WASHINGTON — When U.S. President Donald Trump took office in January promising heightened scrutiny of defense acquisition programs, Boeing and Lockheed Martin's top executives reassured investors about their relationship with Trump and the affordability of their products.
Now it seems the Trump effect has worn off, at least a little.
Boeing and Lockheed Martin's latest round of earnings calls, held last week, were markedly different than the ones at the beginning of the year. In January, executives spelled out their commitments to lowering costs and bolstered Trump as a president who could increase defense spending, drive affordability and cut regulations. In April, conversations revolved around budgetary concerns and returning profits to the shareholders.
The message, analysts told Defense News, is that Trump hasn't shaken up the defense acquisition process as deeply as some in industry had projected. After a period where companies had to balance hopes of a defense budget hike with the expectation that the new president could unexpectedly put pressure on weapons programs, it looks like the status quo has more or less returned.
For this report, Defense News analyzed quarterly earnings call transcripts of the five top U.S. defense contractors — Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon — from 2014 to the most current call in April for the first quarter of 2017. We captured and counted all quotes from executives that mentioned the words "affordability" or "affordable," except when they were a part of a slogan such as Lockheed Martin's "Blueprint for Affordability" for the F-35.
November-March: Message shift
By and large, the data didn’t showcase any sweeping trends with regard to how much companies spoke about affordability and when that talk increased. Trump’s ascension to the White House, however, did provoke a boost in the number of times affordability was talked about for two key contractors: Lockheed Martin and Boeing, companies that had been the subjects of Trump’s ire on Twitter late last year.
Trump has lambasted two key defense programs — Boeing’s Air Force One replacement plane and Lockheed’s F-35 Joint Strike Fighter — since winning the election in November. After calling for the presidential aircraft recapitalization program to be canceled and the F-35 program to be rebid, he held separate meetings with Boeing CEO Dennis Muilenburg and Lockheed CEO Marillyn Hewson.
During a January earnings call about the final quarter of 2016, both executives assured investors that Trump’s interest in weapons programs was an asset that would lead to a higher top-line budget for defense and that characterized their technologies as affordable.
During that call, Lockheed executives used the terms "affordable" or "affordability" three times — tied with the second quarter of 2014 and the third quarter of 2016 as the most mentions since 2014.
"President Trump recognizes that the F-35 is a very large program, the largest program in the Department of Defense," Hewson said in a Jan. 24 call. "He wants to make sure that that the American taxpayer is getting the lowest possible costs on the program and we share, we understand his concerns about affordability, we certainly share that."
She added that while Trump is focused on reducing the cost of the program, "it is not about slashing our profit, [and] it's not about our margins."
Muilenburg, in a January 25 earnings call, used similar language when talking about his engagements with Trump, adding that he was encouraged by the president’s messages surrounding economic growth and tax and regulatory reform. He and other Boeing executives said the terms "affordable" or "affordability" 10 times during the discussion, double their previous peak usage.
"I'm very encouraged by President Trump’s engagement," Muilenburg said in one exchange. "And as you noted, we had some targeted discussions, well-publicized discussions on things like Air Force One and fighter aircraft. I think those were very productive discussions as well. This is all about making sure we are providing [the] best capability for our government and our war fighters at [the] best affordability, best value for our taxpayers, and we are exactly on the same page there."
April-May: Affordability chatter lessens
By the time the next batch of earnings calls on the week of April 24 took place, much had changed. Lockheed executives made no references to affordability in their discussions with investors, and Boeing executives only mentioned it once, when talking about layoffs in Puget Sound, Washington, which predominantly affect its commercial business. Neither company spoke about Trump during the call.
Douglas Royce, an aerospace expert at Forecast International, pointed to Trump’s mercurial interest as a reason why Boeing and Lockheed made trimming costs such a pronounced topic in January, while barely mentioning it in April.
After Trump began criticizing the F-35 and Air Force One, industry was left wondering whether the commander in chief would emerge as a tough negotiator, and whether other programs like the KC-46 tanker could be next to garner vitrol on the president’s Twitter feed.
But while "no one wants to be the subject of the presidential tweet … it could be, at this point, that they’re just realizing that you may get the presidential tweet, but the attention will move off you very quickly. Something new will come along," Royce said.
Richard Aboulafia, an analyst with Teal Group, said affordability is always a priority for defense contractors, but it became crucial to these companies’ messaging to investors as Trump took office.
"I think there was this period of panic where it looked like it was intimately involved. And now it turns out he just wanted to take credit for a few things and move on," he said.
Industry’s hope that Trump would greatly expand the defense budget also played into the conversation, Aboulafia said.
"You don't want that juxtaposition of having cash thrown at you while simultaneously having a reformer in the White House," he explained. Now that it’s beginning to look as if the budget caps will stay in place, "who cares? It’s more of the same. You don’t need to message affordability."
Mackenzie Eaglen, a defense expert at the American Enterprise Institute, said companies would be wise to continue positioning themselves as cost-conscious.
"Anyone not talking about affordability has missed the nuance of what candidate and now President Trump has been saying all along," she said. "Yes, there's a buildup, but it's going to be partially self-funded, and he expects greater efficiency from the bureaucracy and greater cooperation from the contractor all the way down the line."
Defense News Pentagon correspondent Aaron Mehta in Washington contributed to this report.