U.S. defense outlays seen staying high

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Defense spending is likely to remain strong for the foreseeable future, as the U.S. military scrambles to replace equipment worn out in Iraq, although high growth rates are unlikely to be sustained.

In addition, the Pentagon is gearing up to award several huge multibillion-dollar contracts next year for new refueling aircraft, helicopters and surveillance systems.

"It looks like the worse-case scenario is an extremely healthy plateau for the next four years," said Richard Aboulafia, an analyst with Virginia-based Teal Group. "So much equipment has been lost or worn out that spending needs to stay at or above these levels."

Top industry executives and military officials will discuss the sector's outlook at the annual Reuters Aerospace and Defense Summit in Washington, starting on Monday.

Leading defense contractors have benefited from record spending spurred by the wars in Iraq and Afghanistan, and a huge push by the United States and other countries to beef up homeland defense, border security and intelligence work.

Top-tier defense contractors Northrop Grumman Corp (NOC.N: Quote, Profile, Research, Stock Buzz), General Dynamics Corp (GD.N: Quote, Profile, Research, Stock Buzz) and Lockheed Martin Corp (LMT.N: Quote, Profile, Research, Stock Buzz) (LMT.N: Quote, Profile, Research, Stock Buzz) all reported higher profits in the third quarter, and raised their financial forecasts.

Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz) also posted higher income, but said profits were off in its defense unit, while Raytheon Co's (RTN.N: Quote, Profile, Research, Stock Buzz) earnings were hit by a one-time charge related to the sale of its private jet chartering unit.

Analysts have expected defense spending to level off for years, but lawmakers have kept the boom going longer than expected by adding funding to better protect U.S. troops.

After pumping billions of dollars into extra armor for Humvees and body armor for soldiers, lawmakers are now forcing the Pentagon to buy thousands of new heavy trucks built to withstand roadside bombs at a cost of over $20 billion.

BACK TO BASICS

Defense analyst Loren Thompson of the Virginia-based Lexington Institute predicted slower growth in the defense budget and said rising personnel costs would eat up some spending that might have gone to fund new weapons programs.

The Bush administration was not likely to recommend a big increase in defense spending in its fiscal 2009 budget, and a few programs could even be scaled back, Thompson said.

Since the departure of Donald Rumsfeld as defense secretary in November 2006, there is now less emphasis on expensive and technologically challenging programs to link communications among weapons systems, and more of a shift back to traditional spending priorities such as warships and aircraft, Thompson said.

For instance, defense officials once had high hopes for programs such as the $30 billion Joint Tactical Radio System, an ambitious drive to replace current military radios with new software-based radios that has been plagued by technical and cost problems. That program could now be scaled back.

Defense consultant Jim McAleese said lawmakers and defense officials were focused far more on the affordability of weapons systems, given concerns about chronic cost and schedule delays, contractor accountability and potential war profiteering.  Continued...