The last federal government shutdown ended more than 15 years ago. (File photo / Agence France-Presse)
Defense contractors are quietly preparing for a potential federal government shutdown in the coming months should Congress fail to pass a fiscal year 2011 budget or extend an existing continuing resolution, an analyst warned Thursday morning.
With the current continuing resolution set to expire the first week of March, these companies are re-examining their internal business plans, according to Stan Collender, a federal budget expert with Qorvis Communications.
"I say that there is a better-than 50-50 chance that we're going to have one or more shutdowns, and at least one of those shutdowns will be longer than just a couple of days or a couple of hours," Collender said Thursday during a meeting with reporters at the Center for Strategic and Budgetary Assessments in Washington.
He noted that a shutdown could delay contracts and lead companies to trim their work forces.
"I wouldn't be surprised if there are layoffs [or] furloughs," the analyst said.
The last time the government shut down was in November 1995, and then again December 1995 and January 1996, after Republicans took control of the House and Senate. The first shutdown lasted a few days and the second a few weeks. About five days into the second shutdown, contractors began laying off employees.
Collender believes that Republicans will shut down the government, at least once, "to show the tea party folks that they were willing to do it."
The tea party is a loose confederation of conservative voters generally aligned around cutting government spending.
The analyst said defense contractors have "already started to prepare for this possibility."
Collender believes there will be another "short-term" continuing resolution, for no more than a month. After that, another government shutdown is possible.
"It's not unlike what happened in '95 and '96, where government agencies and departments had to continuously prepare to shut down," he said.
With a government shutdown, federal workers are unable to award contracts or release and review proposals for services.
At the same time, Collender believes that Wall Street analysts have not considered deep defense cuts as a reality.
"They seem to be pretty skeptical about the likelihood of significant defense reductions or changes in the path," he said. "I'm not sure that the stock prices have been affected, but they will."
In January, Defense Secretary Robert Gates announced the Pentagon had identified $154 billion in potential savings over the next five years. Those savings amount to a 5 percent of the planned funding over that period, according to a CSBA report released Thursday.
"The fiscal 2012 budget debate is likely to be looked at as a turning point for the defense budget," Collender said. In a year, analysts will reflect on 2012 "as the beginning of a significant change."
This will translate into "an extremely challenging time for defense contractors," according to Collender.
"With the path changing for defense spending, a lot of the assumptions that contractors have made in their own five-year business plans are going to have to be re-examined," he said. "There simply won't be as much available for all the things that the DoD said it wanted to do and was planning on doing as early as three, four months ago.
"It's not that they're running scared, but there are significant re-evaluations of business prospects going on," he continued. "They're looking at commercial applications in ways that they haven't before, a variety of things like that."
In addition, Collender projects 2012 "to be not only a turning point in the path of defense spending but the beginning of what will be considered a shakeout in the defense and aerospace contracting community." Defense companies are likely to explore mergers and acquisitions while larger businesses might look to shed divisions that are not expected to profit in the immediate future.
"I'm expecting a lot more activity or at least exploration of … mergers and acquisitions within the community simply because … the path won't be as great, the profit-making opportunities may not be as substantial," he said.
Collender's predictions came one day after Pentagon acquisition executive Ashton Carter warned the major defense companies not to merge. That said, Carter predicts and uptick in mergers and acquisition among lower-level suppliers.