Some critics on Capitol Hill and elsewhere view this as an irrelevant budget: It just comes in on the costs, DoD won’t get everything it wants, and the next relevant budget will be in May 2017, after a new administration submits its budget. How would you make the case that this is relevant? Does it contain, in your view, major muscle movements or initiatives that you think will outlast this administration? and be embraced by subsequent administrations?

I think it does. If I would list the major move, I think in this it’s with respect to Russia, and that’s within the secretary’s framework of trying to really have us reorient a little bit so that we’re thinking across the spectrum from now to 20 years from now. Here and now is the fight against ISIL, of course, and the Taliban in Afghanistan. But he’s really trying to focus us as well on the higher end, peer and near-peer competitors, that’s Russia and China, as well as Iran and North Korea. I think that what we’re doing in Europe, in particular, on this so-called European Reassurance Initiative, is probably the biggest muscle move in my mind in this budget. But it’s also the mental framing to think about the high-end competitors as well as the here and now. No secretary is ever going to escape the demands of the here and now. But to think ahead is really where I think Secretary Carter is trying to push us, and to think across the spectrum of time, geography and all the domains now: air, sea, land, to think about space as a contested environment, to think about cyberspace as a contested environment. He’s really challenging the military to be, as we know that they are, versatile and agile across every imaginable dimension. , I would say, of time, space, geography and domains from the physical to the virtual.

For many observers, the biggest loser was acquisition programs, with a 7 percent decrease between ’16 and ’17. There is a concern that by continually cutting and deferring programs, the administration is causing a bow wave, a crest of programs that will come due around 2020, 2025, at a time when the nation may not have the money because of debt reduction and demographic trends. By pushing this stuff out, Are you potentially dangerously delaying modernization, but also creating a bow wave that may simply be too big to address in the future?

There was a pre-existing nuclear modernization bow wave that is coming throughout the decade of the ’20s and the first half of the ’30s as we buy the replacement for the Trident submarine, one at a time over a period of a dozen years or so, as well as the other two legs [of the nuclear triad]. That challenge is before us, it’s something that we’ve been working hard, the deputy secretary in particular has been working very hard trying to make sure people understand it and start exploring different ways that we can solve it. More resources, of course, would be our top solution to solve it, because we look back at what was done historically in what he calls the first and second waves, of the early 1960s and mid-80s when the triad was recapitalized to some extent, it didn’t come at the expense of the conventional force. That’s what our ideal is, that we’d be able to achieve that again, but the fiscal situation in the ’20s and ’30s with the baby boomers in full retirement mode is going to be a challenge for sure.

In the near term, though, balance is something that’s almost inherent in budgeting. On the Air Force side, we rebalance slightly toward the capacity side, on the Navy side, slightly toward the capability side. from where we were. Historically when there are budget gyrations up or down, acquisition accounts, procurement in particular, are the most volatile. The budget deal that we got was a deal for fiscal ‘16 and fiscal ’17. That deal gave us zero guidance about what’s going to happen after this, in ’18, ’19, ’20, ’21 and then on into the future.  We know that the Budget Control Act caps are still the law in ’18, ’19, ’20, ’21. This department has been very consistent that we can’t live with those caps, we don’t support living with those caps. , and our budget profiles have been really consistent, probably as consistent as any administration has been. Looking at our ’15 budget, our ’16 budget, our ’17 budget, where we say we need to go for the next five years has been remarkable, we’re talking maybe a billion difference or two out of 500 in any given year. Over those three years our position has been consistent.

Then you get a short-term signal in the budget deal that you’re going to get less money, you’re going to get much of what you want but not all. How do you react to that? , how do you make reductions? Compensation is really not a good short-term lever. You certainly wouldn’t give people a pay cut.

In fact you have you have a pay increase in the budget.

Yes, we have a pay raise. So that lever is really not available to us to reduce compensation unless we were going to reduce the size of the force. Size of the force is really the biggest lever that there is. , it affects everything else. If you have a smaller force, then you need less facilities, you have less people to pay, you need less health care, you need less rifles and ammunition and aircraft. But when you have a short-term signal that your budget is going to be adjusted 3 percent down, as it was in this deal in ’17, with no information about where the future is going, that’s not a propitious time to make the force smaller permanently. Making the force smaller is a big muscle move, it’s a hard muscle move, it’s a slow one, it involves getting people out of the force either voluntarily or involuntarily. I wouldn’t say it’s a step of last resort, but it’s a very difficult step to do. So where that tends to leave you is you go to the acquisition accounts. They are more adjustable in a short-term, one- or two-year change in supply of money, not so much a change in demand for military force but a change in supply of resources. That’s what historically has happened, and that’s what we did. It’s not unusual if you look at history to say that procurement is my short-term shock absorber.

How did you decide how much to take from each of the services to make up for an almost $22 billion shortfall?

The primary way we look at our program and how to adjust it is what we call portfolios, so things like space, ISR, ground forces, tactical air forces, not so much that each service is going to get a bill, although that is one of the tools that we use. But it’s primarily, where do we think that we have too much risk or that we have an investment in what sort of fields of endeavor could an investment really make a difference. It’s kind of looking at the margin of where we think we have a little too much or that we really think progress could be made.

Some in the department have referred to the F-35 as the “piggy bank,” with reductions to annual buys freeing funds for other uses. But volume is vital to the program. , and repeated cuts and deferrals could produce cost spikes. Is there a danger that the department is destabilizing its largest program by keeping planes around like the A-10, continuing to buy F-18s instead of moving to this new-generation airplane?

I wouldn’t say there’s no risk. I don’t personally worry that this is going to end up like the B-2 did where the quantity drops to such a small number that the unit price spikes up and people aren’t willing to buy it anymore. I do think there’s some risk of that, and obviously in this program what we do is a key driver. What our partners do is also relevant. The analysis that our acquisitions folks did was that the quantity changes in this budget were not going to materially affect the unit cost. So we didn’t see ourselves as kicking off a bad spiral in terms of unit price, but it’s not where we wanted it to be. We would certainly have liked to be buying more.

Can you give us a rough sense of how much of the department’s total resources are going to things that could be characterized as either major innovation initiatives or third offset initiatives?

The amount of resources that we’re talking about in the FY17 budget is on the order of $3.5 billion, so kind of in the 1 percent of our budget range. It’s not enormous in terms of funding. One of the points that the secretary has tried to make to us is innovation, in his mind, is not just about money. It’s also about the way you think. What he likes about the Strategic Capabilities Office is they imagine ways to take a weapon you already have and use it differently. It doesn’t necessarily take a lot of money to do that if you have some clever adaptations of things you already have. So third offset, and innovation writ large, the primary yardstick is not necessarily money.We’re not talking about taking 10 percent of the department’s budget and moving away from tankers and aircraft and ships to new innovative things, it’s much smaller resource-wise. The import is a combination of the money but also the mindset.

Overseas contingency operations (OCO) has evolved into something that is not really supplemental, but is actually a core part of the way the department runs things. There are still a lot of base-budget items that exist in OCO. If it isn’t going away, isn’t it time to establish more firm criteria about what goes into it and what does not?

We’ve had pretty firm criteria between ourselves and the Office of Management and Budget over the course of this administration. We wrote them early on, and we’ve largely left them in place. The signals on OCO have been very confused. , I’d say the situation is pretty confused if nothing else happens as we turn over this administration to the next one. What we’ve done in this budget deal was really unprecedented, writing OCO numbers in advance of any particular requirement level being established of here’s what it should add up to. That really was moving pretty much 180 degrees opposite of what the desire had been in many quarters to tighten OCO and get it back in the base. Getting OCO back in the base is a good thing but it can’t be done with the Budget Control Act caps. We simply can’t absorb those kind of resources. We just don’t see how it’s possible to move that back in there unless you’re going to revisit the whole Budget Control Act structure.

Right now, there’s nothing as far as what I can report. We have provided the information to the Qataris. Whenever we export equipment, there are many people across our government and industry that are involved in the decision. s to export this equipment. So I think there are many things going on right now and we’re in kind of the waiting period. 
 
China, Russia, North Korea, ISIS are all threats. You regularly meet with leaders around the world to advance the US and Air Force interests. What do US allies and partners want from you?

The biggest thing is command and control. This isn’t only for the high-end fight, but also for humanitarian response. If we look at the Pacific and the humanitarian disasters in Japan and Philippines, we found that although we have interoperable equipment, common equipment, command and control is one area that we’re working on also both for humanitarian assistance and the high-end fight. And there’s never going to be enough ISR. There’s an appetite that the more intelligence, surveillance, reconnaissance we have, the better off we’re going to be.
 
The ISIS fight is a priority. What are our ISIS partners looking for, and what are you expediting for them?

This is one of the biggest success stories. When I look at the coalition, especially the air coalition, 12 partners that are in there with us flying sorties, dropping munitions every day, it’s a huge success story. If I can highlight one country particular it would be the UAE.

That relationship started through a sale of F-16 aircraft over 15 years ago. Since then we’ve trained with them, we’ve exercised with them and they’ve been very successful right now in conflicts going on in the Middle East. That’s one story.

To answer your question, we’re seeing requests for replenishment of munitions. That’s, again, been a success story. , how we’ve been able to expedite some of these urgent requests. 
 
Close allies Britain, Italy, Turkey and France have bought US Reaper unmanned aircraft. But they’ve been frustrated over how long it’s taken to get the strike version. of the plane. What’s being done to accelerate that process for nations fighting alongside US forces on a daily basis?
 
Years ago, it used to be that the US Air Force would operate a system for years until it was proven, then we’d export it. Now our partners are asking for capability at the same time and sometimes even before the US Air Force starts operating it. We’re trying to work to get these policies in place to allow the export and allow our partners to be capable in the coalition. That’s been one of the biggest initiatives that we have. People say, “Oh, it takes so long.” Well, it takes so long because it’s new putting these policies in place.
 
You see that accelerating as everybody gets more familiar with the process? 
 
We want to make sure that this most-advanced technology that we have, that we protect that technology. It’s a balancing act that we want our partners to be capable, but we want to make sure that the US Air Force continues to have the edge. 
 
America’s close Middle East allies have the resources to buy the highest-end US systems. But the drop in oil prices has hit the pocketbooks of many countries, including Saudi Arabia. You meet with those nations. Any evidence they’re reducing or delaying weapon programs?

I haven’t seen that they’re reducing or cutting back mainly because of the challenges in the region. I’m seeing a higher demand for the US to be the partner of choice in the region. However, having said that, I think they’re going through similar things that we are. Some of the discussions I’ve had with them, as here in the US, as your budget gets smaller, making those choices between putting resources towards your defense or putting it to your domestic needs.
 
The Saudis have made clear their unhappiness to Washington over the Iran nuclear deal, Mubarak’s departure in Egypt and other things. Do you notice the change in the Saudi relationship that involves the US Air Force?

I’m aware that there are some policy issues right now between our countries, but as far as I see it, the Air Force-to-Air Force relationships, I really believe it’s stronger than ever. Just about a week ago I was able to meet with [acting Saudi Air Force chief Mohammed bin Saleh] al-Otaibi btw he is acting air force commander]]] Gen. Atabay  [PH] (check the name of the Saudi Air Chief – vm) to review their F-15SA project, the largest foreign military sale in the history of the United States. 
 
The UAE bought Block 60 F-16s that are among the world’s most advanced fighters. Two years ago it looked like they would buy 30 newer Block 61 aircraft. Now we’re told the UAE is looking to sell its Mirage 2000-9s to buy Rafales. Will they buy Rafales or upgrade their F-16s? 
 
We do a lot to work on the partnership with UAE, and as I told you before we have a strong partnership through the F-16 aircraft. My advice to any country is to keep commonality between their equipment just because of the cost to sustain them and operate them. Also, selfishly, the US wants to be the partner of choice, so that would be our recommendation. Having said that, many air forces like to have more diversity in their fleet, and I respect that. So if that’s their choice, and they’re looking for more diversity in their fleet that brings them the capability, in my role it’s all about having a capable coalition. The more capable our coalition is the less the US Air Force will need to do to respond. 
 
Is this either they buy Rafales or upgrade Block 60s, or can both coexist?
 
I think that they can coexist, and my hope is that they will.
 
There’s concern the United States is moving to the highest bracket of combat capability. For example, the joint strike fighter will be a great airplane but very expensive. Richard Aboulafia of the Teal Group says there’s a big global market for far cheaper fighter aircraft. Are you concerned the United States is pricing itself out of some markets? 

My concern on that is I know that there is still quite a demand out there for our fourth-generation aircraft, so to keep the US industrial base going on F-16, F-18 and the F-15. That’s important because there’s still a high demand for those aircraft. Now, the other issue that we’re looking at is there’s a demand out there for aircraft that are not in the US inventory. We call it nonstandard aircraft, but these partners still want to train with the US Air Force, so we’re looking at how do we make that happen. The best example I have right now is the A-29 aircraft. It’s not something that’s in the US Air Force inventory, but we’re using it to train Afghan pilots because it’s the right aircraft for them.
 
Would Textron’s Scorpion jet fall into that category as well?

That would be one of the many and part of the role of my staff is to be aware of all of the US industry, what they have to offer from the lower-end capability and price point to the very-highest-end to the F-35, and that’s our job is to collaborate with industry and be an advocate for the US to be the partner. 
 
You just got back from the Philippines, which will allow US forces to return to its bases. What’s the future of the relationship between Washington and Manila and what’s next for Clark Air Base, the former Air Force hub in the Western Pacific?
 
The new agreement that was just signed, I think, will bring us even closer together. It’s opening some opportunities for basing. I believe it’s about eight bases, but I look at it as an opportunity to open the relationship. Gen. Delgado, who is the air chief there, hosted Gen. Welsh, our air chief and me there recently. They took us to Basa Air Base where they’re going to be flying the FA-50 aircraft that they just purchased from Korea, but I see it as an opportunity to open these bases and see what we can do to assist them and to allow more exercises, and not only with the US; but when I look at in their region, it’ll open opportunities for other countries to exercise there too.
 
Japan, a key ally worried about China, has changed its laws to allow greater arms cooperation as well as exports. What what’s next for the US-Japan alliance?
 
As far as recent agreements and new laws that were there, I think it’s just strengthening our relationship there with the US-Japan alliance. 
 
Could you see working with Japan to export a system to another ally?

I think it’s open. To me, where we can leverage, the more we can leverage expertise of countries around the world, and the industrial-based knowledge they have, I think the stronger we’ll be together. 
 
For years, the Air Force has trained Iraqi and Afghan air forces, but there are concerns that the Afghans are still not up to speed. What more needs to be done so the country can stand on own?

A. Well, I can tell you both in Iraq and Afghanistan their air forces are good-news stories. Our focus when we initially started building the security forces capability was on growing the Army and the police force, so we were a little behind to build the air forces of these two countries.

I can tell you that it’s amazing how we’re doing right now with the F-16, C-130 for an example. In Iraq the pilots are out there utilizing the F-16 that was just delivered. I was able to be there in July for that ceremony.

And I just attended in December the graduation of the Afghan pilots, so the first nine Afghan pilots graduated, and we have about four aircraft A-29s in Afghanistan learning tactics and procedures before they go into combat.

Email: vmuradian@defensenews.com

Woodburn, 45, was tapped by BAE’s board for his international business savvy and the new perspectives he would bring as a commercial executive, but has no defense experience.

With a doctorate in engineering from Cambridge University, Woodburn joined Expro in 2010 after spending 15 years at global energy services titan Schlumberger, including as the head of engineering and manufacturing.

He would become the second top BAE executive from the energy sector. The other is BAE Chairman Sir Roger Carr who came to the defense firm from British Gas.

While the publicly traded BAE is the world’s No. 3 defense contractor, according to Defense News Top 100 ranking, with $25.5 billion in 2014 sales, Expro is privately held with $1.4 billion in 2014 sales. The company specializes in oil and gas well flow management.

BAE declined formal comment. Britain’s Sky News broke the story Feb. 13.

Last year, BAE began looking for a potential successor to King, its longest-serving CEO who took office in 2008.

In fact, the last time BAE had a COO was when King took the job before succeeding Mike Turner as chief executive.

According to a source, the transition between Woodburn and King would be a long-term effort to ensure the incoming chief learned the intricacies of the global defense business.

The source added that, for the being, the company’s senior management team would remain unchanged.

Headquartered in Brussels, EDA shapes industrial policy, research and development and drives collaborative programs to equip member nations, like aerial tankers, unmanned aircraft, satellite communications and cyber.

Domecq was in the United States last week for meetings at the Pentagon as well as with NATO Allied Command Transformation officials in Norfolk, Virginia.

Q. How do you envision the strategic linkages between the EDA, US and NATO on US Defense Secretary Ash Carter’s third offset strategy and technological innovation strategy?

A. In the new security environment in Europe, NATO and EU are obliged to cooperate and this has been even clearer in a hybrid situation where we see that EU has a set of tools including military which give us the comprehensive approach to defense and security. And NATO has a set of capabilities also that are complementary. Fifteen years ago we were worried about non-duplication. I think that time is over. We are now in a new situation where we cannot continue to pretend that NATO remains relevant if there is not a strong and relevant military European component.

Q. You’ve said there is no real defense capability without industrial capability. How do you maintain a leadership component and credibility if the nations themselves are not investing as much as they all should be?

A. We need the first investment to be devoted to the right items in defense. We cannot continue to use in Europe half of defense spending on personnel. We cannot continue on defense spending which only has 10 percent of what the US gets out of every buck it devotes to defense. This lack of efficiency in defense spending in Europe is an effect of the fragmentation and the national approach to defense by big, medium and smaller nations. Defense cooperation is no longer an option. Many of the prime technological defense industries in Europe remain in Europe because they have the defense part of business. If they did not have it, probably they would have translocated the production lines somewhere in the world.

Q. Are you satisfied enough money is being programmed by governments as they look at the Russia threat, at ISIS, and other emerging threats? Do you sense that there is going to be an uptick in that R&T spending?

A. I hope so, because R&T has gone down in the last six years by 27 percent and R&D 29 percent. That is more worrying than the entire defense spending because the effects of that downturn in R&T and R&D spending will be noticed in the immediate term.

Q. Europe seems to be better at getting technology that works the dual-use angle and more rapidly embraces commercial technologies and adjusts them to defense programs. What lessons can the US learn to attract interest from commercial firms?

A. There have been good examples of incorporating civilian technological innovations in Europe, but in the US it is a very long tradition of civilian technologies spinning into the military domain. I think around 75 percent of R&T in the US is happening in the civilian sector. The third offset strategy is going to continue already a long policy in the US of devoting public money into technologies. What is going to change is not only how we incorporate it but how defense ministries change their way of functioning vis-à-vis these industries. That is the way in which defense programs are run and which will have to change exponentially in the coming years with shorter cycles, going for demonstrators, having to rely also on venture capital to fund them.

Q. What is the status of the Airbus MRTT program?

A. At present, this program, which is a model of operation among different organizations in Europe, we have established the common staff requirements. Now OCCAR with our support is taking care of the procurement management and in the end the fleet of air tankers will be maintained and owned by the NATO procurement agency NSPA. At present, Airbus is preparing an offer that will be presented to the free states, which are so far a part of the program and we are going toward a signature of the contract in June next year with an initial operational capability in 2020. Three nations are involved, the Netherlands, Poland and Norway; more are interested to join at a later stage either by procuring additional aircraft or flying hours.

Q. What is next for the pan-European drone effort?

A. We have to separate what are our immediate operational needs and what we need in a longer term. Immediate needs, we do not have this strategic medium altitude long endurance drone in Europe at present. So all of these countries have opted for the US [systems]. Now in the medium term there is a need from a strategic autonomy perspective for Europe to have that capability, and it is even more important for the industry in Europe to retain the skills that they now have in the combat aircraft domain. In the coming 15, 20 years we do not see a next generation of combat aircraft.

Q. Would more consolidation produce greater integration in Europe’s industrial base?

A. I clearly consider that industrial consolidation is more than necessary in Europe. It has to happen around cooperative programs that are agreed by member states where we have defined common requirements and then asked the industry to come together and do it. A clear example where there has been a success, for example, the missile area where you know you have two US firms who take two-thirds of the global market and the other third is a European company made up of different companies which have come together which is MBDA.

Q. Historically, there has been a very tense relationship between the EDA and NATO, including the US, where there has been a perception that the EDA is working sort of a separate agenda. What is your view of what the relationship among all three has to be?

A. That lack of trust, or looking at what Europe was doing with distrust, has finished. What the US is clearly signaling is Europe has to get on and get its act together whatever it does in defense. That has meant that the issue of NATO and EU cooperating is no longer if, it’s how. We are doing it so far within the political limitations that exist informally. However, I got a mandate from defense ministers in the agency in May to enhance and synchronize our defense planning in Europe and in NATO to ensure that we do not unnecessarily duplicate work, and to work specifically on hybrid strengths.

Working hand in hand with NATO and choosing what is done better in one place or another is the best way forward. I also think the US, which has shown a keen interest in the agency in recent years, should also look at a possibly more structured approach to the agency as the best way to enforce and reinforce NATO and the EU getting together in the perspective of the Warsaw Summit as well as the development of the Union’s Global Strategy.

Q. Does Europe need a much more integrated strategy to work along with the US as it develops its third offset strategy?

A. I think it is very important that the US talks to its allies and partners in Europe collectively on this. We cannot afford creating more gaps but we need to synchronize to the most possible extent primarily to ensure interoperability amongst the EU member states and NATO nations. One of the key aspects of the third offset probably will be related to cyber, which is an area you can only deal with in a collective manner.

Email: vmuradian@defensenews.com

Q. What’s your cyber strategy?

A. Since 2007, we have purchased fourteen cyber-related companies. We pulled key products from those companies into Raytheon Cyber Products, and have been selling to the government via the GSA list; growing about 20 percent year over year.

In September 2013 we decided to get into the commercial cyber business to unlock the value of our cyber investment. But we knew we needed channels into that marketplace and looked for properties we could acquire to provide us those market channels. We also needed a state-of-the-art platform onto which we could plug our defense-grade cyber products to accelerate our move. We’ve done that with Websense, which is a joint venture with Vista Equity Partners, a private equity company that sold us Websense. They will own 19.7 percent and provide their market expertise to grow this new business, which we will be reported as a separate business unit.

Q. How are you increasing agility?

A. You must have differentiators and discriminators to win in the marketplace. And you have to tie that back to the IRAD (independent research & development) investments you’re making, sometimes 10 years in the past, to be ready when these new capability needs come to fruition.

That happened with the investments we made on gallium nitride about 10 years ago. There were a lot of problems with GaN in the beginning: a lot of power in a very small area for a device creates a lot of heat. There were a problems with circuitry fatigue due to the heat and a lot of folks abandoned it ten years ago for something called high voltage gas. We stayed with it, and like Thomas Edison we had a thousand failures before we had success. We had a vision, we felt we could achieve it. It was a big bet, and we got there.

That’s kind of like Silicon Valley, right? People making a lot of bets and sometimes having a lot of failures. You have to allow for failure. We knew whoever figured it out would essentially be king of the hill, at least for a short duration. And frankly, I think we proved that out. We had the highest-powered devices and highest efficiencies. GaN gave us a discriminator in key competitions like Next Generation Jammer, Air and Missile Defense Radar, and the 3D Expeditionary Long-Range Radar, which is still in protest.

Q. Is success about a more distributed decision-making culture?

A. I think it’s the focus on growth. Our three focus areas are global growth, competitive advantage and enterprise collaboration. We made a distinct push into the international marketplace – we felt that 25 percent of our business being international was a glass ceiling. We got away from a regional model to a country-based strategic model. Last year, international sales were close to 29 percent, and with the recent Saudi Patriot award about 43 percent of our backlog is now international.

Domestically, growth is about being more competitive and having the differentiators and discriminators to win.

We were focused and made sure the programs had the right support across the company; to approach the marketplace as one company. It’s not easy to get the whole company to act as one. When you can make that happen, the elephant does dance.

Now, everybody is stepping forward and thinking about growth. You know, think about it, since the Budget Control Act of 2011, everybody’s thinking decline. So how do you get 61,000 employees to think growth? How do you get folks to think really creatively and not feel they’ve got to hunker down and batten down the hatches. That was a culture challenge: not to hunker down but move forward. We had to set the tone at the top — we increased our IRAD spend and we built our cyber center right around when the Budget Control Act happened. We made those investment to improve our capabilities.

During this period, we increased our IRAD, year over year, by 24 percent. We sent a direct message to our employees that we’re not just going to sit back and ride out the storm; we’re going to be proactive. It’s the results that count. If we didn’t win those big awards, then I would say we weren’t effective.

At the same time, we consolidated from six to four businesses. We took out millions of square feet. We took out cost wherever we could. We introduced our strategic sourcing capability. The company is now on one material resource planning system, which allows us to do data analytics across our whole supply chain. We know what we’re spending at any supplier at any given time, and we leverage that spend for the best affordability and capabilities.

Q. How do you balance short-term investor needs like dividends and stock buybacks with long-term investment?

A. We’ve taken a balanced capital deployment approach. We just announced the eleventh consecutive increase to our annual dividend, so I think we’re definitely giving money back and we have been buying back shares. But we’ve also been looking for opportunities to add value to the shareholders in other ways. Instead of putting all our eggs in one basket,we believe there are opportunities to add value by winning programs like AMDR. You know how our industry works. Each one of these franchises is going to create value for fifteen, twenty or more years.

We could’ve given all that money back, but then we wouldn’t have won those programs and we would’ve missed out on four franchises that will last decades. If we had lost because we didn’t invest, I should’ve been fired.

Q. Do CEOs have to educate investors?

A. That’s the job of a CEO. There are three camps. There’s the camp that says, “we just want you to return all your cash directly to shareholders via share buyback and dividends.” Some of them don’t want the dividends, they want all share buyback.

The second camp says, “we want a balanced capital deployment strategy. That you should be thinking about how you’re going to invest in yourself to maintain and grow your business.”

The third group is saying, “wait and see.” If we’re going to make these investments, they’re going to want to see the results. And by the way, I agree with that. And to date, we have been showing results. And I think as long as we can continue to show those results to the investor community, they will support us.

Q. Has the budget hit bottom?

A. Some said it was last year, but we think this year is the trough year. We expect growth in ’16 and beyond. It’s going to be initially low, single digit, but we’re starting to see it.

If sequester ends and budgets significantly increase, then I think it could jump-start things a little bit faster. Bottom line is that the threat’s significantly increased around the world, not just in one location. And the threat has many different faces so that makes it more sophisticated and harder to deal with.

Q. Has declining oil revenues changed your Middle East sales outlook?

A. The words I hear when I’m in the region is: a strong defense is a strong deterrence. Nations want to protect their sovereignty and revenue-generating resources.

Q. What will Raytheon look like 10 years from now? Will it be more commercial markets?

A. We’re making the major push into cybersecurity because it will pervade everything that we sell. There will be a requirement that cybersecurity be embedded in all solution sets, otherwise systems will be defeated.

So you’re going to have cyber security engineers that are involved in the design and development, integration and test and production of these systems. I think you’re going to see that as a major change to the industry.

Our brand is growing internationally and allowing us to expand into areas that we haven’t been in before. Commercial cyber is just one example.

Q. How do you interpret Defense Secretary Ash Carter’s Silicon Valley speech?

A. I think we do need to innovate faster. There is a concern by folks in industry that with sequestration in place, there aren’t new things coming along. Secretary Carter is providing direction and as the industry sees where he is taking the department and the opportunities there, I think they’ll react in a positive way.

Q. Better Buying Power 3.0?

A. I support it. I like competition. Any way that DoD can figure out how to stretch its dollars is important to the industry. We just need to make sure that as we proceed that they continue to allow industry to innovate and give us the opportunity to try to be a defense Silicon Valley.

Q. How do you attract and retain top cyber talent?

A. You’ve got to provide all employees an environment where they feel that they’re adding value. That they’re getting results and the results are meaningful. That’s noble work.

Q. Are you comfortable with Frank Kendall’s new IRAD rules?

A. It’s always good to be connected with the customer and to ensure that what you’re developing has some military utility. So I think that connection makes a lot of sense. We don’t want to be off developing IRAD that’s meaningless to those in the field.

The question is how it’s implemented. If it’s seamless and leverages the benefit of getting some insights into the capability needs of the military, then I think that works.

Q. In the first state of the Coast Guard address, you unveiled a new strategy where you have to make prioritized calls. The spirit of the service has been, no matter what the missions, we are going to execute all of them. What are your priorities and where are you potentially going to have to start saying no to?

A. A lot of times we will put a budget package together and then at the end of the day we look at what is left. We never get the full budget that we ask for and then we decide, what are we going to do with it. Instead we turn that around and we actually put the horse in front of the cart and say, here is our strategic intent.

The Arctic is important to our nation. We have an Arctic national strategy. We chair the Arctic Council over the next two years. Eight of the 10 most violent nations in the world, when we talk about regional stability, are here in the Western Hemisphere that we share. And how did they get that way? It is through illicit drug flow. So you look at drugs and violence, crime, rule of law that is right on our doorstep.

Q. But what are some of the things that you are potentially going to have to say no to? I mean there has been a long debate within the Coast Guard that you have too many missions. Do you think that you are at this point where you need to go to Congress and say, “look, I have too many congressionally mandated missions”?

A. We are the right service for the missions we have been allocated. You can go back, actually, 100 years ago. There was an efficiency and economic study conducted back in 1915 that said we can take these missions and give them to another entity in federal government, which then they have to develop maritime capabilities. At the end of the day, it is even more expensive for those entities to do the missions that we have today. So when it comes to efficiency, the Coast Guard is the right place to do it, we just need to be properly resourced to carry out these missions.

Q. How much more resources do you think that you would need from a resourcing standpoint to be able to be at that position?

A. We have gone through several iterations now of our missions needs statement for a program of record. Eight national security cutters, 25 offshore patrol cutters, which obviously we are still in competition, and then 58 fast response cutters, plus an ISR package that goes with that.

Q. You have one heavy icebreaker, the Polar Star, that is back in service, a 40-year-old ship. You’ve said that the service needs three heavy icebreakers, three medium icebreakers. What are the options to get those ships?

A. The three heavy, three light, that goes back to a high latitude study done by an independent research firm back in 2010. Going forward we have several options. One would be to reactivate the Polar Sea, which has been laid up now for over four years. There is money in this year’s budget to haul it out of the water and do a full material assessment. Unfortunately, under continuing resolution we can’t execute that contract to pull it out of the water. But by next year we need to make a decision. Do we reactivate? Do we even consider leasing or do we recapitalize? Recognizing that reactivation maybe might buy you 10 years, but at some point our nation needs to recapitalize its ice breaking fleet.

Q. What are some of those capabilities that those ships need? As these ships are going to last five decades or more, what are some of the baseline capabilities they are going to need?

A. First of all, it’s heavy ice breaking capability. Last year the Polar Star had to rescue a medium ice breaker from China. Just before they arrived, the wind shifted and they were able to get out on their own. Clearly, [that] is no place for a medium ice breaker. It does require heavy ice-breaking capability. It does require a command-and-control suite. It needs to be able to augment a response team especially up in the Arctic where we have no shore infrastructure and any response up there will be coordinated from sea and not from shore. It needs to exert sovereignty. We have an extended continental shelf that other nations right now are doing research in. That ice breaker also needs to be a sentinel of US sovereignty up there as well.

Q. Where is the funding for this going to come from? You have said that the stakeholders should be able to contribute to it. That would be the Navy, National Science Foundation, NOAA and others that are stakeholders in the ice breaker fleet. Do we need to take a more national approach?

A. We have a national strategy for the Arctic region. Within that strategy there is a series of implementation measures that must be taken. This is clearly one of those, but this is clearly at a national level. It is not just a Coast Guard issue, but we have a number of stakeholders as you mention, the National Science Foundation, Arctic Research Council, Department of Commerce, State, Defense, Transportation, we have a lot of equities in the polar regions both north and south, but it really is a national challenge that we have right now.

Q. You have talked about the state of shore infrastructure that the Coast Guard has. You have about $40 million available to solve a $1 billion problem. How are you going to address this problem?

A. With the $1 billion acquisition budget, $40 million is all I can afford, so clearly a $1 billion acquisition budget does not adequately address the $1.4 billion backlog that we have right now.

Q. The Arctic Council is going to meet next month in Washington. You mentioned that your predecessor, Adm. Robert Papp, is going to be involved, and obviously the US representative is the chairman of that. What does the United States hope to accomplish?

A. We want to move the ball forward during this period. I want to create an Arctic Coast Guard Forum that really address the most pressing challenges in the Arctic, environmental, safety of life at sea, the welfare of the native tribes that have lived up there for more than a millennium and not militarize the Arctic, but these are really Coast Guard equities not military equities. And establishing a Coast Guard forum would allow us to right-size what our needs, what our objectives are, in the Arctic region. ■

Email: vmuradian@defensenews.com.

Carter is expected to tap current Air Force Undersecretary of the Air Force Eric Fanning as his chief of staff, and US Army Maj. Gen. Ron Lewis, head of Army public affairs, to be his senior military adviser, according to a source familiar with internal deliberations.

Fanning has served in his current capacity since April 2013, and is widely regarded as an up and comer in defense circles.

As undersecretary of the Air Force, Fanning primarily oversees work on the service’s budget and takes the point position onmatters of space operations, policy and acquisition issues.

Before joining the Air Force’s USAF’s leadership team, Fanning also served as deputy undersecretary of the Navy and its deputy chief management officer from 2009-2013, where he led the sea service’s business transformation and governance processes.

Fanning “has had a terrific tenure in the Air Force,” said Rebecca Grant, a former Air Force official and president of IRIS Research. “He’s really been able to operate across the full range, including being involved in the difficult budget meetings in the Pentagon” over the past several years, she added.

Grant also noted that the Air Force is facing some weighty issues, such as that like the cominglong-range bomber program, finding ways to pay for the expensive fleet of F-35s that will soon be making their way down assembly lines and into the operational Air Force, and finding ways to increase — or at the very least maintain — the current operational posture of its fleet of ISR and strike drones.

The chief of staff commonly assists the secretary with policy deliberations and coordinating interagency matters, among other tasks.

Lewis took over the Army’s public affairs office in June, of last year, fresh off a yearlong deployment to Afghanistan having served as the deputy commanding general (support) for the 101st Airborne Division.

A career Air Cavalry officer, Lewis also served a tour in Iraq and an earlier tour in Afghanistan.

Between deployments, Lewis has spent a lot of time at the Pentagon, much of it at Carter’s side, most recently as an adviser on his transition team.

Not counting his role on the transition team, Lewis has already filled the role of military adviser to Carter twice, first as his military assistant when Carter was the undersecretary of defense for acquisition, technology and logistics in 2011, and following him to become his senior military assistant when he took over as the deputy secretary of the defense until he deployed back to Afghanistan in early 2012.

Maj. Gen. Lewis also served a has a stint as the military assistant to the chairman of the OSD Defense Business Board. under his belt.

Email: pmcleary@defensenews.com

Twitter: @paulmcleary

Better Buying Power 3.0, the new “offset” strategy and Defense Innovation Initiative are still in their early stages, but there has been much talk about how the defense industrial base leaders in the US and Europe can collaborate in the future to meet the need for their countries’ forces to increase interoperability and drive down costs.

French Air Force Gen. Jean-Paul Paloméros, NATO’s Supreme Allied Commander Transformation, is right in the middle of these debates.

Q. Why is this new Pentagon Defense Innovation Initiative important, to both sides of the alliance?

A. Industry needs to do everything possible in terms of innovation for defense. There has been a lot of bad news in the recent past about the reduction in defense budgets. We see that in France, but in other places as well. There is a real difficulty in trying to define a long-term perspective for the industry. We have heard that many times from industrial leaders. They have no clear vision about what the future potential is for defense investment in European countries. What this innovation initiative brings is a new perspective, a new vision, and a new hope for industry to be involved in the preparation of the new strategy.

Q. How will you engage NATO and EU allies about this initiative, which US Deputy Defense Secretary Bob Work insists must include European allies?

A. As the head of Allied Command Transformation [ACT], I consider this as a part of my responsibility.

ACT is really the command that is looking at the future. This is for us to propose a vision on those initiatives and to open the doors. I hope that will be carefully followed. We have a lot of interesting ideas about how to transform NATO. The US initiative itself is new, but the mindset is very much embedded in what we try to do when we work with NATO and EU allies. Perhaps we will help the European countries make up their minds about what they want to do for the future, where they want to invest, and how they want to use science and technology. This is fine to get a pledge for 2 percent or 20 percent of funding for defense spending and investment. The question is what the priorities are.

Q. You have talked about not looking at things as NATO or EU, but more broadly as an alliance. What role can you play in explaining this innovation and partnering initiative?

A. I see a great potential in partnering with the EU, which would be of great benefit for NATO. Obviously, we have to be very smart in presenting this opportunity to the European Council. It might have started as a US initiative, but in a conversation about a trans-Atlantic initiative we must be frank. The reason is, we know, that this is seen as a US-only initiative. That is why NATO, being associated with this, must assure allies that the European nations can have their say and make up their minds about how much they want to push this initiative, and how much currency they want to give to this initiative with their US partner.

Q. DoD acquisition chief Frank Kendall recently said a sixth-generation fighter would be part of Pentagon’s 2016 budget. Is this an area of trans-Atlantic NATO collaboration?

A. The job of NATO is really to focus on providing deployable troops, command and control, information sharing, cyber, and anti-ballistic missiles and collective defense. NATO can help to define a concept for the future but is not really in charge of defining the platforms of the future. The aim of NATO is that those platforms can be integrated within the overall system.

Today we have 16 key shortfalls in the NATO inventory. We will need to exert a lot of effort to fulfill or bridge those gaps in the near to middle term. I cannot imagine it will be done in the short term, as this is a very demanding roadmap. We must be very careful, as far as NATO is concerned, in pushing too hard in certain demands. This is why if nations want to develop a specific platform, this is their business. NATO has its key priorities, as defined by the heads of state. We must keep this roadmap in front of our eyes when we are making priorities for the future.

Q. Many large companies view this DoD offset strategy with concern, fearing disruptive ideas that will undermine existing programs. How do you get everybody pulling together?

A. You put your finger on the key issue. On the one hand, we are promoting partnership with industry. On the other hand, we are promoting competition as well. More than ever, we have to manage this dual approach, which is not only for states but for the industry. We are looking to improve our defense capabilities, and the environment is such that there is a sense of great priority and perhaps urgency.

The defense industry needs a vision for the future. They cannot invest their own money and the money of their stakeholders without a clear vision and strategy. In many ways they know that the military research and technology investment accounts are no longer the key driver, but still important. They will see the benefit perhaps in a new opportunity.

On the other hand, they are compelled to invest in breakthrough technologies. In getting more involved in the advance projects, and getting more of their view taken into account in how we imagine the future. You see that there will perhaps not be a place for everybody. That could mean some restructuring.

Q. Is this a challenge for industry?

A. The industry is very agile at the end of the day. Depending on the priorities we have set down in the past, they have been able to adapt. If they are not able, they die. I am sure that providing a better vision — and I mean not only the vision of what should happen in the next few years but our longer-term ambitions — will be critical. That is exactly what the heads of state say as well — they pledge for reinvesting in defense. They did not say that they were launching an innovation initiative. That could be the next step. Perhaps NATO needs a NATO innovation strategy.

We have the tools to do that in the science and technology world. We have a relationship with industry. We have the Connected Forces Initiative. We have Smart Defense. We have many tools in our inventory to foster innovation. It is not as visible, but I can tell you that when we move in a step-by-step approach on cyber, we are innovating. When I see the last cyber coalition that we organized, it was amazing to see how much innovation there was, and to see the many nations bringing their skills and expertise.

Q. How critical are ideas and technologies from commercial sectors like cyber and communications?

A. It will be critical to do that as well, but we have to be careful when we open our doors to the commercial sector. There is a question of confidence in the industry. We must be selective in a certain way, building a network of confidence if we really want to move forward. This game could not be open to everybody and anybody. I took part in one seminar in northern France recently on information communication and cyber. I was really amazed to see the small businesses, which were really able to innovate. They were not obviously driven only by technology. It was more the know-how, the perception, and the ability to conceive the problem and the solutions.

Q. You were the chief of the French Air Force. How did America’s first offset strategy and the second affect France and other nations? How do you expect the third offset strategy, this time in partnership with the US, to change the whole alliance?

A. This is striking, to see a strategy affecting the offset. When you look at long-term effects of the second offset strategy, it defined more or less the systems that we are using today: command and control, long-range precision guided munitions, and intelligence and reconnaissance.

The questions raised by this kind of offset strategy are key questions for the future. Everything is really on the table. For instance, let’s take drones, which is one of my favorites. It has proved indispensable. But it was never tested in the contested environment. We cannot operate them in the future without knowing what the risks are there. If they are so important for our strategy, and tomorrow we have to use them in a contested environment, we should not be surprised if we have some problems. We must take that into consideration now. In battle, it could be too late. You see those questions about electronic jamming. We cannot take the risks.

Q. Is speed in fielding new technology, systems and operational concepts key?

A. This is the clear objective, but the question is, what is the best way is to achieve it? The reality of what we see for the near future is that developing big systems will be more difficult. First and foremost, we must take the full benefit of what platforms we have. This is where there is an opportunity in the upgrading of systems, to adapt them in a more timely manner. It is a very important question for NATO as a rule. It is a problem of efficiency, of how the NATO nations are able to spend their money. ■