Ready, Set, Go! The U.S. Midterms Are Finally Here and Everything Happens After
Host: Roman Schweizer, Managing Director, Washington Research Group - Aerospace & Defense Policy Analyst, TD Cowen
In this episode, Roman Schweizer, TD Cowen WRG geopolitics & defense analyst, is joined by an all-star reporter roundtable to discuss the spending and policy outlook after the U.S. midterm elections. There are big implications for defense spending and regional crises in Europe and the Middle East. We also discuss Deputy Secretary of War Feinberg's intentions, a recent Department of War memo on profit reform and three big aviation programs: the F-35, F/A-XX and Global Combat Air Program.
This podcast was recorded on October 30, 2026.
Tony Bertuca:
The Trump administration's recent moves toward Moscow and whatever Elon Musk did or did not do with Starlink and Starshield created an unusual problem for the White House, right? This is bipartisan congressional resistance. You've seen Republicans call for hearings, investigations. They want to get Musk up on the Hill.
Roman Schweizer:
From DOD to Congress and from the White House to Wall Street, the NATSEC Need to Know Podcast, an unrehearsed podcast presenting insightful discussion and forecast of the major national security and defense issues of the day. Welcome to the NATSEC Need to Know. We've got a reporter's round table today to discuss the top national security issues in Washington and around the world and to preview what to expect over the next several weeks.
Joining me is a great group of experienced aerospace and defense editors and reporters. We've got Tony Bertucca from Inside Defense, Aaron Mehta from Breaking Defense, Robert Wall from Aviation Week, and Marcus Weisgerber from the Wall Street Journal. They've each covered Washington and the Pentagon for decades and are as well sourced as anyone in town. Let's get after it.
Gentlemen, thanks so much for joining us for a October installment, I guess, or early November, depending on when we publish this pre-election edition of the NATSEC Need to Know. News has been fast and furious. We've got a lot of ground to cover in this spooktacular edition. Dad jokes, I've got them. And we are recording this on the Friday before the election. So I'm going to say that right up front to caveat everyone. Obviously, Tuesday's going to be a big day and then really it's going to be game time on a bunch of different things.
So gentlemen, election vibes and lame duck to-do list. Obviously everything, the entire world has been waiting for these midterms. I think we'll all be happy when they're over and we're onto the next thing. Since we don't know the outcome, I don't follow prediction markets, but nor do I think they're particularly reliable, nor are polls apparently. Once we get going next week, what's on the to-do list here in DC?
Tony Bertuca:
The midterms are about more than who controls Congress next year, right? Because it's about how they could impact what Congress can actually get done in the lame duck before January. And the remaining defense agenda is enormous, right? The administration wants $1.5 trillion and that's 350 billion in reconciliation. And basically nobody I've talked to thinks it's going to happen, just like the air has gone out of the sails completely on whether or not they're going to get that money.
I talked to one staffer who said, "We're going to be sitting here in six months wondering how the hell did we not get this money? We had the president, we had the Senate, we had the House. We'd already had one successful reconciliation. We're in the middle of a war. How did we not get this money?" To unpack that, I mean we're going to have to see what happens obviously, but there's going to be recriminations I think from a lot of GOP defense hawks who felt like this was OMB's fault and then you're going to hear from folks and it's going to get interesting as soon as that gets set up.
But the more immediate deadline for them is December 11th. That's when the CR expires. And so everybody also is thinking that it's probably going to be another CR and maybe one that nobody wants to do it, but there's plenty of lawmakers who think it's going to extend into the next Congress. And that's just really going to complicate all sorts of spending discussions when it comes to defense and the amount of money the administration really wants. I'll stop there and let other people jump in, but I mean the lame duck is going to get very interesting.
Aaron Mehta:
Yeah. And I think as much as we care deeply and rightly about the budget and sorting out these important things that have real impact, on the defense side, I think the bigger story for the lame duck is going to be the question of impeaching Pete Hegseth. We know that these documents were filed by Representative Massey before, and perhaps that's why the House was called early a couple of days and ran out of town a few weeks back.
And he said that as soon as they're back the week following the election, he's going to push forward with it and force a vote. So the question is if Massie's going to vote for it, maybe Don Bacon votes for it. You only need, I think, two or three more Republicans. What if some Republicans don't show up because they've lost their seats and they no longer care?
It could get very interesting very quickly. And even if it doesn't pass this time, I think we can assume pretty early on in January Democrats are going to make another go at this if they take the House. So that's going to have an impact on defense, potentially including on the budget because if Pete Hegseth is impeached, it's going to be a hard sell for him to go to the House and try to press flesh. And we know he's already not done a great job on that based on several different reports that are out there about his relationship with Congress.
Tony Bertuca:
Yeah, just also to add there, there are many lawmakers, most of them Democrats, but there's some Republicans for whom the Pentagon right now is best understood as an active crime scene. And that is not the attitude you want when you're looking to get another $350 billion out of the legislative body that you spent the last year sort of ignoring half of or telling half of them that they're traitors.
Marcus Weisgerber:
How do we not get this money? Well, politics and limited at best outreach to Democrats and not having a unified front on the Republican side. I think the big thing you're going to see in this lame duck is just it's all going to depend on how big... and just from talking to people this week, how big the Democrats win. Assuming they win the house, how big is that win? If it's small, do they cut a deal and try to get out of a budget deal for the next year and move on? Or if it's big, do they just say, "Screw it, let's just sign a CR and move on?"
One thing somebody told me is Jeffrey is assuming he's the Democratic leader. He's not going to want to deal with having budgets and stuff coming in. They want to investigate Pete Hegseth, they want to investigate the Trump administration. They're not going to want to have to deal with the budget. And if they're dealing with the budget, that's going to distract from government shutdowns possibly and stuff like that. It's going to distract them from actually carrying out things they want to do in their agenda.
Tony Bertuca:
And you've got the administration's posture too toward Ukraine and Russia. That's going to play a huge role in all of these debates, especially in the lame duck. You've got Mitch McConnell saying in your publication, Marcus, that that's basically table stakes, right? If you want to get anything done in lame duck, you need to walk the hell away from Vladimir Putin right now and start back in Ukraine again. So that's also just going to complicate things even further.
Roman Schweizer:
All right, I'm going to chime in with my two cents. So one, if Marsha Blackburn of Tennessee wins her governorship, then Pete Hegseth gets nominated or directed to fill that seat. He becomes Senator Pete and you get someone new as sec def or sec war. I apologize. I'll put a nickel in the swear jar. And my vote would be Mike Waltz who has done his penance at the UN and comes in as Secretary of War. Just spitballing, throwing that out there, but that is the deal that avoids a Hegseth drama on the hill. Two, and one of the things we've talked about, I think your publication, some of them have talked about this. I mean, it does depend on the majority that the Democrats get. I mean, if the Democrats get 10 or 15 seats, I mean, how is Hakeem Jeffries going to manage that caucus to really get anything done?
And I got to be honest, early next year, I mean, if that's CR, again, I don't think there's any way the CR doesn't get punted into next year, but are we going to have a vote or are we going to have an appropriations bill or a CR to defund ICE or to stop the war in Iran? I mean, that smells a hell of a lot like a shutdown to me. So I mean, I really think there is a big shutdown risk in the offing, again, depending on political scenarios because we don't know how that's going to break.
And third, since I've been saying it, I'm going to continue to say it, that the Republicans will get a third reconciliation bill. I am the only guy, the only Kool-Aid drinker in DC who thinks so. But again, I'm just going to say the Republicans passed one reconciliation bill. They passed a second one to pre-fund three years worth of mass deportations, which some would say is a politically sensitive vote. And the House did manage to clear their third reconciliation budget resolution before they left town.
Ron Johnson wrote one, they just didn't vote on it because they want to have optionality. So I get it. I totally agree. If they fumble the ball on this, then I think defense has got a real problem because again, if you're Russ Vought and the option is getting a $1.1 trillion defense budget, but you have to give the Democrats a bunch of non-defense spending, they don't do that at all. Because guess what? Republicans will find religion on debt and deficits if the Democrats take control of Congress. And 40 trillion becomes the big number and then not funding the troops who are in war with Iran becomes another one.
Tony Bertuca:
Well, as long as we've got you, Roman, do you want to call a funding range for how much you think then the next, the flame duck magic reconciliation would be? How much you think they could get through? What do they agree to?
Roman Schweizer:
My magic number is 250 billion because that is the number that Ron Johnson actually talked about. J.D. Vance has talked, this is the fraud task force and this is the number like the New York Times has been... Everybody knows, the fraud task force has discovered 250 billion in fraudulent payments for Medicare, Medicaid, all that stuff. Guess what? 250 billion, that offsets a defense increase that becomes budget neutral, that appeases the fiscal hawks. So you get 250 and then you get, guess what? The bad news is you get 858. You get a straight CR because we're in a CR this year. 27 was a CR on 26. So if Russ Vought can hold a CR for four years, that's a real cut in his terms. I think his drug deal has been, he has always talked about using a partisan appropriations process or a non-bipartisan appropriations process.
So if Republicans can get more money for defense using reconciliation, good for you guys, but we're not doing dollar for dollar defense non-defense. So that's how I get to a range of about 1.1 to 1.2. Maybe you throw some supplemental money in there, maybe that's kind of low table stakes, munitions replaced. So that kind of gets you 1.1 to 1.2. The one thing I would say is everyone thinks 1.1 is the range and on Wall Street, people always sort of take the high end, low end and they take the midpoint of the range and that becomes the estimate. That's the lazy way of doing it. What I suggest is a political scenario in which you get to one one, one two. If anybody tells you it's one two, ask them how the hell they get to that number. I don't think you can get a $1.15 trillion discretionary budget. Democrats aren't going to go for that.
Marcus Weisgerber:
So could we take a poll right now, NDAA, Department of War, since it was brought up. In both bills, does it make it out of conference? I would've said yes until the Pentagon put out a statement this week calling for it to be put in the bill. And folks keep telling me anything controversial and when it's like this, everything gets stripped out.
Tony Bertuca:
They made it a thing. They made it a thing. Honestly, I think a lot of Democrats were happy to call it the Department of War. They liked calling it Department of War. I don't think defense contractors would like to be known as war contractors, but that's for others to decide. But you're right, I think until they just sort of put the spotlight on it again in the middle of all this other stuff, and I think it's just going to make it too hot. I don't think they change it. We'll see, but I don't think so.
Aaron Mehta:
It seems like the kind of thing that Democrats will hold fast on if they know they're getting the house in a couple of weeks, and just to your point, poke back at a bunch of people they're not popular with. I also just want to just note something. We've all been doing this long enough that we remember this, but I was just going back. And in 2017, defense spending was around 650 billion. It's just wild to think about the fact that we're now talking about a range of 1.1 to 1.5 trillion a decade later. Again, we've all lived through this, but it just struck me as how much this has escalated relatively quickly.
Roman Schweizer:
Well, as you know, the world is increasingly dangerous and I am against the use of the word increasingly. Please, no one used the word increasingly. It's lazy writing. It's not making you seem smarter by saying increasingly. Sorry. But yeah, no, I think that's true as trying to advise people on what the outcome may be. On the low end of the range, 858, on the high end of the range, 1.5. I mean, when in the last... I mean, I've been doing this a little bit longer than you guys, but I mean, you're talking about a range of $700 billion. That's crazy town. But here's the question, as long as we're riffing on this, NDAA, does it get done this year, this calendar year? I've heard vibes that it might not.
Marcus Weisgerber:
I've heard that too. And as one person told me, never bet against the NDAA. It's the only train that'll be leaving the station.
Aaron Mehta:
I do think though, if everyone knows that they're just going to do another CR ahead of December 11th and kick it into the next year, you could see it be a situation where everyone says, "Okay, let's just deal with this in the new Congress as long as everything's getting kicked."
Roman Schweizer:
All right, let's shift gears a little bit. We're mainly Washington focused on some of the policy stuff, but we've got a lot of Ukraine stuff percolating in the background and certainly Iran potential war escalation. I'll give you my personal view on that. I think the administration is thinking end state in both cases. And what I mean by end state is what does a Ukraine win look like? What does a Russian win look like?
And to me, my thinking is there's all these assumptions that the Trump administration is favoring Putin now, but maybe they're incentivizing him to try and take a ceasefire where things stand right now. I mean, obviously the Donbass continues to be an issue, but I mean really it still gets back to the same issue we've had coming up here on the anniversary in February. What does the end state look like? And I still think that's the big issue.
And then again, we get to Iran, I think we get more talks. I've said this privately. I'm not in on Admiral Cooper's or I guess maybe I should say Pete Hegseth's signal chat, but I don't think an aggressive bombing campaign starts until after the holidays. And so what I mean by that is into January before Ramadan, right? So I mean you've got this sort of window, another round of talks, another round of positioning, all that kind of stuff. So I've got a bunch of fingers raised. We're going to kick it over Robert Wall first in London to get his perspective.
Robert Wall:
Yeah, I think the wild card here is the Israeli elections, which we haven't talked about, and the fact that that situation isn't resolved. The Iran situation has been something that's been, from a polling perspective, a strength for Netanyahu. I mean, you could imagine that once the midterms are done, and assuming by then we still don't have clarity on what the government situation is in Israel, that he will lean on the White House and try to get them to do something on the sooner side because it would help him strengthen his hand potentially in Israel. So I'm not saying that's going to happen. I just think that's a wild card you really have to consider. So two elections really playing into this mix.
Aaron Mehta:
Yeah, and there was some reporting out of Israel in the lead up to their election that the defense chiefs basically said to Netanyahu, "We're not going to let you launch an attack ahead of the election." The military in Israel has a history of being a scrupulously neutral political force, and by that I mean being willing to say things like, "We won't support military action around an election."
The opposition, who at first it looked like had won more seats than Netanyahu and now is actually down a couple of seats, although neither has enough to form a full government, has called on the military in Israel to not take action and to resist calls from Bibi to take action. I think that's very much on the table. They actually will follow those calls and be reluctant. But to Robert's point, that doesn't mean Bibi can't call up Trump and say, "Hey, if the US goes ahead with it, then I'd have the ability to join in, plus it would force me to be able to form a government more quickly."
We've seen in the past that Bibi has been able to form coalition unity "governments" in the face of military action. So I think that is, to Robert's point, very much on the table. The question is how quickly that could happen and how much Trump is willing to go to bat for Netanyahu, who he has kind of an on and off again love affair with.
Robert Wall:
Right. Interesting, of course, on that point, what Aaron just said with the Israeli military, Eisenkot being a former chief of staff of the IDF. Yeah, I think I kind of agree. It's entirely how healthy is the relationship between the two and does that change after the midterms? Is Trump looking for open to someone who places a call and makes it feel good after a potentially bad night?
Roman Schweizer:
Two things I just want to point out as a little sidebar pieces. One, I know there's been considerable conjecture reporting, et cetera, that the US, Pete Hegseth, has not been delivering Patriot missiles to the Ukraine, and also that the US FMS customers have not been really receiving their Patriot missiles as well. I'm just going to spitball here. What if all of those Patriot missiles are going to the Middle East in preparation for something big? They got to go where they need to protect US troops.
Second thing I would say is fascinatingly, this is kind of my Star War maybe upbringing, but there is some crazy stuff going on in space, boys and girls, sorry. But if you guys have noticed there's this Russian satellite following this ISI X36 in remote proximity operation. The other thing though, people don't know, in early September, a US satellite spontaneously disassembled itself about the same time a Chinese satellite spontaneously disassembled itself. And then the Air Force secretary says, "Surprise, we have orbitable space weapons."
So I think there's all these crazy things going on. And the other thing I would just say is look into Latvia because there was a suspected arson attack on a SpaceX downlink station. Part of me wonders if Putin said to Elon Musk, those are some nice starlinks you have up there. It would be a shame if something happened to him. So I'm telling you, I just think the Star Wars stuff is for real and no one can hear you scream in space.
Robert Wall:
Well, Roman, just a reminder that there was reports around that kind of talk a couple of years ago already between the Russians and SpaceX. And just to kind of amplify, I mean, we have seen how space ground infrastructure, forget what's happening in orbit, is increasing target. I mean, Viasat was subject to cyber attack just before Russians invaded Ukraine. We had satellite uplink terminals, commercial uplink terminals hit in Israel when the Iranians fired ballistic missiles.
So this is becoming more and more routine, frankly. Clearly what's happening with Cosmos 2612 around the ISI satellite is super interesting. But even there, the Russians have maneuvered around the UK Skynet satellites in the last few years. In a way, it's not new, it's just more and more intensity. I think with the Cosmos 2612, it's also perhaps more closer proximity than we've seen before. It is increasingly happening.
Roman Schweizer:
Damn it. Come on, Robert.
Marcus Weisgerber:
Hey, you have a DIA report that came out this week too with the Chinese space plane that looks just like the X37 out there. Game on up there, it seems.
Tony Bertuca:
As long as we're talking about SpaceX, talk about an issue that is going to throw another wrinkle into whether or not you get the defense top line you want because the Trump administration's recent moves toward Moscow and whatever Elon Musk did or did not do with Starlink and Starshield created an unusual problem for the White House, right?
This is bipartisan congressional resistance. You've seen Republicans call for hearings, investigations. They want to get Musk up on the Hill. All this stuff is going to, I think, help pull the curtain back in probably a significant way about what is going on militarily in space as soon as Congress figures out what type of hearings and investigations they want to have about it.
Marcus Weisgerber:
Can I raise just one more thing? I know we're going long on this. I feel like the SpaceX, the turning off of Starlink, a lot of folks have asked, "Hey, doesn't the Space Force have to do that?" And it's like, "No, this is a commercial." You're relying on commercial right now, and until Amazon Leo comes on that they're really the best game in town. It's not Space Force people sitting at terminals controlling those satellites, it's SpaceX people who are controlling those satellites.
Tony Bertuca:
And what's also interesting for me is that the debate kind of mirrors the one they're having with Anthropic right now over whether or not they can turn on or turn off the AI model, right? Is a contractor supposed to be in charge of any of this stuff? No. No, they're not. The law doesn't say so.
Marcus Weisgerber:
Well, this was the exact fear. This was the fear of why Anthropic's a national security threat.
Tony Bertuca:
And now it's playing out in real time, and I'm sure lawyers have brought it up.
Roman Schweizer:
If Elon has to testify before Congress, I would recommend they make it pay-per-view and we could probably clear a good chunk of that 40 trillion in debt because that will be a show.
Tony Bertuca:
I'll see you guys in that little tiny House Armed Services Committee hearing room on the right over there where they squeeze the reporters in on top of each other.
Roman Schweizer:
We're going to speed up. We still got some stuff I want to cover. This is a holdover from last time. If folks haven't read it, you probably did and you should. Marcus here managed to get a sit down with DeepSeek war, Feinberg and had a big piece on him and just anything notable from that that you want to just circle back on. I was sort of the assumption that Feinberg was going to leave next year anyway of his own volition before all this he's going to get fired stuff came out. So what do we think on that? Marcus spike the football.
Marcus Weisgerber:
Yeah, man, so it was wild. I'm not going to get into all the details of how we got it to come together, but it was about an hour and a half conversation with him. For somebody who is just behind the scenes type person who you hear lots of palace intrigue about, you didn't know what to expect. How is this interview going to be? Is he going to be all over the place? Is he going to be clear and concise? Is he going to be combative? You just don't know. And it ended up, he was super engaging.
It started a little shorter answers and stuff, but we were kind of hitting him with, "Can you clarify this? Can you clarify that?" Yes, no type questions. I said to my colleagues, "We need to get some personality out of this." He really opened up after I asked a really hard-hitting question of, "What's your favorite type of cookie?" Because I've heard Feinberg is into cookies and sweets. He told us he's committed to the end of the administration. Pretty sure he talked to us because every week, three times a week, we were getting sourcing telling us from all over town, incredible people. He's resigning, he's being fired, he's leaving, who knows what.
It was a really, really good interview. I found myself as a New Yorker who has worked hard to not speak like a New Yorker that I've been here over 20 years in DC, I was very much speaking as if I had just talked to my folks or watched an episode of The Sopranos after talking to him to the point where my two colleagues who were on with me were like, "Wait," because we were on the phone, we were not in person, and they were messaging me like, "Is that you?" And I'm like, "Yeah, sorry." Usually I have to have a few bourbons or something for it to come out like that, but...
Tony Bertuca:
Aren't you going to tell us what the hell the cookie is or was that an off the record?
Roman Schweizer:
Exactly. How did this go on without that?
Marcus Weisgerber:
I think we had put sweets. He actually was saying he was big into chocolate cake was kind of his jam. I really wanted to get into how there's just no good Italian pastry shops here in Washington, and you got to go up to Baltimore if you want anything that's halfway decent. And if anybody wants to send their recommendations-
Tony Bertuca:
You got to find Italians and you got to go to Belmont.
Aaron Mehta:
I've never heard this before. Marcus is of Italian descent from New York.
Marcus Weisgerber:
Exactly.
Tony Bertuca:
The stuff with Feinberg and the mystique has really been just fun for me the last year or so. Is it true he smells like money? Is it true that... My God, all this stuff with the... A guy shows up and he just sort of wants to go to work and doesn't want to talk to anybody about it, but he happens to have a job that's supposed to be a very public facing job and then quietly completely restructures Pentagon acquisition and centralizes so much power.
Good on you for getting the interview, but I want to know more. I want more. Get him to talk to you again because we're going to rework profit policy right now. We're redoing price transparency. I mean, you've got Hegseth saying he's the secret weapon, really trying to back him every time Hegseth speaks publicly about him. So yeah, my fascination is endless with him.
Marcus Weisgerber:
There was so much, and we were really trying to just keep it as high level as possible for this one interview. We really hope he talks to us again. I will spike the football right now. I have received more feedback on this story and engagement from senior officials and people just popping into my DMs, government industry, CEO level after that interview because they all were very, very interested in, especially I think because lots of CEOs have had, at least when he first came in before all the DRPMs were in place and stuff, had a lot more interaction with him, were very, very interested in it.
I'll even say at AUSA, because it came out right before AUSA, I had a number of folks approach me and want to talk about stuff they're doing a little bit more. I think clearly this administration has really clamped and controlled the information, but people have looked at it as, "Well, if he talked, then maybe we can talk about what we're doing too." And I really hope that that resonates not just for me, but for all the reporters on this beaten, CEOs and companies and such who are listening to this like, "Hey, if you don't engage, you're not going to get your money." I think that's also become a big reality for them as well.
Tony Bertuca:
Loosen up out there is the message. Thank you, Weisgerber, for your service.
Roman Schweizer:
All right, Tony, you did mention profit policy. I do want to toss it to you because you did some reporting on a new memo out from the director of cost and pricing about profit, I think October 27th memo. I admit I have not read it, so why don't you just give us a quick download?
Tony Bertuca:
It's not huge, but it certainly is sort of the latest thing in the saga that industry's following very closely. This is something controlled by the office of Steve Feinberg, which is the Pentagon's effort to overhaul profit margin, defense pricing, transparency as the phrase the Pentagon is using, stuff that has made industry pretty nervous because it's going to change the way they get paid, right?
We saw this a couple of years ago when they tried to tweak progress payments, and that was a huge issue. The whole market slid on news of that. They started with this effort that some people will tell you a little clumsily with a big memo saying we're here to make sure industry stops screwing the taxpayer basically, which that probably wasn't the way to go in the view of some who I've discussed this with. And so then what they've tried to do is they've tried to put out these other memos that are trying to be more reassuring about how the Pentagon doesn't want to do anything invasive, they don't want to go after your cost secret sauce necessarily.
And the most recent memo here, this is as we await sort of rulemaking on the new profit margin policy where they want to do more of a commercial model and have tiered profits for some of these different things in different categories. The new memo is just policy memorandum from the Defense Pricing Contracting principal director, John Tenaglia, basically saying that defense contractors can retain profits generated by efficiencies on fixed price contracts.
It's not like an earth shaking memo, but also saying that while they're accounting for those savings and the Pentagon's going to be negotiating future production deals, sort of saying if you can save money through superior execution, productivity gains, you guys should share in that. You should be able to hold onto those profits. But if the price goes down, the cost goes down.
So it's sort of trying to strike this balance between what I think Feinberg and the Pentagon's trying to do right now, sort of tell industry the bottom line message is, "You're going to get rich if you do a good job," which I think that's the message they want to send now and sort of backing away from more of the, "We're here to play hardball" type thing, at least publicly.
Roman Schweizer:
No, I think there's obviously a ton of interest in this issue, not just in industry, but of course Wall Street. The first memo was a huge shock. Second memo was a little bit of confusion. Third was a little more relief. I think folks kind of think there's an opportunity that this will evolve over time, perhaps in a way that favorable to the companies.
Robert Wall:
Yeah, it just feels also a bit that that's reflected in the tenor on some of the Q3 calls, earnings calls. I think companies are leaning a bit more into talking about their dividend policy and share buyback and openness to this, whereas perhaps earlier in the year they would try to skirt around the capital allocation question when it came in.
Roman Schweizer:
Last night, the Army, or I guess yesterday, the Army announced that Lockheed had got a contract for the future interceptor for the next Gen Patriot. It's a billion dollar contract. It's an OTA. 600 million is army money, 400 million is Lockheed money. So again, these traditional defense primes paying in and paying for part of the developments.
Marcus Weisgerber:
And the Pentagon going with the traditional and not the startup.
Roman Schweizer:
Yeah. Well, I mean there's still the low cost interceptor. I'm sure they're going to spread the field a little bit there. But also, I mean, again, some of this stuff is hard and this is not to disparage any of these companies out there, but I think hitting a bullet with a bullet in outer space or close to it is still pretty hard. But not that there aren't companies out there that are going to do it.
Okay. Sort of along those lines, just two things in aviation we can kind of riff off quickly. One, this kind of happened, Boeing won FAXX, and then Lockheed got a potential 10-year framework for 850 F-35s. Still not definitized, not a contract, not even a YUCA, but any thoughts on those two big programs, fellas?
Marcus Weisgerber:
I mean, it's a big win for Boeing. I think we heard Northrop's name talked about a lot. I mean, that's the thing, you just don't know if anything's real. Everyone wants a game on who has the capacity. Northrop's got the bomber, the F-35's going to be built forever and Boeing's got these next two. Boeing didn't go out of business from not getting the F-35, which was their fighter production, which everyone... I mean, all of us have been here long enough to hear all those arguments that were made 10, 15 plus years ago.
Clearly, they were still able to do something right, still have to deliver. We don't know how this differs from NGAD. I guess I always think of, I'm thinking more F47, but how that differs from NGAD and what Will Roper said was flying back then and how it's differed, I guess in our X32s and X35s, I guess it's that version compared to whatever the production version is. And as Aaron's publication has reported at length, the Boeing has had so much trouble with the T7 and MQ25. So they have to deliver, but they keep everything in St. Louis for now. So Robert, go ahead.
Robert Wall:
Well, they've also been pretty clear that they didn't sign up to some of the insane contract terms that they've previously signed up to when they were willing to basically give away the farm just to get the contract. So I mean, I think this came up also here on the last earnings call. They were a bit clearer on this 47, but indicated also that the FXX terms were something from a contracting perspective that would not break the company even if things get a bit challenging along the way. So I think the new regime there is a bit smarter about how you go about bidding things.
Tony Bertuca:
And on the Lockheed thing, I kind of have a question for the group really, I think I would pose, which is this is a huge framework deal. This is 10 years, but as you guys point out, it's not a real deal. What are we to make of these frameworks now? We're on our 15th framework. Wall Street apparently views these as deals. Everybody's like, "It's going to be fine." Are these companies having to act, do you think?
There's money for stuff that hasn't been funded yet, you're seeing CapEx investments, yet they're saying in these earnings calls that they're insulated from risk. What are we to make of these frameworks and whether or not there's some sort of secret language in all this nobody's seen that's going to make all these guys whole if the money doesn't show up? What's going on here?
Roman Schweizer:
Wall Street does not view these as firm contracts, slam dunks or guaranteed at all. And I think even if you look at the YUCAs, undefinitized contract actions that have been awarded, even that stuff is not firm. I think you've seen this quarter, managements talk about the provisions to make them whole. I assume, and people I've talked to assume that is some sort of termination liability that you don't normally get in a multi-year contract that should the government not come through, exercise its options in later years, then the company gets a bag full of money essentially to help make itself whole. So now again, the question is one, is the money going to be there for the termination liability?
Tony Bertuca:
Has that been shared with Congress?
Roman Schweizer:
Well, I think it has been.
Tony Bertuca:
They haven't said anything publicly about what they're out to look for.
Roman Schweizer:
No, but so I mean again, congresses hate some of that stuff and I think a big chunk of that money in the reconciliation bill when you look at PAC3, FAD, all these things is some of that authority to finalize those contracts for the termination liability. So again, I don't think anybody thinks this is a done deal. And the other thing I would just say, when you look at the budget documents, it's 85 F-35s in perpetuity, but that basically counts on trillion dollar plus budgets and that's going to be tough and it's going to be tough when you're buying F-35s along with F-47s, FAXXs and everything else and you don't get a trillion dollar budget.
Marcus Weisgerber:
MB21s and sentinels battleships.
Robert Wall:
I mean, one thing I'd like to also throw in on the make whole provision, I think there's a bit of maybe a misunderstanding there. I mean they get made whole for perhaps some of the contractual commitments that don't come. But if you've put in a bunch of more facilities, then you're not going to get whole for having that for example. And T7 is a good example. Part of the problem with T7 right now for some of the companies, and I follow, I mean Europe, SAB is a huge supplier on that. They've built this massive facility in the US and it's just not at rate, so it's underutilized.
So you could very well see a company, yes, they get made whole for a part of it, the contractual part, but then you're sitting there with a factory that's empty basically or largely empty and that of course you don't get made whole for or almost certainly don't. So it's not as much of an insurance I think as they're making out to be because no one really wants to talk about it.
Tony Bertuca:
I mean, if you want to use that to segue into AUSA, that was one of the things, the conversations I was having with people at AUSA, which is has AUSA peaked this year basically? Are all these companies here chasing money that's not going to materialize? Maybe some of the big ones, but that just might be a way to segue into it if you wanted to talk about nuggets. But the optimism at AUSA, what's it backed by?
Roman Schweizer:
Let's just finish up real quick. Bully, FAXX, I think it was Marcus alluded to the fact. And I mean the Air Force released its new fighter plan. Let's not forget, percolating in the background is this idea of the Air Force potentially buying F-16s as sort of a low cost fighter derivative. So all of a sudden the US fighter market is two new six gens, F-35 plus F-15EX plus F-16. It's diversified. It's about capacity.
Honestly, again, I've said this before, and I'm sure in your discussions with Pentagon folks, I mean they're prepping for a major war and getting capacity and rate and supply chains up to snuff or able to double or even quadruple in some cases along with what they're trying to do in shipbuilding and munitions and elsewhere.
Before we switch over to AUSA, because I definitely do want to talk about that, but there is a European fighter program, GCAP, which again, I will still call Tempest because it's a cool name, but we had SCAF or FCAS or I don't know if that's just a difference in language terminology or dyslexia. But Robert, where is that program at right now and what are the Germans going to do?
Robert Wall:
Okay, so quick recap, FCAS, SCAF really was multiple parts to it. NGF, next generation fighter was the core part, was Spanish, Germans, French. They divorced. The French have now gone off. They've said they're doing their own thing. They are going to do their own thing. Then of course you've got the Italians, the British and the Japanese working on GCAP together. So the question is what happens to the German and the Spanish to some extent?
And it's interesting because the divorce was kind of drawn out, so we kind of knew we were going to get to the situation. Situation's actually interesting because really it's going to come down to the governments. The Germans are talking to British and there seems to be some interest there, but there's also parts of the whole industrial landscape that kind of get a say, and you get the feeling Airbus been pretty clear. Wherever we go, we want to get meaningful work. We don't just want to be a minor partner.
Now that means that someone at GCAP would have to give up meaningful work to bring them on board. And for instance, BAE Systems, they may not like that idea. So I think this is very much in play. Where's journey going to end up? I think Airbus would rather the Germans pursue a relationship with the Swedes. The requirements may not line up. So I think this is not going to be something that gets sorted quickly. What I do think we can say is GCAP is sitting in a pretty strong situation whether the Germans join or not.
And to some extent it looks like the healthiest of the new generation fighter programs in Europe. We don't know what the Swedes want to do net. We don't know where the Spanish and the Germans are going and the French will do their thing, but they're first going to do Rafale F5, a major upgrade of that, then their drone, then their next fighter. So GCAP, I would say sits pretty well and it's probably going to be quite exportable, which F-47 will not be. So I think that's in a nutshell where we stand on the European fighter landscape.
Roman Schweizer:
Yeah, the only thing I would just add to that, I noticed that German chancellor Merz is in Japan or had been in... I don't know where current status is, but meeting with Prime Minister Takaichi. And so obviously Japan, a big component of GCAP, the three Asian Tri-Nation program. I think for Japan as well, the key is the timeline, the fielding timeline. I don't think they want to stretch that out. So if you add the Germans, it's still got to be somehow that keeps the existing timeline for the program on schedule.
Okay. No, I think it's fascinating times. I mean, again, you've got some major fighter programs going on globally and really a whole reset. But then again, ultimately, a lot of this is still about F - 35s too. Okay. And then just to piggyback on what Tony said, AUSA, my thoughts were, I love the idea, was it peak AUSA? I mean, it was mobbed and honestly, it had been drones a couple of years ago this year.
I think one-way attack, directed energy was prominent, some more ground robotics and different kinds of vehicles. I mean, definitely. But then again, still plenty of the same old stuff. I mean, obviously munitions ramp a lot of the munitions programs and things like that. So ton of interest. I mean, I do wonder if it's peak AUSA. We did multiple days of meetings and had investors walking around. It was a really big turnout.
But again, as you point out, the army, the smallest from a funding perspective, from a market perspective of all the services and really kind of viewed as the service that's probably going to lose the most if the budgets decline. So that's also that risk there. So just any thoughts or observations you guys have?
Tony Bertuca:
Yeah, I think as I sort of got it before the conversations I were having, and this is one I had with a colleague and he was like, "This has got to be peak AUSA. We've never seen crowds like this. We've never seen so many different conferences and meetings." The Secretary of Defense showed up as the guest of honor on the third day in this massive ballroom, was filled with people. And yet sort of what was going on in that room, you had on the stage a secretary of defense who might not be secretary of defense soon.
You had an acting Army secretary who's probably not going to be the Army secretary. You had an acting Navy secretary who maybe can't get confirmed, and you had a Congress who was out campaigning during midterms who might not be able to come back and deliver any money. So it was an interesting comparison between the optimism of what was going on at the conference, the energy of the moment, and maybe some of the stuff that was actually going on beneath it.
Marcus Weisgerber:
It was scary crowded. I don't get claustrophobic really ever. I felt like I was on the floor at, to date myself, a Nine-Inch Nails Rollins Band concert in the '90s, just really mosh pit.
Tony Bertuca:
It's more like the Magic Kingdom now for us. More like the Magic Kingdom.
Marcus Weisgerber:
Now we go to the Magic Kingdom. Yeah, yeah, yeah. Yeah. But you got to go in the off season. You got to go in the off season. But I try to think back, Rome and Tony, Robert, you guys have to remember this. I didn't go to AUSA my first few years reporting because I was an Air Force reporter, but I do remember going in '07 maybe, '08, surge time. And I remember it being packed, but in a different way. I don't remember as many uniforms maybe as now, and I'd love to get your thoughts in comparison. And then we saw it go down. The crowds were so down in late Obama years, troop draw-downs and whatnot.
Roman Schweizer:
I don't disagree with what Tony said, but to me, the fascinating thing, and this is perhaps a much longer view, I really astounded by the amount of technology, new companies, and technological change. And that's drones, one-way attack, directed energy, even newer combat systems. And I published a note today, looking at just some of the munition stuff that Lockheed and some others, Castelion and RTX have announced. I mean, if you look at the new categories of air-to-air weapons, I mean, Lockheed just got a production contract for Aero, which is the air launch hypersonic weapon.
I mean, the US finally has a hypersonic weapon. I mean, after five, six years ago, we were losing the arms race to China and Russia, and guess what? Now there's a hypersonic weapon in the mix, and there's more not far behind it. And so I think to me, AUSA, looking at the change that we've seen since even the surge, even when you think of Iraq or Afghanistan, the way the US army, the US military fought in those wars, what the hell it's going to look like soon with ground robotics and drones and maritime. I mean, obviously the irony is I saw a lot of maritime MUSVs and stuff like that at the Army show, which again was somewhat interesting. But if you're doing robotics, you're doing almost every class, right? Air, ground, sea.
Marcus Weisgerber:
Hey, to put a bow on it, but where's the money coming from?
Roman Schweizer:
Well, I mean, the one thing that I would say last year, I always say, I think it's IISS that I let them do the bean counting because I can't figure it. Global defense spending, $2.9 trillion last year, highest ever. So the money's global.
Tony Bertuca:
Somebody will buy it, right? Your one way kamikaze drones, right?
Roman Schweizer:
The technology is out there.
Robert Wall:
I mean, I'm not sure. I mean, the thing is there's what's not to the level that's happening in the US, but the amount of newcomers, even here in Europe now, not a place that hasn't been a hotbed of innovation, I would say in a few decades in defense. I mean, it is pretty crazy, and especially given this focus on sovereignty over here now. If you're a US contractor and the Pentagon ain't buying it, I'm not sure how open the door is somewhere else.
Roman Schweizer:
The thing I tracked is, again, at least for last year, fiscal '26, US foreign military sales case announcements, forward-looking, $154 billion all time record. So it's still pretty robust. I don't disagree with you five years, 10 years from now. We'll see how that may or may not change. But then again, who knows, maybe hopefully in five years, 10 years, we get a peace graze and things settle down. So maybe hopefully our kids can enjoy that. So gentlemen, we've gone long as always. We've covered a lot of ground. Thank you so much for doing this as always. Happy Halloween, happy election day, and we'll be talking to you soon.
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Roman Schweizer
Roman Schweizer
Managing Director, Washington Research Group - Aerospace & Defense Policy Analyst, TD Cowen
Roman Schweizer joined TD Cowen Washington Research Group in August 2016 covering defense policy issues. He held previous positions at Guggenheim Securities and MF Global. TD Cowen Washington Research Group was recently named #1 in the Institutional Investor Washington Strategy category. The team has been consistently ranked among the top macro policy teams for the past decade. Mr. Schweizer has over 15 years of experience in Washington, DC, serving as a government acquisition official, industry consultant, and journalist.
Prior to joining Washington Research Group, he was an acquisition professional with the U.S. Navy’s littoral combat ship program. Previously, he directed a team providing congressional and media strategic communications support to senior Navy officials on high-profile ship acquisition programs. Mr. Schweizer has also consulted on U.S. and international defense, aerospace, homeland security, and technology market sectors to Fortune 100 clients on behalf of DFI International and Fathom Dynamics LLC.
He has been published in Inside the Navy, Inside the Pentagon, Armed Forces Journal, Defense News, ISR Journals, Training and Simulation Journal, the Naval Institute’s Proceedings, and the Navy League’s Seapower.
Mr. Schweizer earned a bachelor’s degree in history from American University in Washington, DC.
Material prepared by the TD Cowen Washington Research Group is intended as commentary on political, economic, or market conditions and is not intended as a research report as defined by applicable regulation.
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