While much of the focus regarding U.S. manufacturing has been trained on the beleaguered automotive sector, there has also been considerable discussion of the domestic airline/aerospace industry. On the one hand, a falloff in air travel on the commercial side has spooked many airlines into trimming back orders for additional aircrafts and cutting back routes. Already, the Air Transport Association is estimating that airlines worldwide lost $11 billion in 2009. And that’s not counting private jet orders, which are under pressure as well.
At the same time, defense budgets, which account for a big chunk of contract work, face ongoing review. Luckily, revenues on the defense side of the U.S. aerospace industry are still growing despite high-profile program cuts by the Pentagon. This according to recent comments provided by the Aerospace Industries Association (AIA).1 According to its annual forecast, AIA projects sales of military aircraft will fare better than the overall defense industry, rising 8% in 2009 to an estimated $61.7 and surpassing $63 billion in 2010. The revenue forecast hinges on increased spending on fighter jets such as the F-35, rotorcraft, military transports and aftermarket services, the report showed.
A snapshot of some of the new orders and contracts earned by industry’s biggest suppliers reflects tempered optimism in critical aerospace and aircraft sectors. Take Pratt & Whitney, a United Technologies Corp. company, for example. The manufacturer’s specialty Rocketdyne division has developed a J-2X engine to power the nation’s next-generation space launch vehicles, the Ares I and Ares V. The Space Shuttle Main Engine is the world’s most sophisticated reusable rocket engine, providing power to space shuttles since the first shuttle launch in 1981.
In another recent coup—this one pertaining to the civilian sector—Pratt & Whitney signed a deal with All Nippon Airways, which entails on-wing engine performance monitoring services utilizing Pratt & Whitney’s ADEM (Advanced Diagnostics & Engine Management) tools, for ANA’s fleet of 30 Boeing 777s powered by PW4000 engines. Through detailed analysis of engine data, engine management programs help operators achieve superior reliability and lower maintenance costs throughout the lives of their engines.
One area where the AIA is concerned, though, is the impact that cuts made by the Pentagon in 2008 that are just now affecting the supply chain. AIA president Marion Blakely recently told Aviation Week magazine that further cuts could “damage the industry’s base of suppliers and technical expertise, eroding its ability to meet military needs in the future.”
On the whole, though, Blakely is optimistic that future military spending will take into account the necessary balance between national security, future research and development, and budgetary constraints. Specifically, she sees potential for future growth in the maintenance and replacement of equipment as a result of use in current military operations.
“Our industry has always done well by funding its future,” Blakely noted, adding that investment in research and development by industry and government is key to ensuring that the aerospace and defense industry remains healthy and competitive. “I believe that despite pressures on budgets at all levels that there will be considerable effort to preserve investment accounts.”
Blakely’s hunch seems to have been spot on. According to a recent Bloomberg BusinessWeek article2, U.S. Defense Secretary Robert Gates has directed the Air Force to “return to its proposed budget three major programs the service offered to cancel, including one by Boeing Co. to build and install upgraded software in the cockpits of C-130 transports.” Specifically, Secretary Gates ordered restoration of $285 million in 2011 and $1.843 billion overall through 2015 on the C-130 program. He also requested that the Air Force restore $2.4 billion for an Internet-like radio that Lockheed Martin Corp. is building for aircraft and vessels, the article stated. Additionally, Gates has instructed the service to add $280 million to continue installing upgraded Pratt & Whitney engines on the Northrop Grumman Corp. Jstars surveillance plane.
That has to be music to Boeing’s ears. Despite steadily increasing its production pace through 2009, delivering 481 airplanes, the recession and ensuing airline crisis impacted new sales last year. According to the AIA, Boeing Corp. won a net total of 142 new orders for the year—the fewest since 1994, when it won125 orders. That’s down compared to 2008, when net orders totalled 662, and miles off from 2007, when Boeing logged a record 1,413 net orders. Although Boeing won 263 gross orders last year, the AIA report said, the total was reduced by 121 cancellations. Those included 83 canceled orders for the 787 Dreamliner, which made its first test flight on Tuesday, Dec. 15, 2009, in Everett, Wash., more than two years behind its original schedule. Randy Tinseth, Boeing’s vice president of marketing for commercial airplanes, attributed the drop to the decline in air traffic for passengers and freight.
FURTHER BELT TIGHTENING
Amidst the challenges facing the industry, major aircraft manufacturers are looking to further reign in costs. Boeing Co., for example, recently broke ground in North Charleston, S.C., on a second assembly facility for its 787 Dreamliner. The facility, to be located across the country from its traditional plane-making hub in Everett, Wash., will handle assembly of prebuilt sections of the aircraft. Industry analysts say the move will translate into savings due to the likelihood that the work force will be comprised of nonunion labor. Boeing has moved quickly to begin work on the site, adjacent to where it already owns a factory that produces Dreamliner fuselage sections and a plant—in which Boeing has a stake—that fabricates 787 parts. Boeing executives as well as South Carolina government officials say the new Dreamliner plant will eventually employ more than 3,800 people.
“We look forward to expanding our capability in South Carolina through our existing site, while maintaining our commitment to the Puget Sound region where Boeing Commercial Airplanes remains headquartered,” said Jim Albaugh, president and chief executive of Boeing’s commercial-airplanes unit. “Puget Sound will continue to design and produce airplanes, including the 787.”
Significant shifts are also under way at other areas of the company. Boeing recently announced it has renamed its St. Louis-based defense unit to Boeing Defense, Space & Security (formerly Integrated Defense Systems), consolidated some divisions and named new leaders.3 According to Boeing, the new unit will remain headquartered in St. Louis and will be a “somewhat smaller organization” than its predecessor.
Boeing Defense, Space & Security will retain its current operating units—Boeing Military Aircraft, Network and Space Systems, and Global Services & Support—but consolidate some divisions, including the Combat Systems division, which has St. Louis operations, and the Command, Control & Communications Networks division into a new division called Network and Tactical Systems.
Dennis Muilenburg, president and chief executive of Boeing Defense, Space & Security, said that reshaping the unit positions Boeing for further growth in other markets such as power grids and unmanned vehicles. “Boeing anticipated flattening defense budgets and shifting customer priorities for the past few years and has been taking aggressive steps to position the company for profitable growth in a challenging economy,” Muilenburg explained. “In the past 18 months alone, we have acquired seven companies to enhance existing capabilities, expanded Boeing’s services business, and created new divisions—like Unmanned Airborne Systems—to directly and rapidly respond to our customers’ emerging priorities.”
As they shore up their own operations, the major players in the domestic airline manufacturing industry will also be getting support from the local government level. It was recently announced that several Gulf Coast governors—including Bob Riley (R-AL), Haley Barbour (R-MS), and Bobby Jindal (R-LA)—plan to create The Aerospace Alliance, a 501(c) private/public partnership seeking to establish the Gulf Coast and surrounding region as a world-class aerospace, space, and aviation corridor. Specifically, members will advocate for policies, programs, and specific aerospace projects on the local, state, and national levels. Participating states and organizations hope to aid this sector’s growth, thereby attracting more jobs and suppliers to the region. The Alliance’s primary objective will be securing the KC-45 aerial tanker program for the Gulf Coast area, but the organization said it will not focus exclusively on this project.
“This alliance will go far in promoting our region for what it is—one of the largest aerospace corridors in the world and a great place for companies in this sector to do business,” Governor Barbour stated.
The aviation industry, particularly the supply side, expects allocations to resume, albeit not at previous levels. Case in point: Lockheed Martin recently received commitments for ongoing funding through a newly issued Acquisition Decision Memorandum (ADM). Specifically, this authorizes Low Rate Initial Production (LRIP) associated with the C-5 Super Galaxy Reliability Enhancement and Re-Engining Program (RERP). The $344.3 million funding supports LRIP RERP production for 15 aircraft, including installation on three aircraft, material and fabrication for five aircraft, and long-lead funding for seven aircraft.
“This funding enables us to continue to partner with the U.S. Air Force to produce enhanced C-5M Super Galaxy aircraft to support the warfighter for decades to come,” said Lorraine Martin, Lockheed Martin C-5 program vice president. “The C-5M Super Galaxy is redefining strategic airlift and delivers unparalleled support to all U.S. armed forces.”
Production of the C-5M Super Galaxy began in August 2009, when the first aircraft was inducted into the production program. This aircraft is slated for delivery to the USAF in September; three C-5Ms have already been delivered, with plans for 52 fully modernized units slated for delivery by 2016.
While it’s way too early to forecast how 2010 will shake out, observers point to early signs that the industry is poised to overcome its challenges. Among other things, they cite the fact that a handful of U.S. airlines in early January reported their traffic rose while revenue shortfalls narrowed in December, compared with a year earlier.4 That news is fueling optimism that the industry will start to grow again this year.
“The aerospace industry is a cornerstone of our economy and a wellspring for much of the technology and innovation that gives the United States its global lead,” AIA’s Blakely said during the association’s annual year-end review meeting back in December. “It’s also an industry that’s been remarkably resilient in the face of economic adversity, and I’m confident that it will remain that way.”
Blakely’s optimism in based, in part, on the cyclical nature of aerospace sales. Her belief is that whatever downturn that might occur in the next 18 months is expected to be far less severe than previous down cycles. “We’ve talked to the experts, we’ve looked at the numbers, and it simply does not appear that we’re headed for the same severe and sustained downturn that we saw in the ’90s,” she explained.
By AIA’s count, civil aircraft sales are expected to register moderate growth, with sales improving slightly more than 2% to $82.5 billion. Additionally, the International Air Transport Association is forecasting an increase of slightly more than 3% in passenger traffic this year—which clearly bodes well for aircraft purchases.
On the defense side, the aviation industry expects to see a large-scale recapitalization of existing military systems showing signs of wear and tear. Another bit of good news: There are several initiatives currently before Congress that have the potential to generate significant growth. And to top things off, total 2010 aerospace sales, according to AIA’s projections, will be slightly more than $214 billion—a new record for the sixth straight year and the eighth year of growth in the last nine years.
"This is not blue-sky thinking," Blakely said, but rather an "expectation of realistic outcomes based on comprehensive analysis."
- “Defense Stays Strong in 2010,” By Madhu Unnikrishnan and Joseph C. Anselmo, AviationWeek.
- “Gates Restores Billions to Major Air Force Programs, AIA Daily Lead, Jan. 8. 2010
- “Boeing Renames Defense Unit, Combines Divisions,” by Kelsey Volkmann, St. Louis Business Journal , Jan. 7, 2010
- “After Year of Pain, Airlines Claw Back,” by Mike Esterl, The Wall Street Journal, Jan. 7, 2010.