The War Profiteers:

How Are Weapons Manufacturers Faring in the War?

Companies like General Electric and IBM, which cashed in on the tragedy of September 11th through tax breaks in the Economic Stimulus Bill, have drawn the ire of fiscal conservatives and progressive corporate watchdogs alike. But scant attention has been paid to the biggest war profiteers, the weapons manufacturers and the Pentagon.

Congress is debating a Bush administration defense budget of $343.2 billion, an increase of $32.6 billion over last year. This increase would mean that military spending would account for more than half of all discretionary spending (money that Congress must allocate each year).

This is good news to the weapons industry and while pink slips and hiring freezes are spreading like an epidemic from sector to sector, the top weapons manufacturers are awaiting new orders, holding job fairs, planning Initial Public Offerings, raising new capital and gaining new attention on the stock market.

As Loren Thompson, a defense analyst with the Lexington Institute, remarked "the whole mind set of military spending changed on Sept. 11. The most fundamental thing about defense spending is that threats drive defense spending. It's now going to be easier to fund almost anything."

So, what better time to be Lockheed Martin, Raytheon, Northrop Grumman or even the beleaguered Boeing? The war in Afghanistan is an unequivocal success- despite friendly fire incidents, bombing accidents, mounting civilian casualties and the recent crash of a $280 million B-1 bomber- and the Bush administration is already listing new countries targeted for military action, with Somalia, Yemen and Iraq topping the list. It is a good time to be in the war business.

"For a long time-- [the defense industry] just didn't seem like a sexy area that has a lot of legs to it," said a partner at one options trading firm. Well look again, because these former "wallflowers" are ready to go. Responding to investor interest, stock exchanges are thinking about creating a new Defense Index. The American Stock Exchange has its 15- stock index up and running, Philadelphia and Chicago are not far behind.

That is music to the ears of weapons manufacturers. And they have not wasted any time capitalizing on Congress' new generosity. As a lobbyist for a major defense contractor boasted, "There are 150 programs on Capitol Hill that we are actively working."

Congress is still working out the wrinkles of their versions of the military budgets, but weapons manufacturers and their supporters are confident that it will be big. "With the [Bush] administration, we'll see a rebuilding of the military to bring it back to where it was eight years ago," said defense analyst Paul Nisbet. "We'll see a considerable appreciation in defense stocks, as we saw in the Reagan years."

NORTHROP GRUMMAN

This Los Angeles-based company manufacturers planes and bombers dropping munitions on Afghanistan, including the B-2 bomber, the F-14 fighter. The company also makes the much-praised unmanned Global Hawk. The $10 million per copy Global Hawk has been deployed to Afghanistan despite the fact that it had not completed its testing requirements.

The company boasts that it has the capability to "meet current and emerging national defense needs, including anti-terrorism and homeland security." And analysts like Loren Thompson agree, "the most immediate hardware demand that this crisis will generate is for intelligence gathering and command and control. Those are Northrop's strengths."

In addition to its planes and bombers, the company's Maryland based Electronic Systems division makes high tech systems like the Airborne Warning and Control Systems (AWACS), a control center and a huge radar disc mounted atop a Boeing 707, which serves "as the airborne nerve center for a military air campaign." Northrop Grumman is also responsible for ALQ-15 jamming device, used to protect jets from enemy radar-guided missiles. As David Steigman, senior defense analyst for the Teal Group, boasts, "Northrop Grumman's role is supplying the command control communications and the intelligence surveillance systems to find the bad guys and bop them in the head."

When Wall Street opened again on September 17, 2001, Northrop Grumman was ready to bob those bad guys and its stock had risen 16% to $94 a share in anticipation of the coming war. Two days after bombing in Afghanistan began; Northrop Grumman's stock had reached a three-year high of $107.60 a share on the New York Stock Exchange. The future looks bright and the company has job openings from more than 1,000 employees. According to a recent article in the financial magazine Barrons, Northrop Grumman is now seeking $2 billion in loans and equity investment to expand business opportunities and acquisitions.

It doesn't hurt that Northrop Grumman has friends in high places, like Secretary of the Air Force James Roche, former Northrop Grumman Electronics Systems chief. Since September 11th, Roche has emphasized the need for more spending on intelligence systems, specifically mentioning Northrop Grumman's AWACS plane. Not content to rest on its laurels, the company is lobbying Congress for a $300 million to upgrade the $1.3 billion B-2 Stealth Bomber, which has successfully completed bombings run in Afghanistan.

RAYTHEON

The Lexington, MA based company is best known for its Tomahawk missile. About 100 of these million dollar land-attack cruise missiles have been lobbed at Afghanistan from U.S. Navy ships since October 7th, fifty in the opening salvo alone.

Orders for Tomahawk missiles are already coming in from allies like Britain, which signed a contract for 48 Tomahawk missiles in a $87 million deal. And Raytheon is confident that significant Pentagon orders will follow. As David Polk, Raytheon spokesman, proudly said, "we are prepared to meet the urgent needs of our customers."

Raytheon also makes the "bunker buster" GBU- 28, a 5,000-pound bomb and missiles like the TOW, Maverick and Javelin, all being used in Operation Enduring Freedom. In addition to missiles, Raytheon also builds sensors and radars used on unmanned and manned reconnaissance airplanes used extensively in Afghanistan. This diversity is part of what makes Raytheon the biggest stock percentage gainer since the war began; on September 10th the company's stock stood at $26.85, now it is holding at about $32.80. Raytheon is looking to hire 1,400 new college graduates this year.

The company has been raising money recently. In mid-October, the company doubled its equity sales program with a major offering. The company raised about $1 billion by selling 29 million shares. Raytheon says the money will be used to reduce debt and for general corporate purposes.

In the never ending quest for more contracts, Raytheon has been pushing its agenda on Capitol Hill; $677 million to work on the next generation of Patriot cruise missiles and an undisclosed amount to upgrade Tomahawk cruise missiles.

LOCKHEED MARTIN

Lockheed Martin is the world's largest weapons contractor, a major player in the areas of nuclear weapons and ballistic missile defense. The company was recently awarded the world's largest weapons contract ever, a $200 billion deal to build the Joint Strike Fighter, a "next-generation" combat jet that eventually will replace aircraft used by the Navy, Air Force and Marine Corps.

Lockheed Martin did not win the contract on force of personality alone, or fighter plane design. During the calendar year 2000, Lockheed Martin spent more than $9.8 million lobbying members of Congress and the Clinton administration, more than double the $4.2 million the company spent during 1999. Among the company's newest lobbyists: Haley Barbour, the former chairman of the Republican National Committee. During the 1999-2000 election cycle, Lockheed Martin contributed just over $2.7 million in soft money, PAC and individual contributions to federal candidates and parties. More than two-thirds of that money went to Republicans. Lockheed Martin spends more on lobbying Congress than any of its competitors, spending a whopping $9.7 million last year. Only General Electric and Philip Morris reported more lobbying expenses last year.

Since September 11th, the weapons giant has been steaming along. Stock prices rose almost $10, from $39.39 on September 10th to a high of $48.11 on November 12th , the stock is now steady above $46. Lockheed Martin makes the ubiquitous F-16 fighter plane, the Hellfire missile, "bunker buster" munitions and the massive C-130 transport plane. The F-16 plant in Ft. Worth, Texas expects to hire as many as 1,200 factory workers to increase production. They have more than 200 orders to fill from foreign governments for 1999-2000.

As the largest military contractor, Lockheed Martin has a lot of jobs in the pipeline. The company wants to go highest tech with its "combat Internet system," a rugged handheld computer, that will put a "dot-com face on the modern battlefield." The company is hiring in Silicon Valley, looking to replace "Rosie the Riveter" with "Suzie the Software Programmer." A recent Lockheed Martin job fair attracted 1,300 applicants for 290 new positions in the company's missile defense division. Even while Lockheed Martin celebrates its JSF successful, it is trying to shore up support for an additional $3.9 billion for development the F-22 Raptor.

BOEING

The Chicago-based Boeing Company, manufacturer of commercial and military aircraft, has not had an easy time since September 11th. While other weapons manufacturers are picking up new orders for weapons, Boeing announced the lay off of 39,000 workers in its commercial aircraft division.

On the military side, despite losing of the coveted Joint Strike Fighter contract, Boeing has a lot to be grateful for. Boeing's JDAM (joint direct attack munitions) is the most widely used smart bomb in the war. The JDAM kit fits over a "dumb" missile and coverts it into a satellite-guided weapon using movable fins and a satellite positioning system. According to Pentagon spokeswoman Victoria Clarke, of the 12,000 bombs the U.S. has dropped on Afghanistan, 7,200 (about 60%) were precision-guided. Of these, 4,600 were Boeing's Joint Direct Attack Munitions. The rest were laser-guided bombs or satellite-guided Raytheon Co. Tomahawk cruise missiles. But there was a downside, the precision JDAMs have repeatedly missed their targets; crashing into a residential neighborhood near the Kabul airport on October 12th and killing at least 10 civilians, falling off target and killing three American soldiers on December 5th, and wounding five Special Forces soldiers a week earlier. The Pentagon maintains there is no problem with the weapon, and insists it will continue to use it.

Since the United States began bombing Afghanistan, Boeing has received two separate orders for more than 1,074 JDAMs, to be delivered by December 2001 and March 2002. Boeing spokesman Robert Algarotti said the company expects to receive an additional contract soon. "We don't have anything officially from the government yet, but we are expecting a new order to come in and we'll be producing them faster than we have before." As David Baker, retired Air Force General now with Schwab Washington research, said approvingly, "Boeing has taken a thrashing, but their military sector is pounding away like a Ferrari on all cylinders."

JDAMs and Ferraris notwithstanding, the Pentagon's award of the Joint Strike Fighter contract to rival Lockheed Martin was a major setback for Boeing. Panicked about commercial losses and military snubs, Boeing has dispatched an army of lobbyists to Washington and their wish list is a mile long and more expensive. Boeing is looking for Congress' help in the form of approval for:

• Air Force purchase of 60 Boeing C-17 cargo aircraft under a special "commercial" provision that removes financial oversight;
• Air Force leasing of 100 Boeing 767 planes to be converted into surveillance planes and mobile command centers for the military;
• Protection from billions in potential liability claims stemming from the 9-11 attacks;
• Measures to encourage Lockheed Martin to share its Joint Strike Fighter contract.

The C-17 Globemaster is Boeing's jumbo military transport plane, which performed high altitude food drops in Afghanistan. As recently as March 2001, Boeing tried unsuccessfully to make the plane available to commercial buyers. This time around it seems the company is capitalizing on widespread sympathy for its commercial losses, but the proposal is still a bad ideal. Selling the military planes as though they were commercial would allow the Air Force to bypass important pricing oversight. In addition, the $232 million per copy C-17s aren't all they promised to be. A General Accounting Office report found that Boeing's failure to rigorously test the C-17 before production resulted in increased costs of more than $2 billion to the program.

The plan to lease 100 converted Boeing 767 air-refueling aircraft for a period of 10 years is a big rip-off for taxpayers too. The Office of Management and Budget estimates that the lease plan would cost $22 billion, while purchasing the aircraft outright would cost just over $15 billion-that is a difference of $7 billion that Boeing can pocket. The aircraft is even less of a bargain when the $600 million cost of modifying existing hangers to house the plane is taken into account.

Some officials at the Congressional Budget Office and in the House and Senate budget committees oppose the leasing plan, contending it is a scam that adds to the long-term costs. "This would be a first," said G. William Hoagland, minority staff director on the Senate Budget Committee, of Boeing's plan. "We've got to maintain some discipline. This just isn't the time to be adding in this way."

But, cool heads like Mr. Hoagland's might have a hard time prevailing, given Boeing's political weight. The 767 plan goes before a House-Senate conference committee next week and Boeing has a lot of well-connected and important people looking out for its interests. John M. Shalikashvili, retired Chairman of the Joint Chiefs of Staff is on the Boeing board. Former Deputy Secretary of Defense, Rudy de Leon heads Boeing's Washington office. After September 11th Boeing beefed up its political connections by hiring former Senator Bennett Johnson (D-LA) and former Rep. Bill Paxon (R-NY). Former Ambassador Thomas Pickering, Boeing's senior vice president for international relations since January, uses his forty years of experience to generate business for Boeing with foreign governments and corporations.

Also on the Boeing agenda is more money for its portfolio of major contracts. Boeing is currently working on more than a dozen contracts-- including the expensive F/A-18 fighter jet, the crash prone V-22 Osprey tilt-rotor aircraft, the AH-64 Apache Longbow helicopter and the Airborne Laser for the Pentagon's Ballistic Missile Defense Organization-- that account for well over $10 billion in the 2002 Pentagon budget alone.