By Andrea Shalal-Esa
NATIONAL HARBOR, Maryland (Reuters) - Top U.S. defense officials on Monday said the tough budget environment underscored the need for honest dialogue with the defense industry, as well as greater discipline by the military services in setting requirements for new weapons.
Assistant Marine Corps Commandant General Joseph Dunford said growing concerns about U.S. budget deficits meant that defense companies would need to focus more on cost, weight and energy efficiency as they developed new weapons systems.
"Those three questions increasingly are important to us," Dunford told the annual Navy League conference. "We've got to take a look at those capabilities that are most relevant."
Dunford and officials with the U.S. Navy and U.S. Coast Guard welcomed congressional passage of a stopgap bill funding the federal government for another week, and said they hoped the fiscal 2011 budget would be finalized this week.
Industry executives are bracing for tighter budgets and pressure on profit margins given the current climate.
Defense analyst Rob Stallard of RBC Capital Markets said he had modest expectation for defense stocks heading into the first quarter earnings reports, but said nominally weak revenues and bookings due to the budget impasse would largely be forgiven by investors.
"Despite the potential for soft toplines, we think cost cutting and buybacks may help keep EPS (earnings per share) on pace with consensus," Stallard said in a note to investors.
Officials at the Navy League conference agreed that the Pentagon would face increasing budget pressures in coming years and said that meant defense officials and industry executives needed to work even more closely together to lower weapons costs and keep programs on schedule.
Dunford said the military was already reforming the way it defined its needs, saying that in the past senior leaders had largely been "spectators" to that process.
But now cost was increasingly being factored into decisions as military requirements were being established.
"I'd appreciate frankness when we're doing something stupid," said Navy Admiral Jonathan Greenert, vice chief of naval operations, urging industry executives to speak up if military officials were demanding a technical capability that could not be realistically achieved.
He said consolidation in the industry left the military with limited choices, and said he wanted to see more innovation, particularly in the area of unmanned aerial and underwater propulsion systems.
Stable budgets and stable requirements were imperative, he said, as well as good partnerships with industry, such as those that had been able to drive down the cost of the Virginia-class submarine and the DDG-51 destroyer in recent years.
"We owe frankness and clarity about where we're really heading," he said.
Dunford said the Marine Corps was trying to improve its energy efficiency, noting that one battalion had just returned from Afghanistan where troops successfully operated two bases that used zero fossil fuels.
The Marine Corps was now "buying out the shelves of all the products that are available" to equip other battalions heading to the war zone in coming months and years.
The bigger challenge in coming years would be to improve the energy efficiency of new ground combat vehicles still in development, including the Joint Light Tactical Vehicle.
Dunford said the Marines remained committed to developing a new amphibious assault vehicle after Defense Secretary Robert Gates canceled work on the General Dynamics Expeditionary Fighting Vehicle in February.
He said Marine Corps Commandant James Amos was also keeping close tabs on the F-35B Marines Corps version of the Lockheed Martin Corp Joint Strike Fighter, and officials were pleased with progress seen on that program in recent months.
Amos was "personally and decisively engaged" and his approval was needed for any changes that added even a pound of weight to the airframe, Dunford said.
(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)