military contractors — Raytheon, Lockheed Martin Corp., Northrop Grumman Corp. and General Dynamics Corp. — all have been trading near all-time highs, outpacing the Standard & Poor's 500 index of large companies' stocks.

Investors anticipate rising sales for precision-guided missiles and bombs, and other high-priced weapons, as well as sophisticated surveillance and reconnaissance equipment, as the Pentagon gears up for a conflict that commanders say is likely to last years.

"There are plenty of reasons to think that defense spending is going to be on the rise again," said Wayne Plucker, an aerospace analyst with research firm Frost & Sullivan. "Defense companies are not being harmed by the current situation, I can tell you that much."

The Center for Strategic and Budgetary Assessments, a nonpartisan Washington-based think tank, estimates the air campaign could cost $2.4 billion to $3.8 billion per year if the current tempo of airstrikes is maintained.

Congress also has agreed to provide $500 million in weapons and training to Syrian rebels who can act as a ground force against the militants in Syria, although it's unclear whether that will require new stocks.

The cost of future U.S. operations will depend on how long they continue, their intensity and whether U.S. ground forces are added beyond the 1,600 military advisors now in Iraq.

Defense Secretary Chuck Hagel says the Pentagon needs more money to combat Islamic State, and Pentagon officials have begun working with Congress on an emergency measure to make more available.

"We're going to require additional funding from Congress as we go forward," Hagel said at a news conference Sept. 26. "We're working now with appropriate committees on how we go forward with authorizations and funding."

The Pentagon was under pressure to lower war-related spending in the latest round of budget requests for fiscal 2015. It asked Congress to appropriate $58.6 billion, about $20 billion less than in the previous year.

One of the reasons that military costs are so high is pork barrel politics. The Tomahawk missile, for example, was being built by an established assembly line and it was clear that more of them would be needed. However, the Congress voted to 'eliminate' the Tomahawk even though... 

But then the Islamic State fighters swept out of Syria and captured more than a dozen major cities and towns in northern and western Iraq, sparking alarm in the White House and a fast-expanding campaign of U.S. airstrikes.

In all, the U.S. has launched 250 airstrikes in Iraq since Aug. 8 and, working with Arab partners, a total of 73 in Syria since Sept. 23. French warplanes also have bombed targets in Iraq, and British fighters also conducted their first airstrikes this week.

In Syria, the Pentagon and its five Arab partners — Saudi Arabia, the United Arab Emirates, Jordan, Bahrain and Qatar — are flying American-made fighter jets and dropping American-made bombs that are guided by GPS signals or a laser beam that's pointed directly at the target.

The Pentagon said 96% of the roughly 200 bombs dropped on a dozen targets in Syria early Sept. 23, the first day of the expanded campaign, were precision-guided.

Alan Nelson stands next to some Tomahawk missiles on the submarine USS Hampton in 2011. The Pentagon has inked a $251-million deal to buy more Tomahawks from Raytheon Co. (Vincent Yu, AFP / Getty Images) 

To replace those munitions, experts say, officials are likely to turn to Boeing Co. for a tail kit that converts an unguided free-fall bomb into a "smart" bomb through installation of a GPS-guided tail section.

The company has sold nearly 262,000 such kits, at $25,000 each, including thousands to Saudi Arabia, the United Arab Emirates, Qatar and Bahrain.

"These coalition partners have already bought quite a bit of weapons from American weapons makers," said Richard Aboulafia, an aerospace analyst with Teal Group Corp., a Virginia research firm. "After a campaign like this, they're likely to buy more."

Seal Science Inc. in Irvine was among the thousands of smaller subcontractors that shed workers in recent years. The firm makes rubber gaskets that are used in Tomahawk missiles as well as F-16 and F/A-18 fighter jets.

Gregory Bloom, the company's president, says larger military firms are already asking him to increase his capacity to supply spare parts. That means ramping up production and hiring engineers and technicians.

"We're having issues finding personnel who left the business after the downturn a few years ago," Bloom said. "We want the work, believe me, but we can't turn on a dime."

Having seen boom-and-bust cycles over the years, the Aerospace Industries Assn., a trade and lobbying organization in Arlington, Va., isn't sure military spending will rise again.

"This might not be a turning point," said Betsy Schmid, a former staff director for the Senate appropriations subcommittee on defense and now vice president for national security and acquisition policy at the association. "While it may seem that there's enough momentum to get the defense cuts rolled back, there have been no promises made by Congress just yet."

william.hennigan@latimes.com

http://www.latimes.com/business/la-fi-defense-contracts-20141003-story.html