Defense contractors downsized in good times, report finds

By Eric Katz

August 8, 2012

The defense industry and Republican lawmakers have for months complained that sequestration -- across-the-board budget cuts scheduled to begin on Jan. 2, 2013, and expected to hit the Defense Department especially hard -- would devastate private contracting companies, forcing mass layoffs when the economy could least afford them.

A new report from a good government group, however, shows the industry has seen significant job losses during the past several years, even as the federal government shoveled more and more money to Defense contractors. The findings may suggest government spending and the contractor workforce are not as tightly correlated as sequestration critics fear.

Ben Freeman of the Project on Government Oversight pointed to the decline in the number of employees from the five largest Defense contractors -- Lockheed Martin Corp., Northrop Grumman Corp., General Dynamics, Raytheon Co. and Boeing Co. -- within the past five years, despite those companies receiving considerably more money from the U.S. government in 2011 than it did in 2006.

“There’s ample evidence to say there is an overreaction to what this will mean in terms of jobs for government contractors,” Freeman told Government Executive. “We simply couldn’t find a correlation between spending on government contractors and the people they employed. The evidence we did have was that as dollars from government contracts went up, the number of people they employed went down.”

The top contractors received $96 billion in government awards in fiscal 2006, a sum that rose to $113 billion in fiscal 2011. That marks more than a 10 percent increase in funding after adjusting for inflation, while the number of people employed collectively at the five companies decreased by 10 percent in the same period.

Freeman also highlighted a study from PricewaterhouseCoopers that found 2011 marked the second consecutive year of record profits for the defense industry. Sequestration would still leave the Pentagon’s budget at a higher level than that in 2006, even after adjusting for inflation, POGO said.

All this could demonstrate that revenues -- with the exception of Boeing, the companies receive an overwhelming majority of their incomes from the U.S. government -- are not a predictor of employment figures.

The Aerospace Industries Association, of which all five of the major defense contractors are members, recently released a report, however, that found the defense portion of sequestration would lead to 1.09 million job losses through fiscal 2013.

In an interview with Government Executive, AIA’s Vice President of Legislative Affairs Cord Sterling said these contractors are slimming down due to requests from the customer.

“You’ve seen a major efficiency imitative in the industry,” Sterling said, “largely at the request of DoD.”

He defended his organization’s study, compiled by George Mason University economist Stephen Fuller, by arguing it used sound economics to arrive at its conclusions.

“These economists have done this work before,” he said. “The methods are tried-and-true. All the economists looking at this agree there will be massive job layoffs.”

Despite its trade group’s claims, Raytheon said it would not guess how potential cuts would affect its employment numbers.

“We’re not going to speculate, because we don’t know whether sequestration is going to be implemented or how it would be implemented,” said Dave Desilets, a spokesman for Raytheon, which got 74 percent of its total net sales from government contracts in 2011, according to filings with the Securities and Exchange Commission. “We’re going to follow our customer’s lead. As in any business environment, we plan for all contingencies.”

Lawmakers are under pressure to avert sequestration before the new year, but an equally money-saving alternative so far has eluded them.

Lockheed Martin, Raytheon’s competitor and the nation’s largest defense contractor, has said sequestration will lead to company layoffs.

In its 2011 annual report, the company wrote, “The resulting automatic across-the-board budget cuts in sequestration would have significant consequences to our business and industry. There would be . . . personnel reductions that would severely impact advanced manufacturing operations and engineering expertise and accelerate the loss of skills and knowledge.”

Lockheed Martin received $10.4 billion more from the government in 2011 than in 2006, but it had 17,000 fewer employees.

Robert Stevens, Lockheed Martin’s chairman and chief executive officer, testified before the House Committee on Armed Services in July that those job losses were part of a larger effort to cut costs companywide.

“We understand the fiscal pressures our nation faces,” Stevens said, “and we are three years into an aggressive effort to reduce costs and better align ourselves to these budget realities. We have reduced our overhead, cut capital expenses, curtailed research and development, consolidated facilities, and engaged in very painful but necessary reductions in personnel across our company.”

He added these cuts would continue and could worsen if sequestration went into effect.

“Some may consider it flattering to believe that our industry is so robust and so durable that it could absorb the impact of sequestration without breaking stride,” he said. “But this is fiction. The impact on industry would be devastating.”

He said his company, which received 82 percent of its revenues from the U.S. government in fiscal 2011, will lay off 10,000 employees if sequestration becomes law.

Dan Beck, a spokesman for Boeing, agreed that an increase or decrease in government funding is not necessarily the best predictor of employment figures, but maintained sequestration cuts would be too deep to be ignored.

“It is difficult to draw exact correlations between revenues and employment figures,” Peck said. “Boeing does support the notion that sequestration would have a devastating impact on the defense industrial base, especially in terms of loss of jobs in these critical, highly skilled, highly paid skills areas.”

Peck added the previous job layoffs at Boeing -- which shed 8,000 jobs in its government contracts workforce, according to the POGO report -- were necessary to create a competitive advantage.

“You can’t sit back and wait for these things,” Peck said.

Freeman, from POGO, took issue with the companies’ defense of their shrinking workforces.

“They are trying to make a public case that they are great job creators, but the numbers don’t support that.”

A spokesman for Rep. Buck McKeon, R-Calif., chairman of the Armed Services committee and one of the most vocal opponents to sequestration, told Government Executive that regardless of previous trends in the industry, there is no conceivable way to cut that much from the budget without also cutting jobs.

“I don’t think anyone is credibly arguing that you will cut $500 billion to $600 billion out of the defense budget and do it without terminating programs and terminating employees,” said Claude Chafin, McKeon’s spokesman.

Some experts, however, have said industry claims of mass layoffs as a result of sequestration are deeply exaggerated.


By Eric Katz

August 8, 2012

http://www.govexec.com/contracting/2012/08/defense-contractors-downsized-good-times-report-finds/57294/