Northrop Grumman chief executive Kathy Warden delivered good news and bad news: the aerospace group expects more demand for its weapons systems, but supply chain issues could hinder efforts to expand production.

“Right now, it’s a question of how do we scale production to backfill stockpiles?” Warden said at the Economic Club of Washington, DC on Wednesday. She has also acknowledged labour shortages.

The largest US aerospace defence contractors are due for a windfall as western governments recalibrate their security strategies and increase defence spending following the Russian invasion of Ukraine.

The chief executives of Lockheed Martin, Raytheon Technologies, Boeing, Northrop Grumman and General Dynamics — prime contractors for the US Department of Defense — acknowledged in April earnings calls that they will profit from increased defence spending. Stock prices for Lockheed, Northrop Grumman and General Dynamics are up 12 to 15 per cent since the start of the war.

Line chart of Defence contracts were 58 per cent of DoD spending in 2020, with 36 per cent going to the Big Five ($bn per fiscal year) showing DoD spending on US defence contractors

Contractors are now expected to ramp up production to meet demand from both the US and European governments, which have renewed commitments to defence spending due to the war.

But the companies have supply chain issues, labour constraints and inflationary pressures that could hold back efforts to scale up production.

Raytheon chief executive Greg Hayes told analysts that finding new, non-Russian sources of titanium has proved difficult, and that the Stinger will need an electronic redesign since “some of the components are no longer commercially available”.

Stingers and Javelins, both shoulder-fired missiles, have become the emblematic weapons of the Ukraine conflict as the country’s soldiers employ them to beat back Russian forces. US president Joe Biden travelled to a Lockheed plant in Alabama on Tuesday to tout the Javelin. The US has committed over 5,500 Javelins to Ukraine.

An estimated quarter of the US’s Stinger stockpile has gone to Ukraine, according to Mark Cancian, a former Pentagon official now at the Center for Strategic and International Studies, a think-tank.

But the Stinger is produced at negligible levels — there is only one active international customer and the US has not bought one for 18 years. Hayes said large orders are not expected until 2023 or 2024 as “we have a very limited stock of material for Stinger production”.

A similar timeline is expected for Javelin orders, added Hayes. It could take two years to get Javelin production up to its maximum of 6,000 per year, said Cancian. Raytheon and Lockheed produced 866 Javelins for $207.2mn for the US in 2021; the Pentagon wants 586 for $189.3mn in 2023.

Long-range systems will take over from medium-range Javelins in the current phase of the Ukraine war as it shifts to a “more conventional conflict in the east” of the country, said Greg Sanders, deputy director of CSIS’s Defense-Industrial Initiatives Group, meaning those weapons could top procurement lists.

“Globally, there’s an ongoing paradigm shift regarding national security, and several allies have pledged to increase defence spending as a result,” Warden told analysts during Northrop Grumman’s first-quarter earnings call. This “will enable us to accelerate our revenue growth rate in 2023”, she added. The contractor expects 2022 sales to range from $36.2bn to $36.6bn, compared to $35.7bn in 2021.

German chancellor Olaf Scholz upended his country’s decades-long defence policy by announcing a €100bn military fund and a commitment to take spending to 2 per cent of gross domestic product. Meanwhile, there is growing interest in Sweden and Finland for the countries to join Nato.

“The depressing reality is that the last 30 years of [relative peacetime] might just be an aberration,” said Richard Aboulafia, an aerospace consultant at AeroDynamic Advisory.

“[People thought:] ‘We won the cold war. Now, that’s the end of naked human aggression — excellent — let’s go start a unicorn petting zoo and everything will be fine.’ And it didn’t work.”

The defence companies have said it is too early to predict sales and revenue boosts. But Morningstar analyst Burkett Huey has updated his sales estimates across a range of products by 1.5 to 3 per cent in the latter years of his 2022 to 2026 forecast.

The Biden administration’s proposed $773bn 2023 defence budget is widely expected to increase further before final congressional approval, potentially by tens of billions of dollars, as the range of potential security threats widens and becomes more complex. As the largest military spender, the US made up 38 per cent of global defence spending in 2021, which topped $2tn for the first time, according to the Stockholm International Peace Research Institute.

While Russia is an acute threat, the Pentagon has made clear that the Indo-Pacific region remains its priority theatre. In its budget, the department “prioritised investments in foundational capabilities that address our challenges from both China and Russia”, under-secretary of defence Michael McCord recently told Congress, indicating the need for acquiring nimble systems that can carry out bifurcated strategies.

“We were heading for this pivot to Asia, which meant de-prioritising land systems and the benefit going to air and naval,” said Aboulafia. Now that the US is “being dragged over to Europe . . . it really becomes a struggle between land systems and naval systems for resources”. Air systems are the most flexible.

After the cold war, the defence industry began consolidating at a rapid rate: since the 1990s, 51 prime Pentagon defence contractors have shrunk to five highly diversified companies, meaning each of the Big Five will get large pieces of the pie.

In 2020, defence contracts accounted for 58 per cent of Pentagon spending, the highest level in 20 years, according to CSIS. Of the $421bn doled out that year, 36 per cent went to the Big Five contractors, up from 19 per cent in 1990.

European companies collectively produce a wide range of weaponry, but there is not enough industrial capacity to ramp up to the production level necessary to meet demand, industry experts said. This will send European governments to US companies. Some US-made weapons will also tailor better to certain governments’ needs.

Eastern European nations will be inclined to buy American not just for the technological aspects, but for the nominal connection to the US, because “with US companies embedded in their military forces, that just gives them a little better feeling”, said Cancian.

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