Political storms won't curb military spending boom, defense firms say

[July 24, 2024]  By Joe Brock and Joanna Plucinska

FARNBOROUGH, England (Reuters) - Defense firms are confident Western governments will continue to increase spending on weapons to counter Russia and China, brushing off concerns that political upheaval in the United States and Europe could curb military budgets.

Global defense spending hit a record $2.4 trillion last year, boosted by the war in Ukraine and rising tensions between China and the West, according to think-tank Stockholm International Peace Research Institute (SIPRI).

NATO members agreed to further boost spending at a summit in Washington this month.

But major recent political shifts in the United Kingdom, the United States and France - all top military spenders - have spooked some investors who think support for the war in Ukraine could ebb in the years ahead.

Industry executives at the Farnborough Airshow, one of the world's largest gatherings of aerospace and defense companies, told Reuters that even if aid to Ukraine was reduced, Western governments would spend big to shore up defenses for potential future conflicts with Russia and China.

"Ukraine has given one important lesson learned: if you don't prepare, you've lost," said Lorenzo Mariani, co-general manager of Leonardo, an Italian defence firm.

Visible evidence of geopolitical tensions were laid out across the airfield in southern England that serves as a jet showroom and arms bazaar every other year, from prototype armed drones to U.S. and European fighter planes.
 

Even an Air India A350 passenger jet parked on the tarmac in front of exhibitor chalets bore traces of the conflict on Europe's border, since it was originally built by Airbus for Russia's Aeroflot before switching owners due to sanctions.

The rush for arms since Russia's full-scale invasion of Ukraine in 2022 has boosted the profits and share prices of U.S. defense giants like Lockheed Martin and Raytheon, as well as European companies including Leonardo and Britain's BAE Systems.

For instance, shares in Germany's Rheinmetall, are up 390% since Russia's invasion of Ukraine, while Swedish defense manufacturer Saab's are up more than 340%.

TRUMP ON UKRAINE

Former U.S. President Donald Trump has hinted he may cut funding to Ukraine if he is elected in November, potentially curbing the booming sales of everything from missiles and drones to armored vehicles and artillery shells.

But Trump continues to be hawkish on China, the world's second largest military power. The U.S. is boosting defense spending in the Asia-Pacific on everything from submarines to air defense missile systems to counter Beijing's aggressive tactics towards Taiwan and the Philippines.

Tom Laliberty, president of Land and Air Defense Systems at Raytheon, said he looks at long-term trends, not the political rhetoric of individual politicians on the campaign trail.

"I've been doing this for 38 years, generally there isn't a huge difference between one (U.S.) administration and another in terms of strengthening defense," Laliberty said.

Attendees view the GCAP (Global Combat Air Program) concept model fighter plane at the BAE Systems pavilion at the Farnborough International Airshow, in Farnborough, Britain, July 22, 2024. REUTERS/Toby Melville/File Photo

U.S. Under Secretary of Defense for Acquisition and Sustainment William LaPlante echoed this sentiment, saying military spending and partnerships with European allies have bipartisan support.

"Production, jobs and security are pretty much with us regardless of your politics," LaPlante told a panel at the air show.

Britain's new Labor government has ordered a defense review, sparking fears programs - including a fighter jet project worth tens of billions of dollars - could be culled.

Seeking to ease those concerns, Prime Minister Keir Starmer affirmed his commitment to the defense industry at the Farnborough Airshow where he toured displays of weapons by companies like BAE and European aerospace giant Airbus.

"As far as the UK is concerned, it's a pretty steady ship," said Trevor Taylor, director of the defense program at Royal United Services Institute.

"I'm confident that there will be increased defense spending over the next years."

Britain can also be a bridge between the U.S. and Europe to curb any tensions over defense spending, said Greg Sanders, defense fellow with the Center for Strategic and International Studies, a think tank.

"Regardless of what happens in the U.S. election, the UK will probably attempt to play that intermediary role, and sometimes to balance some of the conflicting impulses."

FRENCH POLITICS

Industry executives and analysts expressed greater concerns over the political situation in France, where legislative elections threw up a hung parliament this month, increasing concerns that budget gridlock could slow defense spending.

European aerospace and defense stocks dipped by over 2% the day after the election.

"There continues to be the worry about a very, very unstable political system (in France)," said Sash Tusa, defense analyst at Agency Partners, a London-based equity research firm.

Whatever the future, the near-term outlook for defense firms is strong given the demand overhang from Western governments looking to supply Ukraine, said Matt Milas, president for defense and space at Honeywell Aerospace.

"Clearly the war in Ukraine created a huge surge in demand. (We have) all that demand piled up without the supply," Milas said at the air show.

(Reporting by Joe Brock and Joanna Plucinska; Additional reporting by David Shepardson and Allison Lampert; Editing by Mark Potter)

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