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June 11, 2008 > Wall Street braces for impact of Air Force leadership transition

Wall Street braces for impact of Air Force leadership transition

By Donna Borak, AP Business Writer

WASHINGTON (AP), Jun 06 _ The ousting of the Air Force's top military and civilian leaders this week over embarrassing nuclear mix-ups has muddied the outlooks for some major defense contractors.

Wall Street investors and military analysts are wondering what impact the historic shake-up will have on the future of the Air Force's buying strategy and specifically on two contested multibillion-dollar contracts _ a $15 billion rescue helicopter deal awarded to Boeing Co. and a $35 billion pact for aerial refueling tankers awarded to Northrop Grumman Corp.

Defense stocks _ lead by Boeing and Lockheed Martin Corp. _ slipped Friday, a day after Defense Secretary Robert Gates accepted the resignations of Air Force Chief of Staff Gen. Michael Moseley and Air Force Secretary Michael Wynne _ a highly unusual double firing. Shares of Boeing fell $4.15, or 5.4 percent, to $73.16 Friday, while Lockheed Martin fell $3.92, or 3.6 percent, to $103.75.

The surprise personnel moves put the Air Force in a ``disadvantageous position in the waning days of a lame duck administration,'' Heidi Wood, an analyst with Morgan Stanley, said Friday in a note to clients.

Compounding the fact that fiscal 2009 budget requests have yet to be completed, analysts said the timing of Gates' decision could further affect several programs, including Boeing's high-profile challenge of a $35 billion deal awarded to Northrop Grumman and Airbus parent European Aeronautic Defence and Space Co.

The nonpartisan Government Accountability Office will rule by June 19 on Boeing's protest, which it filed shortly after it lost the contract to build the 179 mid-flight refueling planes.

The Air Force's top priorities now will be to secure tanker funding for the 2009 budget year, and advanced funding for the program in the 2010 budget, said Jim McAleese, a Virginia-based defense consultant. Without significant commitments dedicated to future production, the program could be in jeopardy under the next administration, he said.

The Air Force also is close to re-awarding the $15 billion contract for search-and-rescue helicopters that Boeing originally won. The service was forced to re-compete that deal after the GAO twice upheld protests filed by Lockheed Martin and Sikorsky Aircraft, a unit of United Technologies Corp.

An Air Force spokeswoman on Friday declined to comment on any contract-related matters. Spokesmen for Northrop Grumman and Lockheed Martin on Friday said it would be inappropriate to comment on an internal Pentagon matter. Boeing did not return a call.

But the Air Force leadership transition also will make it harder for the service to sustain key programs like Lockheed Martin's F-22 fighter jet and a planned next-generation bomber, analysts said.

For more than a decade, all the military services have sent their ``wish lists'' to lawmakers to lobby for future buys on key programs. However, the Air Force has been ``most brazen'' among the services, said Winslow Wheeler, director of the Straus Military Reform Project at the Center for Defense Information, a Washington think tank.

``It sends a very clear message that the secretary has certain priorities, and that those priorities are going to be pursued,'' said Professional Services Council president Stan Soloway, an expert on federal acquisitions.

For example, the Air Force says it needs 381 of Lockheed Martin's F-22s and is fighting to keep the production line from being shut down. While the option for 20 more planes were included in the 2009 budget year, the service had been lobbying Congress to tack on an additional $500 million to keep the lines open and to pay for materials for future aircraft. Gates has said only 183 of the radar-evading planes are needed.

``The Air Force is no longer the master of its destiny, that (now) lies in the hands of the people running the Pentagon,'' said Loren Thompson, a defense analyst with the Virginia-based Lexington Institute.

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