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Federal budget could create headaches for Rolls-Royce

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The federal budget crunch already has halted work on a second engine for the F-35 Joint Strike Fighter being developed by General Electric and Rolls-Royce—putting thousands of jobs in jeopardy—and it's not the only aerospace program facing an uncertain future.

Defense and aerospace analysts think the Marine Corps will have trouble securing a multi-year contract for the V-22 Osprey tilt-rotor aircraft, each of which takes two engines made by Rolls-Royce in Indianapolis.

“The federal budgeting process is in more disarray than I have ever seen it,” said Loren Thompson, chief operating officer the Lexington Institute, a Virginia-based think tank that focuses on defense and other national policy issues. “The ability of military services to conclude multi-year contracts on any program is in question.”

Multi-year contracts lower the costs per aircraft, compared to year-by-year deals, and they allow manufacturers to plan their work for five years at a time, Thompson said.

The current contract for the Osprey doesn’t expire until Sept. 30, 2012, but manufacturers typically develop cost estimates long before expirations. Thompson doesn’t think the federal government’s recent near-shutdown will be a one-time event.

“It’s going to be 18 months of fiscal chaos,” he said.

The fact that House Republicans went against Speaker John Boehner, R-Ohio, in voting to cut the alternate engine program for the F-35 points to a new climate for defense spending, said Richard Aboulafia, aviation industry analyst at Virginia research firm Teal Group.

About 2,500 jobs—mostly in Indiana and Ohio—are tied to development of the engine, and GE has said that figure could nearly double if the project reaches peak production. “The only thing that’s changed is the nature of our politics,” Aboulafia said.

Last month, the U.S. Defense Department issued a 90-day stop-work order after the program was eliminated from the remainder of the 2011 budget. The companies will continue working on the engine, called the F136, but are reassigning most of their people to other projects until the 2012 budget is settled. Rolls-Royce had about 130 people, mostly engineers, working on the F136 in Plainfield and Indianapolis, spokesman George McLaren said.

The Osprey is a much larger, ongoing program for Rolls-Royce. The company has produced more than 450 engines for the Osprey since being selected in 1986, and its $222 million engine-and-services contract in 2009 was more than double the next-largest contract awarded that year.

Rolls-Royce officials would not provide current information on the Osprey contract, saying only that “we’re proud of the program and look forward to continued service for our customers.”

The Osprey's blades pivot, so it takes off and lands like a helicopter but flies like a plane. Developed by Bell Helicopter and Boeing Co., it has a well-documented track record of technical issues and crashes.

It is also expensive. The Marine Corps’ 2012 budget request for 30 of the aircraft is $2.31 billion, or about $77 million each, said Joseph Katzman, editor-in-chief at Defense Industry Daily.

Katzman and Thompson think the Marine Corps, which favors the Osprey for its unique capabilities, will keep the program going, but they are split on the wisdom of that decision.

“The Osprey has enough political backing to continue,” Katzman said. “Ten years down the line, that could really bite the Marine Corps.”

The Government Accountability Office has documented the Osprey’s maintenance problems, which stem from a huge downdraft that sends sand into the engines.

With the cost of maintenance, Katzman predicted the Marines eventually will face a tough choice. “You start not buying other things to feed this gorilla, or you retire it long before its due date.”

Thompson thinks the Marines have picked a winner for budgetary and tactical reasons. In an article for Forbes earlier this month, he argued that the Osprey is the cheapest rotorcraft the Marines operate, when viewed in terms of cost per seat-mile, because it holds more people and flies farther than a helicopter.

The March 22 rescue of a fighter pilot who crashed in Libya, Thompson wrote, opened a “new chapter in the expanding chronicle of Osprey successes.”

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