Military Logistics Sector Has Positioned Itself Well For Any Downturn In Spending

With all eyes on the Congressional Super Committee and potential sequestration of defense department funding, many observers are wondering what Washington’s budget wars may mean for the $100 billion military logistics and sustainment business. Over the last ten years years this sprawling enterprise has supported American combat forces in some of the most remote places on the planet. But now it is coming under intense scrutiny as wars wind down and the federal fiscal crisis escalates.

Some of the most innovative leaders in the government run the logistics operation, and they have crafted a series of highly productive public-private partnerships that should be well received even among proponents of less government.

Air Force General Duncan McNabb has just retired as head of US Transportation Command, but not before he successfully stitched together an alternative route of supply into Afghanistan, known as the Northern Distribution Network, through Russia and several other former Soviet republics. It is run by private companies like Maersk Line and APL, and gives the U.S. and its allies an alternative to the southern supply route through Pakistan. The new route even includes trans-polar flights on monster C-5 cargo planes — an option made possible by Russia’s willingness to permit use of its airspace.

The Air Force has also renewed its largest performance-based logistics contract with the Boeing Corporation to service all 211 C-17 strategic airlifters, and folded in repair work for four allies that fly C-17s to help further drive costs out of the contract. This was a gutsy decision by Air Force leaders like Deb Tune at a time when the service was worried about how its installations might fare in the impending fiscal tsunami.

A senior Army logistician once told me “if you don’t want to work with private industry, you really should not be working at Army Materiel Command.” And sure enough, innovative Army depots like Letterkenny (southern Pennsylvania) and Anniston (northeast Alabama) continue to partner with industry on key weapons like the Patriot air defense system and Stryker combat vehicles.

Another partnership opportunity is emerging at the large Army supply depot in northern California. The Sierra Army Depot has significant business now because of its West Coast location and all the “retrograde” war materials coming back from Iraq and Afghanistan, to include thousands of combat vehicles. Companies like Maersk Line and BAE Systems are well positioned to bring new jobs to the depot on container activity and spare parts for foreign military sales. With millions of items heading home from Iraq, this is going to be an interesting logistics challenge to watch unfold.

One other area to watch is F-35 fighter jet repair and support. This is the largest defense department weapons program, so is a natural target for budget cutters. The department has released an astonishing estimate that F-35 sustainment will cost $1 trillion over the next 50 years, and prime contractor Lockheed Martin is being criticized by some legislators who do not understand all the assumptions built into the estimate. About half of that trillion dollars is projected inflation through 2065 rather than actual buying power. On other words, Pentagon analysts are assuming that the Federal Reserve will preside over a massive devaluation of the dollar spanning the next half century. It will drive up the cost of everything, including the F-35 fighter, and then a private company is supposed to take the blame for this inflation. More care, and more seriousness, ought to be brought to the discussion on how to preserve our air superiority at a reasonable cost. Senior leaders like deputy secretary of defense Ashton Carter should know better than to base program decisions on such shaky analysis.

At any rate, both the public and private logistics organizations will take some big hits in the coming years, but they appear to be reasonably well-positioned with good partnerships and capable leaders. And the downdraft in military spending should generate some attractive acquisition opportunities for companies that have made a long-term commitment to the military logistics market.