China's Aircraft Carriers Forge Ahead ... as U.S. Backtracks

A plan to curtail aircraft carrier production puts the entire defense industry at risk.

Feb 2, 2014 at 4:15PM

China's first aircraft carrier, the Liaoning (PLAN CV-16). Source: Author photo, using Google Earth.

China has an aircraft carrier.

Indeed, by 2020, we could see the People's Liberation Army Navy equipped with two, three, or even four aircraft carriers. Meanwhile, we see the U.S. Navy slamming its carrier-building program into reverse.

Budget cuts and construction delays have pushed back the planned delivery date on America's newest supercarrier, the USS Gerald R. Ford (CVN-78), to February 2016. U.S. Navy Chief of Staff Adm. Jonathan Greenert warns that any further cuts to defense spending could delay the carrier's arrival "by two years." By that time -- 2018 -- China could already have floated its second aircraft carrier.

And that's just the start of the bad news.

A billion here, a billion there
Over in Congress, negotiations over what to cut from the defense budget continue -- and aircraft carriers present a very big target. Annually, each American carrier strike groups costs taxpayers about $2.5 billion -- $6.5 million a day -- to operate. And that's just to pay for the "support staff."

Building the actual aircraft carrier at the center of the strike group centers costs nearly $13 billion. A further $3 billion comes due when the carrier reaches 25 years of age, the midlife point in her 50-year lifespan, and needs to be refueled and refurbished. Then, at the end of those 50 years, it's time to retire the ship -- taxpayers shell out a further $2 billion to have defense contractor Huntington Ingalls (NYSE:HII) take the carrier apart.

Biggest budget bull's-eye on the blue ocean
So it's little wonder that when asked to find savings in the defense budget, Secretary of Defense Chuck Hagel's first instinct was to propose cutting carrier strike groups "from 11 to eight or nine."

Hagel pointed out that we'll soon have to do the midlife refueling work on the USS George Washington (CVN 73) at a cost of $3 billion. But if the Navy were to retire the Washington (at a cost of $2 billion) instead of refurbishing it, that alone would save $1 billion. Eliminate its strike group, and over the next 25 years, the Navy could save $62.5 billion. Eliminate a second carrier, and its strike group, and you're looking at combined savings of $125 billion or more.


USS Gerald R Ford (CVN-78) transiting the James River. A big ship -- and a bigger budget target? Source: U.S. Navy.

The high cost of saving money
Problem is, the Navy is operating with a reduced fleet of just 10 aircraft carriers today -- down from a high of 26 flat-tops in 1962, and down from the 15 aircraft carriers we operated in the 1980s. Ten carriers is actually even below even the minimum level of 11 aircraft carriers that the Navy is required to maintain by law. Reduce the force as much as SecDef Hagel is suggesting, and the Navy could end up with too few carriers to fulfill its mission.

From an investor's point of view, further reductions in the carrier force would also be bad news. For example, each of America's carriers carries more than six dozen aircraft of various types and configurations. Today, these include Sikorsky Seahawks from United Technologies (NYSE:UTX), F/A-18 fighter jets from Boeing (NYSE:BA), and E-2 Hawkeyes from Northrop Grumman (NYSE:NOC). Tomorrow, they'll probably include F-35C stealth fighters, specially designed for carrier use by Lockheed Martin (NYSE:LMT).

Eliminate the carriers that carry these aircraft, and you eliminate the need for upward of 150 warplanes -- and billions and billions of dollars of revenues for the companies that build them.

The situation facing Huntington Ingalls could be even direr. Should the Navy cut its orders by even a single aircraft carrier, this would cost Huntington nearly $13 billion -- or about two years' worth of revenues. Eliminate two carriers, and Huntington would lose four years' worth of work. It's hard to see how the company could survive the blow.

Potentially, it wouldn't survive -- with the result that in an effort to save money, America would lose its only company capable of building its carriers today, and the ability to build aircraft carriers altogether.

Nuclear-powered aircraft carrier USS Gerald R. Ford (CVN-78) under construction. Last of a dying breed? Photo: U.S. Navy.

Psst! America has a secret weapon
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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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