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US defence sector learns to live with Trump’s tweets

America’s biggest defence contractors cannot decide whether to be thrilled or terrified by Donald Trump.

The titans of the US defence establishment beat a path to Mr Trump’s Florida resort on Wednesday to hear the president-elect warn that the US government is spending too much money on wasteful, over-budget, out-of-control defence programmes.

At the same time, however, Mr Trump has consistently promised a build-up in America’s military — including his ambiguous pledge on Thursday to expand nuclear capability — which is one reason why aerospace and defence sector stocks have risen since election day. For all the bluster, a Trump administration could turn out to be good for the industry.

On Wednesday, Boeing and Lockheed Martin sent their chief executives to placate Mr Trump, who has attacked both companies publicly this month. He started by claiming that a project involving Boeing to develop a new version of Air Force One was too expensive. Then he complained on Twitter that the costs of the F-35 — the Pentagon’s next-generation stealth jet being developed by Lockheed Martin — were “out of control”.

Then on Thursday, he set one against one the other, turning up the heat under Lockheed by tweeting that he had asked Boeing to price its F-18 Super Hornet combat aircraft as an alternative to the F-35. Boeing tweeted back “ready to work with @realDonaldTrump’s administration to affordably meet US military requirements”.

The politics for the White House of taking on defence companies — which often have a broad constituency of support across the country — can be complicated. But if he decides to make an issue of waste, Mr Trump will have some important allies, including John McCain, the Republican who chairs the Senate armed services committee. Mr McCain is likely to oppose some aspects of Mr Trump’s foreign policy, most notably over Russia. However earlier this year he said the F-35 project has “has been both a scandal and a tragedy with respect to cost, schedule and performance”.

But many defence industry analysts and insiders are sceptical that the new administration can cut costs as much as Mr Trump has promised. Its Democratic predecessor has already squeezed hard to eliminate waste.

“There is nothing wrong in asking hard questions,” says Howard Rubel, defence industry analyst at Jefferies. But the new administration “needs to understand the nuances of the budget, to learn how it all works, like with the presidential aircraft, you learn there is a lot of work to do before you know whether it’s too expensive or not”.

Loren Thompson, a consultant who has worked with Lockheed Martin and other defence contractors, argues that unnecessary regulation drives up costs. In the case of the F-35, almost 8,000 test flights are needed before approval. 

“Every single major weapons system developed by the Pentagon is enmeshed in a framework of regulation that drives up the cost by as much as 20 per cent,” he said.

Mr Trump could focus his attention on other targets, too. “Realistically, any big programme is at risk because almost any big defence programme is over-cost or was underperforming at some point,” Jason Gursky, aerospace and defence analyst at Citigroup Investment Research, wrote in a recent note. Mr Gursky highlights risks to the share prices of General Dynamics or Lockheed if the Littoral Combat Ship programme, the subject of debate about cancellation, is targeted by a tweet. Northrop Grumman could sustain tweet damage too, he theorises, though “there is no evidence that any of NOC’s programmes are underperforming”.

But Richard Aboulafia, aircraft industry analyst at Teal Group, doubts there is much political traction in going after lower-profile targets than F-35 or Air Force One. “F-35 is the biggest defence contract in history, Air Force One, but beyond that you lose the attention of the political base, which just wants red meat,” he said. “Go after that Blackhawk maintenance contract? Snore. You are serving them broccoli.” 

Several analysts believe a sustained Twitter campaign could have diminishing impact on stocks: “Paradoxically the more Trump tweets about weapons programmes, the less impact it will have. One tweet out of the blue is a shock, one tweet every week for a month and people start to lose their sensitivity,” says Mr Thompson.

Mr Aboulafia points out that, for all the talk of slashing waste, Mr Trump also promises a big increase in overall defence spending, the central pillar of making America great again in the world. “The Trump administration promises great things for defence,” he said. “The only downside: having to suffer through the occasional Trump tweet, aimed at pandering to the base and convincing them that he’s not just going to throw tens of billions of dollars at defence contractors (which he will).”

Via FT