HII’s Petters on Shipbuilding, Cost Cutting, Ship Maintenance, Frigates, Subs

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Mike Petters, the president and CEO of Huntington Ingalls Industries, discusses the outlook for US Navy shipbuilding, cutting carrier construction costs, the ship maintenance summit being convented by Navy acquisition chief Hondo Guerts, a service’s new frigate requirement as well as new submarine programs with Defense & Aerospace Report Editor Vago Muradian at the Reagan National Defense Forum at the Ronald Reagan Presidential Library in Simi Valley, Calif. Our coverage was sponsored by L3 Technologies and Leonardo DRS.

Mike Petters

CEO, Huntington Ingalls Industries

Reagan National Defense Forum

November 2018

Vago Muradian:  Welcome to the Defense and Aerospace Report.  I’m Vago Muradian here at the Reagan National Defense Forum, at the Ronald Reagan Presidential Library in Simi Valley, California, one of America’s truly premier defense events.  Our coverage here is sponsored by Leonardo DRS and L3 Technologies. And we’re honored to have with us the Chief Executive of Huntington Ingalls Industries, Mike Petters, a Naval Academy graduate, former submariner and now a corporate type.  Mike, it’s always a pleasure seeing you.

Mike Petters:  You’re too kind.  Thanks. It’s good to see you again.

Mr. Muradian:  It’s an absolute pleasure.  A lot of debate on the future of the budget going on right now, right?  Whether, there was an expectation it was going to be another robust year at 733.  The President put guidance out, he wants it to be reduced.  I know there’s going to be a plea where Senator Inhofe, Mac Thornberry, and Secretary Mattis are going to go see the President, and Mick Mulvaney, to sort of plead their case for more money.  It was great, Mac Thornberry gave a shout out on 355 ships.  You know, we need more ships, which augers well for you.

But talk to us a little bit about this dynamic.  Because there’s this sense that there’s not only going to be that reduction that we may split the difference and get to 716 this year, but that there may be actually downward pressure.  Everybody’s been talking here about budgets going up, servicing the debt.  How that’s going to become a challenge and an issue. Talk to us about how you’re shaping and trimming your sails for what could be coming.  Where a couple of years ago we thought it was going to be a very, very robust program with a lot more money.  There may be a little bit less money out there.

Mr. Petters:  There’s probably a couple of different levels to that, right?  There’s, first of all, a lot of our programs were authorized and appropriated in the ’18 and ’19 buildup, right?  And what we’ve talked about is that if you want sustained investment and sustained health in the supply chain, you need to sustain that. And the alternative is that that buildup, the ’18, ’19 buildup starts to look like, if it starts to look like a rat in a snake, then you basically undo what you have started to do.

’18 and ’19 is the beginning of recovery for what BCA did to us, and you remember, before BCA Secretary Gates actually went in and had a takeout of his own to kind of head that off.

So recovery for these, you know, just about ten years’ worth of self-inflicted damage to modernization and recapitalization, we just started.  If we decide to go back the other way then you’re going to have a whole lot more folks lose confidence that there’s a long-term commitment to where we’re going to go.

For us at Huntington Ingalls, you know, the carrier is in the ’18, ’19 plan.  The destroyer competition just happened.  The submarine program is in ’18, ’19s plan.  The amphibs have been moving ahead.  So our principal programs are really in a place where it’s more about contracting than it is about the ’20 budget.  There’re a few things we still need to do, but the vast majority of what we need to do is get the stuff that’s already authorized and appropriated under contract.  So that’s what our focus is.

But if you decide to turn this into a bulge and not a sustained commitment, then you start to have a collateral effect on future programs.  You and I have talked in the past about when Columbia starts to really happen, what does it do to all the other programs in the package, right? And so it’s a lot different story if you have a sustained commitment than if you just had an ’18, ’19 bulge.

Mr. Muradian:  How do you think, but as you, on the carrier, we saw Tim Kaine in Canada. He’s still very bullish about the two, you know, putting two carriers under contract at the same time.  Let’s talk about getting everything contracted, right?  So talk to us about your window and whether or not you’re going to get everything contracted by the time you need it contracted to make sure that you have access to that money and that modernization continues.

Mr. Petters:  I remain pretty optimistic about that.  I mean we went through the lead ship challenge, you’re building the prototype of a new design, you’re testing everything out, and Ford was the lead ship and one of the best lead ships I’ve ever been associated with.

We took all those lessons learned and we created a capital investment program.  We put a quarter of a billion dollars into taking the price of Kennedy down.  So from our standpoint, we made a pretty substantial investment.

The next thing to do to take the cost of carriers down is to buy them smarter.  So that’s where the let’s buy them two at a time. We did this back in the ‘80s,  We did it twice.  And those four ships were the most cost-effective ships at least in the carrier production line we’d ever built.  And the fourth one was the best one.  The Truman was the best one.  So let’s get back to that.  Let’s get back to that certainty where we’re not always building the last carrier.

We’ve had really constructive engagement with the Pentagon, particularly with the Navy, but also with the senior leadership in the Pentagon on what could we do to enable even more savings?  So we’re working our way through that.  Because it’s really unleashing an opportunity to save some money in a time when savings are important, it gives us some optimism.

We’re not done yet. You don’t get across the finish line until you actually run through the tape, but we’re optimistic about that.

If you get the carrier done.  The overlap in the ship-building base, but also in the supply chain; the overlap to the Virginia Class from the carrier suppliers to the submarine suppliers; and then from that overlap over to Columbia; it becomes a foundational piece of making all of those programs affordable.

So from our standpoint, that’s first.  We’ve got to get that done.  Once you get that done, then you can see your way clear to go get everything else done.

Mr. Muradian:  What are some of the other cost saving things you can do?  You talked about the contracting piece.  We’ve talked a little bit about automation, but there are certain limits to what you can do.  You can do it kind of early in the phase, but a little bit harder once you’re getting to outfitting.  What are some of the other things you can do to bring and take costs down?

Mr. Petters:  We went through a lot of this between Ford and Kennedy.  We’re running at 15 percent less man hours on Kennedy now. The best we’ve ever done before this was nine.  And that’s because we were able to go through and target, here are some specific investments we can make that will reduce the man hours there.  Some of it was facilities, some of it was information, some of it was digitization, some of it was working with our suppliers in a different way. But all of it leads to lower cost and more efficiency.

If we know that we’re actually going to be building two more, we have an opportunity to now go consider those things that may have not made sense for only one ship but would make a lot of sense for three ships.  And so that to me is part of how do you unlock the opportunity to save real money here.  And when you do that on the carrier, you start to then set the standard for across the industry about how you’re going to be managing digital information, how you’re going to do automation, how’s the supply chain going to engage?  It starts out, it might feel like it’s a pilot or a single program, but the carrier is so impactful to the entire naval shipbuilding base that it will quickly become the way that we do business.  That’s our vision for where it’s going to go.

Mr. Muradian:  Let me ask you about ship repair and maintenance.  When Fitzgerald and McCain were struck, I know the senior Navy leadership was a little bit concerned and said hey, if this had been battle damage, where would we be and what sort of ship repair capability would we have to be able to get these ships back on-line as quickly as possible?  You guys have been key in sort of working on the McCain.  It was an event — Fitzgerald, excuse me.  Admiral Roughead sort of expressed a little bit of frustration that said look, this took a long time to get this ship back.

So I want you to address, because the magnitude of that repair job was I think much more serious than a lot of people thought.  But I also want to ask you about the summit meeting that Navy Acquisition Executive Hondo Geurts has called to get the whole industry in to help the Navy with its backlog issue.

So let’s first talk about what happened with Fitz, and then talk a little bit about how the industry’s going to work with the Navy to eat through what is a monumental pile of backlog.

Mr. Petters:  Well, on Fitz, I’m not even sure I have the right words.  It’s really a humbling honor to be able to do the work on Fitzgerald, just a tragedy of what happened there.  I compliment the shipbuilders at Bath.  They built a heck of a ship.  The damage that that ship took was by all measure, was, I mean it was threatening to the ship.  And so now we’re back into okay, let’s go back and let’s fix it.

This is not about just welding plates over hulls.  This is about rebuilding major pieces of that ship to go in.  And like I said, we’re humbled to be able to have a chance to do that.

The bigger question of how would you deal with the capacity of repair and the, whether it’s battle damage or just a normal in and out of the fleet, kind of how do we take care of our ships?  That is a big strategic issue for us right now as a country.  As we move more of the fleet over to the Pacific, and you step back and you kind of understand the vast distances involved in the Pacific and you start to localize where are the places that we could actually do more than voyage repair?  You start to realize that you don’t have a lot.

So now you have to step back and kind of understand, we may have to completely rethink the way we do maintenance.  One of the ways that we, one of the things we do in maintenance right now is we’ll go and we’ll open, we’ll take a ship into a repair activity and we’ll start to do the work and we’ll inspect something and we’ll find something, and by and large, we pretty much try to get it fixed every time.  You know, if we find it, we fix it.

If you look at other organizations that have fleets that they have to maintain, certainly if it’s a critical safety issue they’ll fix it on the spot; but if it’s something that can be deferred and can become part of a regular, routine and sequence, they can find more efficient ways to keep more of their fleet working.

So from our standpoint, there are some of those things that we can do.  And I applaud Secretary Geurts, because I think he, and Secretary Spencer, have been clued into there’s a lot of folks out there that maintain fleets.  Maybe not ships.  Maybe airplanes or trains or automobiles or buses or whatever, but there’s a lot of people that do that, and maybe they have some ideas on how we could do that better to give more operational tempo than what we’re getting right now out of the system, because we are absolutely stressed on capacity.

Mr. Muradian:  And how much of an investment would be required?  Because everything for the past 25 post Cold War era has been about efficiency and the minimum number of yards; whereas the kind of war we might be going into — not that we are.  But in the event of conflict, broken ships are going to pile up pretty quickly.

Mr. Petters:  I don’t know that I know the answer to that question.  I think you start to have to create scenarios, and then you start sizing to what you’d say is a likely scenario, a worst case, or a better case, and you start to size that.

That’s what we do. We know how to do that.  We know how to size that sort of stuff.  We have to work with the Navy, the industry has to work with the Navy to try to figure out okay, what scenarios do you want to size this for?  And are you willing to pay for that size and that possible scenario at a point in time when you may not need that capacity?  Because it could be over-capacity.  And over-capacity costs money.

So there’s a lot of work to do here.  I think it’s a great idea to bring everybody together and begin the conversation, but I think we’re right on the very front end of it.

Mr. Muradian:  We’ve got two minutes and I want to ask you two questions.  Question number one is, the frigate.  There was a perception that once John McCain passed, he was one of the big paramount champions of the frigate so there’s this perception that that program may fall by the wayside, especially as budget pressures tighten.  Do you see that program staying on track at the end of the day?

Mr. Petters:  Yeah, I do.  I look at it from the other standpoint.  I don’t look at it from the budget side.  I look at it from the mission side.  I think there’s clearly missions out there that are not being performed today that we need frigates to go do.  So I think from that standpoint, there is a legitimate requirement for that platform. And I think I’ve read that the Navy has actually validated that requirement in the past week or so.

So from that standpoint, I think there’s a legitimate requirement.  That’s going to drive it.

The question about the frigate, though, then when it becomes a budget question is not about if, it’s about when.  Back to the rat in the snake.  If we’re in a bulge here and we go back to a different level and you start trying to pay for Columbia, is frigate and timing of frigate becomes something that you use to modulate funding for Columbia?  I don’t know the answer to that.  I’ve been saying for quite a while, our posture is that sequestration is a bad thing and needs to be fixed, and after that you better figure out how you’re going to pay for Columbia.  If you have to pay for Columbia out of hide, a whole lot of programs will be affected. I can’t tell you the frigate would be, but I think you have to just step back and say maybe it would.

Mr. Muradian:  And let me take you to submarines last.  We were talking about water and bilges on older classes of submarines.  Today’s Virginia Class, you’re measuring it with an eyedropper in terms of water getting in the boat.  Great quality, but there has been a little bit of a production challenge in terms of meeting schedule.  Bring us up to speed on the attack sub side of things.  And there was a weld problem on Columbia.  How big of a challenge does that give the submarine consortium?

Mr. Petters:  Well, I mean you’ve talked about really a national industrial base to support all of this.  Whether it’s Virginia Class, the payload modules, or Columbia.  And where you are on Virginia Class is that everything’s pretty highly synchronized.  And when something happens that, it may feel like it’s a small blip, but it turns out to have a larger impact than you thought, you know, we went through the sequestration battle at Newport News where we had an aircraft carrier refueling it was just, the start was delayed one year.  That start delay caused us to lay off 1500 people.  Those 1500 people had to go and then when we brought them back, that began to affect the synchronization of what’s happening in the submarine program.

So we’re getting that all back on track now.  The issue now is to make sure that we have a sustained commitment going forward, and that the industry has a chance to see all of the requirements that are in front of us in enough time so that we can size ourselves to go and execute to it. And I feel pretty optimistic that the submarine program and the submarine industry writ large is absolutely up to that challenge.

Mr. Muradian:  And on the weld issues, you ate through some margin.  We heard a submarine leak.  Are you comfortable with the margin you have on the program to be able to deliver it after that missile tube weld challenge?

Mr. Petters:  I mean there’s a lot of moving parts, but I think that one’s well under control at this point.

Mr. Muradian:  And are you surprised that at this day and age we’re having a weld issue? I mean that’s something that struck me as a little surprising after all the challenges we’ve had on welding and the processes we have in place to make sure that it doesn’t happen.  Did that surprise you a little bit that there was that kind of a problem?

Mr. Petters:  I mean I wish it hadn’t happened, but I think it just points out the complexity of what we’re trying to do and that if you ever take your eye, you know, if you take your eye off the ball it will hit you up the side of the head.  I think as we’re working our way through this, it’s the kind of business where you just have to pay attention to everything.

Mr. Muradian:  Mike Petters, CEO of Huntington Ingalls Industries, it’s always a pleasure, sir.  Thanks very, very much.

Mr. Petters:  Thanks for talking with me again.

Mr. Muradian:  And how do you think the Army/Navy game’s going to go?

Mr. Petters:  Oh, Navy’s going to win easily.

Mr. Muradian:  Okay.  There you go.

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