Analysts, Navy secretary praise shipyard merger

Defense analysts and a top Navy official say Northrop Grumman's decision to combine its Newport News and Gulf Coast shipbuilding sectors appears to be a good move that could benefit both the company and the Pentagon.

Some wondered why the Los Angeles-based company, the No. 3 U.S. defense contractor by revenue, had not done so before now.

"It didn't make sense to have two different shipbuilding divisions within one defense conglomerate," said analyst Loren Thompson with the Lexington Institute think tank in Arlington. "With the new arrangement, it's a streamlined management structure. Before, it was somewhat Balkanized."

Navy Secretary Donald Winter, stung by cost overruns and delays in several shipbuilding programs handled by Northrop Grumman and other defense contractors, is pleased with the consolidation, said Capt. Beci Brenton, his spokeswoman.

"He sees this as a positive step, and trusts that the unification of the sectors will improve the oversight of Navy contracts, and streamline business practices across the facilities," Brenton said in a statement Tuesday.

Early Monday evening, the defense giant announced that it was realigning its Newport News and Pascagoula, Miss.-based Ship Systems sectors into a single division, renamed Northrop Grumman Shipbuilding. It tapped Mike Petters, head of its Newport News yard, as president of the unit.

Petters will oversee an operation with $5.5 billion in annual revenue and around 40,000 employees, slightly more than half in Newport News. In a Tuesday interview from Pascagoula, Petters said the merger is occurring "because we think we are now at a point where we have a higher probability of success than we've had before."

The Ship Systems shipyards in Pascagoula and New Orleans, severely damaged by Hurricane Katrina in 2005, are well on their way to recovery, while the Navy's push to increase the size of its fleet is expected to boost shipbuilding activity.

The Newport News yard builds nuclear-powered aircraft carriers and submarines, and overhauls and refuels carriers. The Gulf Coast yards specialize in constructing surface combatants such as guided missile destroyers, and large amphibious transport and assault ships. It also is involved in the Coast Guard's fleet modernization program, which has been troubled by cost overruns, delays and design and construction problems.

Northrop Grumman, with roots in aerospace work, acquired Newport News Shipbuilding and the Gulf Coast yards in 2001.

"We're trying to get alignment around three large operations in three different states to support multiple platforms in the Navy's portfolio," Petters said. "That's not a trivial matter, and it's not something you enter into lightly."

Petters, 48, a 20-year veteran at the Newport News yard, will oversee the merger from Pascagoula, a transition expected to take the rest of 2008. He flew to the Gulf Coast on Monday night to begin the process.

"I need to spend some time here to understand this part of the business better," Petters said. "I want to see them in action, and not only get to know them, but give them an opportunity to get to know me."

A decision has not been reached on where the shipbuilding sector will be headquartered. Petters said he is "open-minded" about it.

"What I really want to get to is: How do we efficiently align this organization to most effectively support our customers' requirements?" Petters said.

The realignment has made yard workers in Newport News anxious, said Alton Glass, president of the United Steelworkers of America Local 8888, which represents nearly 8,600 hourly workers. The union later this year will begin negotiating a new contract.

"We do have some concerns," Glass said. "The workers really don't know what this means."

The company said Monday that it did not expect to close any facilities or make "significant reductions" in the yard work force. On Tuesday, the shipyard distributed a memo to reassure workers that there were no plans for layoffs.

"The truth of the matter is that one of the many benefits of this organizational change is that it will greatly reduce the need to repeatedly hire, lay off, rehire and retrain our employees," Matt Mulherin, vice president of programs, said in the memo. He will serve as acting lead executive in Newport News during the transition.

Thompson, the defense analyst, said the shift could work to the advantage of Newport News. "That shipyard is more versatile than the other sites," he said. It is capable of building every ship in the Navy's arsenal, he said, while the other Northrop Grumman yards are not certified to build or service nuclear vessels.

Ron O'Rourke, a defense analyst with the Congressional Research Service, said the merger may make it easier for the company and the Navy to contemplate new approaches to shipbuilding that reduce costs - a major concern of Congress and the Pentagon.

During the past year, O'Rourke said, the Navy has been pushing the industry to achieve greater efficiencies and economies of scale in shipbuilding across classes of ships and shipyards.

Paul Nisbet, a defense analyst with Newport, R.I.-based JSA Research Inc., which tracks Northrop Grumman for investors, said he was surprised by the timing of the merger.

"Hopefully, the end result will be a smoother operation, lower costs and higher profit," Nisbet said. "They've had plenty of time to see where the problems are in the various yards. I think it will work well for them."

Jon W. Glass, (757) 446-2318, jon.glass@pilotonline.com