Huntington Ingalls' Shipbuilding Woes: A Warning Sign for Defense Contractors?

Huntington Ingalls Industries (HII), the sole U.S. shipbuilder of nuclear-powered aircraft carriers and submarines, has become a bellwether for the operational risks inherent in long-lead, labor-intensive defense manufacturing. While its $48 billion backlog and strategic position in the Pentagon's modernization plans suggest robust long-term potential, recent operational challenges—ranging from labor shortages to bureaucratic bottlenecks—highlight systemic vulnerabilities that could ripple across the defense industrial base. For investors, these issues raise critical questions about whether HII's struggles are an anomaly or a harbinger of broader industry-wide risks.

Labor Shortages and the "Greening" of the Workforce

The most immediate threat to HII's operational execution is its reliance on a dwindling pool of skilled labor. The shipbuilding sector has faced a perfect storm: an aging workforce with decades of expertise, a post-pandemic exodus of younger workers to less physically demanding industries, and a lack of apprenticeship programs to bridge the gap. HII's 2024 furlough of 471 employees at Newport News Shipbuilding, framed as a cost-cutting measure, underscores the tension between workforce optimization and maintaining critical skills. CEO Chris Kastner's shift in hiring strategy—from entry-level recruits to experienced workers—reflects a broader industry reality: attracting and retaining talent is now a make-or-break challenge.

This labor crunch is not unique to HII. The U.S. shipbuilding industry has fewer than 200,000 skilled workers today, a stark contrast to the 1 million who built the fleet during World War II. For labor-intensive defense manufacturing, where tasks like welding submarine hulls or assembling aircraft carrier propulsion systems require years of training, the risk of operational delays—and the associated cost overruns—remains acute. HII's Shipbuilder Academy, a program blending classroom and hands-on training, is a step toward mitigating this risk, but scaling such initiatives across the industry will require sustained investment and policy support.

Supply Chain and Bureaucratic Bottlenecks

Even when labor is available, HII's ability to execute is hamstrung by supply chain and regulatory hurdles. The company has cited late equipment deliveries and weather disruptions as factors delaying aircraft carrier production, particularly on the CVN 80 program. These delays are compounded by the Navy's risk-averse culture, which often leads to evolving design requirements mid-construction. For instance, the addition of shock-absorption and firefighting systems on vessels has driven up costs and timelines, creating a cycle of inefficiency.

Matthew Paxton of the Shipbuilding Council of America has testified that the Navy's 16:1 shipyard worker-to-NAVSEA oversight ratio—intended to ensure quality—often results in inflexible processes that stifle innovation. For HII, this means navigating a labyrinth of approvals for even minor adjustments, slowing throughput and eroding margins. The company's operating margin at Ingalls Shipbuilding fell to 7.2% in Q1 2025, down from 9.2% a year earlier, a clear indicator of the pressure.

Strategic Responses and Industry-Wide Implications

HII's response to these challenges has been multifaceted. By outsourcing 30% of its work to smaller suppliers by 2025, the company aims to offload non-core tasks while focusing on high-value systems. Investments in additive manufacturing and AI-driven workflows—such as its partnership with C3 AI—signal a push toward digital transformation. Early results from the “Digital Plant” initiative, which increased equipment uptime by 50% in a pilot program, suggest these efforts could yield tangible gains.

However, these solutions are not without limitations. Outsourcing raises questions about quality control and the potential for supplier dependency, while AI adoption requires upfront capital expenditures that may strain smaller defense contractors. For HII, the $60 billion Columbia-class submarine program represents a lifeline, but its success hinges on resolving these execution risks.

The broader defense industry faces similar challenges. Companies like General Dynamics (GD) and BAE Systems, which operate in adjacent sectors, are also grappling with workforce retention and supply chain issues. For investors, the lesson is clear: defense manufacturing is not immune to the pressures of a fragmented labor market and bureaucratic inertia. While the U.S. government's push to expand the fleet to 381 warships by 2050 creates long-term demand, the ability to deliver on these ambitions will depend on systemic fixes—such as modernized training programs and streamlined procurement processes—that extend beyond any single contractor.

Investment Considerations

HII's stock has underperformed relative to peers in recent years, reflecting investor concerns about its operational challenges. While the company's $48 billion backlog and alignment with Pentagon priorities offer a strong foundation, its execution risks cannot be ignored. For defensive investors, HII's position as a near-monopoly in nuclear shipbuilding provides a moat, but aggressive investors should monitor its progress in addressing labor and supply chain issues.

Key metrics to watch include:
- Workforce retention rates and training program efficacy.
- Cost savings from outsourcing and digital initiatives (HII aims for $250 million in annualized savings by year-end 2025).
- Contract delivery timelines for flagship programs like CVN 80 and the Columbia-class submarine.

HII's ability to navigate these challenges will determine not only its own trajectory but also the resilience of the broader defense manufacturing sector. For now, the company's stock appears undervalued relative to its long-term prospects, but investors should remain cautious until execution risks—particularly in labor and supply chain management—are meaningfully mitigated.

In a world where geopolitical competition is driving defense spending, HII's struggles are a reminder that even the most critical national assets are vulnerable to the realities of long-lead, labor-intensive production. For defense contractors, the path forward will require more than just capital—it will demand a reimagining of how expertise is cultivated, supply chains are managed, and innovation is integrated into a sector that has long relied on tradition.