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20 Jan 05. The FT reported that the head of Boeing’s defence business on Thursday warned that Pentagon budget-cut proposals could be the beginning of a long-term squeeze on US weapons procurement. Such a shift could mean cuts in some of the company’s largest and most lucrative programmes.

James Albaugh, president of the US aerospace group’s $41bn military unit, said he expected all large arms programmes to be targeted, including Boeing’s unmanned combat jet project, growing missile defence business, and the $92bn Future Combat System – a programme to refit the US army.

“If I take a look at Boeing and the programmes we have, my sense is that all big programmes will be taxed to some degree,” Mr Albaugh said in an interview. “I don’t know if that will be across the board [cuts] – 4, 5 or 10 per cent – or [if ] it will be stretching programmes out.”

US defence stocks have come under intense pressure since details of an internal Pentagon budget decision memo emerged two weeks ago. Most of the attention has focused on Lockheed Martin, which faces large cuts in its F/A-22 fighter and C-130J cargo aircraft programmes, and shipbuilder Northrop Grumman, which faces reductions in the Virginia-class submarine and advanced destroyer programme. But Mr Albaugh said budget pressures, combined with expenditures for the war in Iraq, would hit Boeing’s defence business as well and could continue into the foreseeable future.

“It’s a lot of issues coming together: a major deficit, a more conservative Congress that is going to look very hard at fiscal policy, the [Iraq] war consuming about $1bn a week, all the equipment that’s going to be worn out.”

Although the budget document, obtained by the Financial Times, did not specify cuts for the FCS – arguably Boeing’s most important defence contract in the long term – it does call on the army to come up with a plan that “rationalises and integrates” the FCS.

Mr Albaugh said although he believed the FCS had strong support in the army, its price tag – last year $2.9bn was appropriated – made it a potential target, along with missile defence, where Boeing is lead contractor on the ground-based anti-missile system. The budget memo suggests a $5bn cut in the programme over the next six years.

“You look at the missile defence agency budget, and it’s about $10bn,” he said. “Despite the great support enjoyed by missile defence by the administration, $10bn in the kind of budget environment we’re in will be a target.”

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