Aerospace: Preparing for Takeoff Against Uncertain Economic Climate

The aerospace industry - like so many others - saw the bottom fall out of its sales and revenues during the last quarter of 2008. The precipitous drop, which accompanied the worldwide financial meltdown and reflected widespread hyper-caution among businesses and consumers, capped what had been looking like a solid year even into the third quarter.

The prospects for aerospace in 2009 vary from sector to sector, with defense looking healthiest in the short term and commercial aviation most tenuous. But across the board, industry officials believe they are in a strong position to emerge from the downturn successfully - provided they embrace necessary efficiencies and make the right adjustments to the market.

The Downward Slide
According to the Aerospace Industries Association (AIA), total U.S. aerospace sales fell 4.0 percent in the fourth quarter of 2008 compared with the third quarter, with profits falling a dramatic 91.1 percent. Compared to the same time period in 2007, the fourth quarter saw sales down 6.5 percent and profits down 91.5 percent.

For the entire year 2008, sales were slightly up compared with 2007, rising 4.2 percent to from $231.88 billion to $241.66 billion, but profits fell 16.5 percent, from $18.66 billion to $15.58 billion - well below an earlier AIA projection that the industry would top $20 billion in 2008 profits.

The weak fourth quarter mirrored so many other U.S. industries, as the near collapse of financial markets prompted a precipitous drop of more than 6 percent of gross domestic product. But prior to the final quarter, Bill Chadwick, the AIA's aerospace research director, says the industry was headed for a solid year. "There really was a sudden downturn," he says. "Even late into the second quarter, people were still talking about the aerospace industry going great guns. But the bottom fell out. This is a true case of where, with the whole economy, it was just so sudden and dramatic."

In addition to the fourth-quarter economic downturn, last year's Boeing work stoppage also made a major impact on industry production, sales, and profits. Chadwick says an AIA analysis projected that the strike cost the industry 2 percent of its 2008 sales.

While he is not quite prepared to say the industry's tailspin has hit rock bottom, Chadwick does believe that such a precipitous downturn is unlikely to be sustainable over the long term: "Sales and orders are still sliding a bit, but we still haven't seen a huge run to the door yet."

The aerospace industry ended the year with a total of 655,500 direct employees, an increase of 10,000 compared with the previous year, but still far below its historic high of 800,000 in 1993. Because the trend has been more downward in recent years, Chadwick does not think it is likely to go much lower. "The people who are left are very high-productivity employees, and they don't come and go like they used to," he says. Production workers, who earn an average of $29.58 per hour, now account for approximately half the industry's work force.

Military and Defense
While the outlook for 2009 remains potentially dicey, AIA officials believe the aerospace industry is in a stronger position than most with weather the recession and emerge in a strong position - particularly in the defense sector, where Pentagon budgets are typically in place, along with financing for specific orders, as far as 12 months in advance. And so far, the change in administrations doesn't appear to be raising alarms. "There were people who thought that when the new administration came in, they would just slash and burn, but we haven't seen that," says Chadwick.

Military aircraft sales rose in 2008 to $54.7 billion, with increases in aircraft research and development, aftermarket labor, and materials. Fighter planes saw the largest increase, followed by helicopter and military transports. Missile sales also rose in 2008, increasing 6.7 percent to $13.2 billion. And while spending is not likely to continue rising to fund operations in Iraq and Afghanistan, industry officials still expect to see an increase in orders for the purpose of replacing the equipment that has been lost during those engagements.
But long-term uncertainty does have some in the defense sector exercising extreme caution. Steve Geary, president of the defense consulting firm Supply Chain Visions, said the defense industry is awash in uncertainty over the long-term direction of Pentagon budgets under the Obama administration. "You don't know what's going to happen to your budgets in the out years, so you're guessing on any investment decision you make," says Geary. "People are being very conservative."

Geary, whose company does product and logistics support for various branches of the military and with the Office of the Secretary of Defense, says one trend that appears to be emerging is a move away from flash in favor of more utilitarian options. "If you look at the budget Secretary [Robert] Gates put forth, there is less of an emphasis on the `gee-whiz' futuristic weapons and more emphasis on the weapons that will support national security concerns in the here and now," he says. "Instead of more F-22s, we're going to buy more unmanned aerial vehicles."

As this sector of the aerospace industry prepares for the economic turnaround, it has found opportunities to invest in projects that offer future payoffs. In Oklahoma City, an auto plant that General Motors shuttered in 2006 was purchased by the county and then leased back to the Air Force for use by nearby Tinker Air Force Base, Oklahoma's largest single-site employer. Now known as the Tinker Aerospace Complex, the facility is being retrofitted for maintenance, repair, and overhaul of military aircraft and engines. Oklahoma City Mayor Mick Cornett told The Oklahoman in a recent interview that the military is "thrilled to have the opportunity to build and expand inside that facility" and that there is potential for 3,000 jobs there.

Space and Civilian Aircraft
In the space sector, sales in 2008 increased 4.2 percent to $33.4 billion - an increase that consisted mainly of production and services, as opposed to research and development.

New opportunities could come from NASA's plan to begin retiring its existing space shuttles, a part of its 2010 budget that will leave the United States without its own spacecraft to take astronauts to and from the International Space Station (ISS). To fill the gap, NASA is contracting with private companies to develop spacecraft capable of reaching the ISS. One of the leading projects in this category is a $1.6 billion contract with Space Exploration Technologies (SpaceX), which will also develop crafts to take 12 flights of cargo to the ISS.

The SpaceX project is intended to fill the gap until a new space shuttle is ready in approximately seven years. Without it, the only other option for the United States to get people and cargo to the ISS will be to hitch rides with the Russians. The new craft, the Orion, is a Lockheed Martin project and is designed to be far more advanced than its predecessors; industry and government officials hope it will be able to not only go back to the moon, but eventually to Mars.

In the civil aircraft sector, 2008 sales were $80.6 billion, a tiny increase of $400 million, with transport aircraft accounting for the largest portion of the sales. This was one of the sectors most affected by the Boeing work stoppage, but an increase in the shipment of helicopters and general aviation aircraft helped to produce and overall positive trend.

The future of this trend is jeopardized, however, by the difficult worldwide business environment. "One of the big things is the dropoff in freight," says Chadwick. "That's just really dropped off the ledge. All the commercial freighters have just plummeted, and once again, hopefully since it's dropped so quickly, we're close to bottom. But who knows? Obviously, discretionary income is down, so vacation travel is down, and who knows what's going to happen with business travel?"

Overall Trends
General aviation saw a 6.1 percent falloff in the shipments of U.S.-manufactured planes in 2008, although billings rose 13.4 percent from $21.91 billion to $24.84 billion. Within the category, pistons were down 17.6 percent (falling from 2,174 shipments to 1,791), while turboprops were up 14.8 percent (from 290 to 333) and business jets were up 17.5 percent (from 815 to 955).

The aerospace industry's strong fundamentals, particularly in the defense sector, means it maintains the ability to have a major economic impact on the communities where the industry sites projects. In Elizabeth City, North Carolina, a major expansion by global aircraft services supplier DRS Technical Services, which services the U.S. Coast Guard C-130 aircraft, will create 100 new jobs over the next two years.

DRS Technologies, headquartered in New Jersey, is a supplier of integrated products, services and support to military forces, intelligence agencies and prime contractors worldwide. According to Al Dietrich, president of the company's C3 and Aviation Group, "Our group possesses some of the most advanced aviation services capabilities in the marketplace today, and with strong state and local government partnerships, we are well positioned to pursue opportunities for further growth in our North Carolina aviation facilities."

"The sea change occurred three years ago when the Coast Guard signed a very innovative contract with the company that was then called Tansco, which has since been acquired by DRS," says Wayne Harris, director of the Albemarle Economic Development Commission. "It allowed the Coast Guard to maintain complete control over its protocols for its aircraft fleet, but subcontract the actual work to an outside contractor that would bring in $12 million in capital investment."

Harris believes the DRS project is part of a trend that will see smaller manufacturers play an increasingly important role in the industry: "What happens after a while is that big companies no longer find it profitable to manufacture parts that are needed to keep those planes flying, so the baton gets passed to smaller manufacturers who begin to develop those parts." DRS has spent roughly $12 million on each of the two hangars associated with the project.

If the DRS project signals a shift to smaller manufacturers in some aspects of the aerospace industry, the larger picture still relies on a strong financial structure and solid backing. Chadwick believes a steady number of orders gives the aerospace the best chance of weathering the downturn and emerging in a strong position. "One of the things that was going sky-high was the number of orders," he says. "And even though that dropped off, we're still in a good position because with the trend we've seen in past years, we're way above where we were. So it got kind of crazy for awhile, but now, even if it comes down, we're OK."