BUDGET BLOODBATH

There are increasing signs that the Bush administration's year-end proposal to slash military spending is not the final word and that modernization initiatives that have avoided the budget ax could still face dark days.

Although defense and industry officials hold out hope that Congress will override many of the proposed cuts, those closely affected by the reductions realize they now operate in a budget environment where modernization spending is inextricably tied to huge war costs associated with Iraq and Afghanistan.

The White House's Office of Management and Budget (OMB) wants to put the brakes on escalating national debt by curtailing supplemental spending bills because Congress has used these add-on measures to finance a wide range of pet projects, not just to pay emergency war costs, says a senior U.S. Air Force official. By cutting acquisition and research spending, OMB believes it can avoid putting all the pressure on operations and maintenance for paying war costs.

But another relationship may exist between the supplemental and the cuts. With the Fiscal 2005 supplemental request looming at $80-100 billion (in addition to $25 billion approved last year), the White House wanted to put forward the Fiscal 2006 budget cut as a sign it's trying to control spending, believes James McAleese, a contracting expert for McAleese and Associates, a government contracting and national security law firm. Only if the military needs further supplementals, the threatened out-year cuts are likely to materialize, he argues.

The changes proposed so far are just the opening gambit, but they reflect some reality about where financial pressure may be applied, at least in Fiscal 2006, 2007 and 2008. The initial OMB plan to cut $10 billion per year for six years has already been modified to about $30 billion total: $6 billion in 2006, $1.1 billion in 2007, $3.3 billion in 2008, $8.4 billion in 2009, $7.4 billion in 2010 and $3.9 billion in 2011.

More reductions are likely before the Fiscal 2006 budget is unveiled, defense insiders believe. On the one hand, the Pentagon still needs to apportion all of the initial $6-billion cut, with a fight in missile defense brewing over whether to kill the Airborne Laser (ABL) or the Kinetic Energy Interceptor (KEI), or to tax and potentially cripple all programs. Individual projects not called out in the massive spending rescission also are bracing for additional reductions. For instance, after the Air Force already trimmed its Fiscal 2006 budget buy to five Global Hawk unmanned aircraft from six, another aircraft may be shed before the spending proposal is final.

Furthermore, the administration may be planning further attacks on modernization spending. One industry official says the Pentagon may reprogram about $8 billion in Fiscal 2005 funds, shifting the dollars from modernization to pay war costs. OMB may also be preparing a 20% spending reduction mandate on all federal agencies, to help offset war expenditures.

OTHER PROGRAMS IN THE HOT SEAT to be reexamined if further budget cuts are needed include the F-35 Joint Strike Fighter, with production potentially delayed, and the MH-60R helicopter. McAleese is bullish that the overall cuts will be less severe than they seem at first blush, and that Congress will restore at least half the $6-billion cut proposed for Fiscal 2006.

The F/A-22 program is so far slated to continue production at a rate of 26 aircraft in 2006, 32 in 2007 and 27 in 2008 toward a U.S. Air Force total of 180 aircraft. That would keep Lockheed Martin's production line going through 2010 and give the company time to lobby for additional production and possibly for approval of sales to Japan, the U.K., Australia and other countries where negotiations are afoot. It also might speed development of F/A-22 derivatives for long-range strike and reconnaissance. Pratt & Whitney has started testing the aircraft's F119 engines for sustained high-speed flight for a bomber design and for a slower but more fuel-efficient and longer range reconnaissance design.