Blank-check spending on defense will come to an end.

PHILIP Finnegan is director of corporate analysis of the Teal Group Corp., a Fairfax, Va.-based aerospace and defense consulting firm. Finnegan says that the defense funding that has boosted Los Angeles contractors and the South Bay should continue for several more years. He expects it to level off after that. but major players such as Northrop Grumman Corp. will continue to benefit from homeland security funding, thanks to the company's orientation toward sophisticated information technology systems.

Question: How does the current pace of military spending compare to the last big defense buildup in the 1980s?

Answer: Technically, dollar for dollar, we're spending more now than in the '80s. However, it is important to keep in mind that we're fighting two wars far away from the U.S., and to maintain that is very expensive. Also, as a percentage of defense spending, troops' pay is more than it has been since World War II. Since there was no "war" during the Reagan era, if you don't include the costs of the two wars we're fighting now, spending on equipment is less than it was during the Reagan build up.

Q: Can you be more specific?

A: During the Reagan years, the government was spending three times more on procurement than on R& D, meaning under Reagan much more spending was on building planes, bombs and ships than on developing new technologies.

Q: Has the war on terror also changed the nature of defense spending?

A: Absolutely. Today, procurement and R&D are nearly neck and neck, meaning the need to develop weapons used to fight future threats is seen as being equally as important as building weapons to fight current threats, an indication of the war on terror's constantly changing battlefield.

Q: How about an example.

A: A good example is the beginning of the war, where these high-priced, high-tech items like smart bombs and unmanned aerial vehicles were extremely effective and were utilized extensively. However, today there is more of a need for large volumes of relatively lower-tech equipment like body armor and Hummvees.

Q: That doesn't sound like a good thing for the South Bay's high-tech oriented defense firms.

A: But this shouldn't undermine the quantum leap of technology that has happened as a result of this funding--the equipment our military is using today is by far the most advanced, and expensive, any military has ever used. And this is mainly because of the fragmented and deceptive threats terrorism is posing and the weapons needed to fight them.

Q: Where exactly is the new money going?

A: The big ticket items are missile defense, UAVs (unmanned aerial vehicles), me new P-22 Raptor and P-33 Joint Strike Fighter jets and military space communications. Ail of which will get significant funding until at least the near future and are very, very expensive systems, all totaling tens of billions of dollars. These are sexy, high-tech systems that should be able to attract and maintain funding for a while.

Q: Which defense contractors are benefiting the most from this spending?

A: As expected, the usual suspects are benefiting: Lockheed Martin, Boeing and Northrop Grumman to name the top three. Big ticket items like missile defense, space communications and the F-22 are all helping Southern California because a lot, if not most, of the work is done in that area. With Northrop, Boeing, Raytheon and the Jet Propulsion Laboratory all having either their headquarters or a significant contingency in Southern California, these areas will remain strong into the relative near future.

Q: So what are you predictions for farther out?

A: Military space is going to continue to draw the big price tag contracts because of the very expensive and seemingly essential need for the military to have a global, secure, reliable and high bandwidth communication system. There are heavy budget pushes for this as well as for missile defense now and this will remain for at least the next 7 to 10 years. Both have projected funding well into the next decade.

Q: Is it inevitable there will be a slowdown?

A: Yes, spending will stop and should stop soon. The first half of the war on terror was a sort of vindication for the high price tags of most of the equipment being used and helped continue their funding. But now, Congress has been running significant deficits, and with election years starting to approach, they are at the end of their rope and they will grow weary of continuing the blank-check spending of the last few years.

Q: What are contractors such as Northrop doing to prepare for this?

A: The top contractors have been shifting work to the non-defense sector, such as information technologies services for the government. With the push of seamless communication after September 11, the government has spent billions on integrating and facilitating communication within key agencies, including federal as well as municipal and state agencies. The major contactors such as Raytheon, Lockheed Martin and Northrop have already begun to do much of this work and I'd look for more of that in the near future as the networks take shape and continue to grow. But it isn't cheap.