The Navy's FY 2021 shipbuilding request of $19.9B has succeeded in raising bipartisan ire over one of the most bipartisan items in the budget. Nevertheless Congress is well on its way to adding between $1.4B and $2.4B to the request.
- The SecDef refuses to release the legally required 30-year plan that supports the Navy's shipbuilding request.
- SecDef says that the Navy's plan called does not match the Administration's or the Navy's rhetoric.
- Congress is concerned that the Navy is planning big changes without informing them and/or DoD is not giving shipbuilding enough resources.
- The Navy's request plays loose and fast with numbers in terms of when ships have been or are going to be procured.
- The Navy request shows that it plans to procure 8 ships in FY21 and 44 over the Future Year Defense Program (FYDP) = FY21-25. However, the Navy is counting an FY19 ship as being procured in FY20 and two FY20 ships already procured as being requested in FY21 and FY23.
- This is being interpreted as an attempt by DoD to inflate the number of ships being requested. In its authorization and appropriation language, Congress is treating the Navy plan as requesting 7 in FY21 and 42 across the FYDP.
Differing Views of the Navy's FY21 Shipbuilding Request
- The Congressional Budget Office believes that the Navy is underestimating the cost of its last 30-year plan by 31%, i.e. it will require an average of $28.8B in funding per year vice the Navy's estimate of $22.0B. The difference in estimates stems from how inflation is treated and cost estimates for ships still on the drawing board.
- The CBO chart below compares the 30-year program's estimated shipbuilding cost in constant FY19$ to the average annual funding for the last 30 years (1) and to the 35 year period prior to that (1955-89).
Annual Funding for Ship Construction (FY2014-2049) in constant FY19$B
Follow the Money
- As if to reinforce the bipartisan nature of shipbuilding politics, the Democratic-led House's versions of the FY21 National Defense Authorization Act and the all important Appropriations bill add $2.4B to the Navy's request of $19.9B while the Republican Senate's version of the NDAA adds just $1.4B. The biggest difference is that the House bills add the procurement of a second Virginia-class in FY21 while the Senate NDAA spreads the money as Advanced Procurement across four different ship classes. The Republican-led Senate Appropriations Committee has not yet reported.
- Neither version of the NDAA adds funds for the impact of COVID-19 although the HAC added a token $100M to its version of the Approps bill. Defense companies as a whole are looking for ~$11B in COVID-19 impact funds in the still languishing COVID bill. Cost impacts on individual ship construction contracts based on absenteeism or the strike at GD's Bath Iron Works are as yet unaccounted for.
- It seems nearly certain that by September 30 both houses will pass and the President will sign some kind of Continuing Resolution (CR) in order to keep the government running through the election. A "clean" CR, which keeps spending at the previous year's rate but does not allow major program changes or new starts, is the norm. However, extended "clean" CRs inordinately impact the shipbuilding industry since each new ship is considered a new start even if the same ships were being built in the previous year.
We will continue discussion of the inevitable major changes that are lurking on shipbuilding's horizon and the knock-on effects of those changes in a future note and in an upcoming Skype call to be scheduled after Labor Day. Please contact your Hedgeye sales rep and watch for further information.
