March 26, 2012 Sector at Risk

Volume 15 | Issue 1

The aerospace and defense industry has been enjoying robust financial health. But the blue-sky picture is darkened as the US government cons

The Aerospace Industries Association (AIA) reported last December that annual sales are expected to top $218 billion in 2011, marking the eighth consecutive year of growth. Despite persistently sluggish market conditions around the globe, the aerospace industry remains one of the most significant contributors to the national economy.

Economic markers worth noting include the 3.2 percent increase in civil aircraft sales, driven by growth in the Asian market and the strong demand for fuel-efficient aircraft. Military aircraft, missile and space sales also posted gains. US aerospace exports rebounded 12 percent to reach $90 billion, after falling during the previous two years. The industry’s positive trade balance of $57.4 billion is the largest trade surplus of any business sector.

This is all good news for the US economy and the 3.5 million workers who depend on the aerospace and defense industry for their livelihoods. However, there is a storm cloud brewing that is threatening to wash out these economic, national security and technological contributions. It’s called sequestration.

Last November the congressionally mandated “super committee” failed to reach consensus on deficit reductions under the Budget Control Act (BCA), triggering cuts of more than a trillion dollars from the federal budget. Unless there is some legislative remedy before the end of the year, sequestration will impose a $600 billion cut to defense on top of the $487 billion in reductions that the department is planning over the next 10 years.

FAR-RANGING IMPACT
Sequestration will also target the nondefense discretionary budget, including the National Aeronautics and Space Administration (NASA) and the Federal Aviation Administration (FAA). Both have suffered from a lack of long-term financial commitment for important programs.

While enactment of a long-term FAA funding bill offers a glimmer of hope for progress on the Next Generation Air Transportation System, if sequestration kicks in, NextGen will be delayed and we might as well relinquish the keys to US aviation leadership. Sequestration would also cut into an already lean NASA budget, stalling our efforts to develop space exploration programs in the wake of the retirement of the shuttle program.

ANALYZING ECONOMIC IMPACT
Concerned about the impact of sequestration on the industry – and on the United States – AIA commissioned an analysis by Dr. Stephen Fuller, a noted economist with George Mason University and a totally objective observer. Working with Economic Modeling Specialists Inc., Fuller concluded that more than one million jobs would be lost as a result of defense budget cuts if Congress fails to agree on deficit reduction to replace the scheduled cuts before next January.

The one million figure includes 352,000 aerospace and defense and supply chain job losses. The total loss of wages and salaries would exceed $59 billion and .6 percent would be added to our unemployment rate, which recently stood at 8.3 percent. In addition, the cuts would likely chop about $86 billion off of gross domestic product in 2013 alone, driving economic growth down from 2.3 percent to 1.7 percent.

With the magnitude of these budget reductions looming, industry must make decisions now about how to adapt to a drastically changed budget environment, including upping efficiency initiatives and reducing employment and closing facilities.

DEEP CUTS POSSIBLE
One of the primary concerns is the risk to the defense industrial base. The danger is that cuts will drive too deep and valuable; hard-to-replace capability will be lost. Technologists, engineers and visionaries who will lead the development of the new manned bomber and the cyber, unmanned and ISR capabilities that Secretary of Defense Leon Panetta called for in the nation’s new defense strategy may no longer be there when needed. This important talent pool isn’t sitting in some lab waiting for the funding spigot to be turned on. As projects are cancelled and the budget is cut, these talented people will move into other industries.

Sensing the uncertain future, last September AIA launched the “Second to None” campaign, a nationwide initiative to speak with one voice about the importance of the US aerospace industry. The message about job creation, national security and technological superiority was sent to the media, and across the Internet, and to Capitol Hill – essentially to anyone who would listen. The message includes a warning: Cutting into the bone of the aerospace and defense budget is not the answer to our country’s financial woes.

AIA is not alone in our advocacy. Admiral Michael Mullen, former chairman of the Joint Chiefs of Staff, recently warned about the cuts that could run too deep. “We will burn the very blanket of protection that we have been charged to provide our fellow citizens,” he cautioned. Panetta said that proposed cuts would result in “hollowing out the force.”

A chorus of experts expressed concern about this “doomsday scenario.”

If Congress is able to solve the sequestration issue, 2012 industry prospects are solid. Commercial aircraft sales are projected to increase – volatile fuel prices are spurring airlines to replace less fuel-efficient aircraft with newer models, and there is rapid growth in air travel in Asia and the Middle East.

Defense sales are projected to decrease but maintaining a strong national defense with the best equipment in the world is part of our national strategy and public expectation. Aging equipment needs to be replaced, as the world remains a dangerous place.

In space, the market continues on a reasonable plateau, driven by ongoing satellite replenishment and launch services demand. While cuts to NASA’s FY2012 budget will have a negative impact, they were less severe than those advocated by some policymakers.

CALL TO ACTION
However, all bets are off the table if sequestration takes hold. It’s important for everyone to make their voices heard now on the unintended consequences of the current budget scenario. You can be part of the solution. Send a letter to your congressmen and let them know that you’re concerned and want them to take action now.

The Aerospace Industries Association is the most authoritative and influential trade association representing the United States’ leading manufacturers and suppliers of civil, military and business aircraft, helicopters, unmanned aircraft systems, space systems, aircraft engines, homeland and cyber security systems, materiel and related components, equipment services and information technology. Visit www.secondtonone.org for more information about this issue.

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