Boeing defense projects face threat of budget axe


May 28, 2010 Updated May 28, 2010 at 6:40 PM EDT

US aerospace giant Boeing would be hit harder than other defense contractors if the Pentagon's proposed cuts to major weapons programs are approved, analysts said Tuesday.

Boeing's stock fell 2.65 percent to 37.15 dollars in trading a day after Defense Secretary Robert Gates presented a "reform budget" that calls for deep cuts in some big projects led by the company.

Gates' recommendations call for ending production of F-22 Raptor fighter jets, scaling back the Army's Future Combat Systems (FCS) program of hi-tech vehicles and robots, canceling plans for more C-17 transport planes and cutting elements of the missile defense program.

All of those proposed cuts would deal a blow to Boeing's defense division, which generates about 32 billion in sales.

Gates also recommended canceling contracts that Boeing had hoped to secure, including plans for a new CSAR-X search and rescue helicopter, a long-range Air Force bomber and a series of communications satellites.

"Boeing could face difficult times," the investment firm Collins Stewart wrote in an analysis.

"FCS (Future Combat Systems), C-17 (transport planes) and missile defense are key programs for the company and all face cuts," it said.

Apart from Boeing, the outlook for other defense contractors was not as bleak as anticipated and in some cases encouraging, as budget recommendations removed uncertainty, analysts said.

The defense secretary's budget offered more funding for certain weapons programs, including additional F-35 fighter jets and close-to-shore naval ships from Lockheed Martin as well as more unmanned drones.

"For Lockheed Martin, the news was good. In our opinion, the key to the company's revenue and earnings growth is the F-35, and the F-35 received strong support," the according to Collins.

Chicago-based Boeing "appears to be most at risk on the downside, with several programs under pressure," Fitch ratings agency wrote.

The planned cuts in defense contracts came on top of bad news for Boeing's commercial operations, which have suffered from a drop in orders for new planes amid a global economic crisis.

The Pentagon's recommendations still need to be formally endorsed by the White House and then approved by Congress, where some lawmakers have already blasted the suggested cuts in weapons projects.

The stakes will be high for Boeing when bidding resumes this summer on a contract for a new aerial refueling tanker.

Gates confirmed on Monday that bidding would go ahead after a dispute last year pitting Boeing against Northrup Grumman and its partner the European Aeronautic Defence and Space Company (EADS), the parent company of Boeing rival Airbus.

A previous contract for the tanker was awarded to Northrup and EADS but was cancelled after an appeal from Boeing.

The company said Monday it would examine the Pentagon's budget plans.

"We will be studying Secretary Gates' announcement for potential impact to Boeing," company spokesman Sean McCormack said in a statement.

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