A Wartime Bonanza

President Bush's military budget increase and the war time "unity" on Capitol Hill have created an environment in which weapons makers can enjoy the best of both worlds -- continuing to make money on the weapons systems of the cold war while reaping the benefits of a war time bonanza of new defense contracts.

In order to replace weapons used in Afghanistan and in preparation for possible military action in Iraq, many U.S. weapons makers have increased production. Boeing added a second shift of workers to boost production of its Joint Direct Attack Munitions (JDAMs) -- the most widely used smart bomb in the Afghan war. Raytheon, best known for its Tomahawk missile, added a third shift and announced that production for its laser-guided bomb has been accelerated by five months "to support the warfighter in the war on terrorism." Alliant Techsystems, the largest supplier of ammunition to the U.S. military, was awarded a $92 million contract to make 265 million rounds of small-caliber ammunition for the Army.

Additionally, with the new influx of money for homeland defense ($38 billion for FY 2003), virtually all of the big defense contractors -- Boeing, Lockheed Martin, and Raytheon -- have adapted their marketing strategies and are repackaging their products for use in domestic security. Boeing is looking into how its sensors designed to track enemy missiles could be used to locate and identify hijacked planes. Lockheed is trying to adapt military simulators to train local emergency response teams. And Raytheon is pitching its hand-held thermal-imaging devices, designed for the military, as useful for fire fighters searching through collapsed buildings.

But it's not just the traditional military contractors who are fighting for a piece of the Pentagon pie. Smaller companies, too, are "dusting off old domestic security proposals and developing new ones in an attempt to cash in on what they hope will ultimately be hundreds of billions of dollars in new spending on homeland security," according to The Wall Street Journal. Air Structures is introducing fortified vinyl domes for quarantining infected communities in the aftermath of a potential bioterror attack, Visionics is looking into designing facial recognition technology, and PointSource Technologies is developing a sensor to detect biological agents in the air or water.

In July, the world's top defense contractors gathered in the United Kingdom for the Farnborough International Air Show, which convenes CEOs, generals, and heads of state every two years. At the last show $52 billion in orders were announced. Although contractors didn't anticipate that much this time around, they were keen to show off the latest developments in antiterror weapons and homeland defense.

Raytheon showcased its role in missile defense and precision strike munitions. Boeing exhibited its tried-and-true 767 tanker transport, its C-17 Globemaster, and its JDAM--all of which have been on display in Afghanistan. TRW, Northrop Grumman, Lockheed Martin, and Boeing all focused on new approaches to developing unmanned aerial vehicles (UAVs), another star weapon of the Afghan war.

The big boost in the defense budget is good news for major Pentagon contractors, who were among the few companies to show increases in their stock prices when the market reopened after the September 11 attacks. Among the top gainers for the week of September 17-21, 2001, were military and space contractors like Raytheon (+37 percent), L-3 Communications (+35.8 percent), Alliant Techsystems (+23.5 percent), and Northrop Grumman (+21.2 percent).

As of May 1, 2002, Aviation Week's Aerospace 25-stock index had climbed past the level at which it was trading in May 2001 and compared favorably to the 5.4 percent decline for Standard & Poor's 500. Northrop, Boeing, and General Dynamics all reported better-than-anticipated earnings for the second quarter of 2002, due to increases in weapons spending and homeland security. And with expected annual increases in defense spending of 10 percent or more, most analysts are banking on a gradual, long-term boost for the defense industry. As Loren Thompson, a defense analyst with the Lexington Institute remarked: "The whole mind set of military spending changed on Sept. 11. The most fundamental thing about defense spending is that threats drive defense spending. It's now going to be easier to fund almost anything."