BMI View: We believe that the United States defence budget will be re-orientated to take account of the threat from the Islamic State of Iraq and Syria (ISIS). This will in our view stimulate procurement plans as the country can now focus on obtaining arms and technologies that might have previously been decided against due to austerity. The main focus of these procurements being the development of the F-35 Lightning II Joint Strike Fighter program, which has been hit by another delay.
ISIS is posing a major security risk to US allies in the Middle East, following its occupation of a considerable quantity of the northern regions of Iraq and Syria during the first six months of 2014. In mid-2014, the US commenced airstrikes against ISIS ground forces in northern Iraq, code named Operation Inherent Resolve. As 2014 draws to a close there has been little word as to how effective this campaign has been and talks of further action have been considered.
Although initially expected that US Congress would contract the defence budget in their time of austerity, the recent incidents with ISIS and the humanitarian work with the Ebola virus (along with the persistent problems in the Ukraine and Afghanistan) has meant that this is most likely to be revised. As previously mentioned the request of USD601bn for the defence budget in the fiscal year 2015 is the best indicator as this signals a growth that will continue over the forecasted period as it is expected to increase to our forecasted target. At the moment cost-saving measures have taken place but we expect that this will provide only minor inconveniences in terms of investments and procurement.
The incident between a Chinese J-11B combat aircraft and an American P-8A Poseidon in Q314 has caused further tensions between the two countries; on the other hand it is unlikely to cause any further action from either party. The aggressive manoeuvres allegedly performed by the People's Liberation Army Air Force aircraft do show an increasing hostility between the two countries and serve as an indicator for China's ever increasing military mindset. The US continues to provide emphasis on their exports to the Asia-Pacific region and this will most likely continue and increase for the foreseeable future. Now that South Korea has confirmed that they will purchase 40 F-35 Lightning II aircraft, it is likely that the companies (who showed such a presence at the Farnborough Air Show in the UK this year) will move to seek more opportunities in Asia.
The Joint Strike Fighter Program has suffered another setback as there was found to be an engine fault caused by micro fractures. Although several solutions have been proposed a firm decision will not be made on this matter until late December 2014. Amongst the austerity measures still present in the defence budget the plans for BAE Systems and General Dynamics Ground Combat Vehicle (GCV) has been cancelled saving the US USD34bn over the life of the program. The contract for the new Three-Dimensional Expeditionary Long-Range Radar was awarded to Raytheon on 7th October 2014 and will replace the existing AN/TPS-75 air surveillance radars. The Air Force also plans to build 100 LRS-B aircraft, at a per unit price of about USD550mn per plane, however detail about the awarded contract remain sketchy. Meanwhile, the US Marine Corps will upgrade its fleet of AAV7A1 amphibious assault vehicles, the contract of which going to BAE Systems. It plans to upgrade 392 of the vehicles with a strict maximum expenditure of USD1.6mn per vehicle.
Key BMI Forecasts:
Over 2015, defence expenditure will reach 3.8% GDP (a 4.6% change on 2014 levels).
Defence imports will reach USD5428.4mn over 2015 of which USD3552.9mn will come from arms and ammunition.
Defence exports will reach USD8160.6mn over 2015 of which USD4441mn will come from arms and ammunition.