Aerospace Industries Gliding Despite Decreased Defense Spending

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.


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.

Conclusion

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.

We Recommend