Arsenal expenditure on items like fighter jets, missiles and drones accounts for a significant part of the defense budget - a budget that is equivalent to the combined military spending of all other countries. Yet the fiscal 2014 defense budget is expected to amount to 0.7% less than the fiscal 2012 budget. As the US defense budget tightens, aerospace industries, including space vehicle and missile manufacturers, aircraft manufactures and unmanned aerial vehicle manufacturers, will turn to other revenue streams, such as commercial and international markets. IBISWorld queried its database of more than 1,000 US industries to identify the aerospace industries most affected by defense budget cuts.
Tapping commercial and export markets
The most prominent companies that operate in the $223.6-billion aerospace sector, such as Northrop Grumman Corporation (Northrop Grumman) and BAE Systems (BAE), already sell to foreign countries or are looking to tap into international markets. For example, Northrop Grumman is considering selling its unmanned aerial vehicle - the Global Hawk - to South Korea or Japan. As the domestic market reduces demand for this sector’s products, other aerospace companies will join in the ranks of Northrop Grumman and BAE, recognizing that the most promising opportunities for growth require gaining a greater international foothold.
That said, other industries within the sector will prevail, being able to cite necessity of new or replacement technology for new or extended domestic government contracts. The superiority, and thus benefits, of new technology in aircraft is just one case in point.
Space Vehicle and Missile Manufacturing
The Space Vehicle and Missile Manufacturing industry manufactures guided missiles and space vehicles. The $21.3-billion industry almost exclusively relies on the US government for its revenue, and particularly the Department of Defense, which accounts for about 69.6% of industry revenue in 2013. This share of revenue is expected to decline over the next five years because the formal war in Afghanistan will wind down and decrease demand for guided missiles. This trend will cause some fluctuation in industry revenue, as demand for these products will be somewhat volatile.
The industry will look to grow through other markets, including private businesses for its commercial suborbital spaceflight equipment. According to the FAA, there are nearly two dozen commercial suborbital vehicles under development, with most being developed to serve markets for suborbital tourism. Ten states, including New Mexico, Oklahoma and Texas, and commercial entities, including SpaceX, are proposing to build commercial spaceports, which are likely to take several years due to permit, construction and testing requirements. From 2013 to 2018, the Space Vehicle and Missile Manufacturing industry will grow at an estimated average annual rate of 1.9% to $23.5 billion, supported by the commercial spaceport segment.
Aircraft, Engine and Parts Manufacturing
The $186.3-billion Aircraft, Engine and Parts Manufacturing industry, which manufactures and overhauls complete aircraft, develops prototypes and converts aircraft, already derives about 54.7% of its revenue from exports.
The major companies in the industry, including the Boeing Company and the Lockheed Martin Corporation (Lockheed Martin), nonetheless rely on US government contracts. Although budget cuts are almost certain for aerospace industries, aircraft, engine and parts manufacturers will benefit from rapid technological change that requires fleet replacements. Lockheed Martin currently oversees a multibillion-dollar F-22 Raptor program to replace F-15s; large transports to replace C-130s; and new bombers, helicopters and refuelers.
Over the five years to 2018, Lockheed Martin will manufacture up to 3,000 warplanes to replace US Air Force, Navy and Marines F-16, A-6 and F-14 fighters. Federal entities purchase military aircraft and engines for combat, logistics, surveillance and emergency services, such as the police air-wing and air-ambulance. The Aircraft, Engine and Parts Manufacturing industry will grow at an estimated annualized rate of 1.8% to $20.4 billion during the next five years; this growth will be slower than that experienced during the previous five-year period (2.1%) because of budget cuts.
Unmanned Aerial Vehicle Manufacturing
The Unmanned Aerial Vehicle Manufacturing industry - a $5.3-billion industry - manufactures and designs unmanned aerial vehicles (UAVs) and related control systems for civilian and military applications. UAVs can be either autonomous or remote controlled, and are used in situations where the use of a human pilot is undesirable or dangerous. The military market generates the majority of industry revenue, at more than an estimated 90.0%. Military segments include the US Air Force, US Army and US Navy, with the US Air Force accounting for the largest share of revenue (about 41.1%). According to the International Trade Administration, the Air Force plans to expand its UAV fleet, and it is developing a stealthy UAV to provide reconnaissance and surveillance support to forward deployed combat forces. However, it is uncertain how budget cuts will affect this program.
Data in the Pentagon’s defense budget released in February 2012 revealed spending on UAVs would be reduced by double-digit percentages from 2011 levels. However, the cost savings generated from US troop withdrawals from Iraq and Afghanistan are purported to be spent on industry products. According to the Congressional Budget Office, the $100.0 billion of the expected savings from the troops’ withdrawal will be reinvested in the “development or purchase of unmanned intelligence, surveillance, and reconnaissance assets,” in addition to other technologies, upgrades and outreach to military families. These reinvestments are expected to avoid a more pronounced decline in funding for UAVs. Over the next five years, industry revenue will slow to an estimated annualized growth rate of 3.4% to $6.2 billion, down from an average annual growth rate of 10.9% during the previous five years.
The defense budget cuts are likely to hinder the aerospace sector, given that the Department of Defense accounts for a large proportion of sector revenue. According to the Aerospace Industries Association, the Department of Defense will account for about 41.7% of aerospace industries’ 2013 revenue, down from 48.3% in 2008. Although many of the industries within the sector will continue to experience growth over the next five years, this growth will be relatively weaker when compared with growth experienced during the previous five years. Several reasons will support this contraction, including the formal end to combat in Iraq and the upcoming formal end to war in Afghanistan in 2014. For this reason, these industries will turn to other revenue streams to limit the effects of budget cuts. For example, although many of these industries rely heavily on defense government contracts, they likely will shift greater emphasis on their commercial markets for additional revenue.
Other markets, including exports, will prove an additional outlet for growth. The international market will prove a logical end-user, as a significant number of aerospace companies are located in the west region of the United States. Because of it being a transportation and research hub, the region allows companies more convenient access to new sector-related technologies and cost-effective access to shipping ports. In the end, the next five years will see new opportunities for growth for aerospace industries, as companies adapt to new operating conditions brought on by defense budget cuts.
For a printable PDF of Aerospace Industries Gliding Despite Decreased Defense Spending, click here.
By IBISWorld Industry Analyst Radia Amari