The U.S. aerospace industry had a better than expected 2011 in terms of overall sales, driven by gains in all key, sectors but the outlook for 2012 appears flat, the Aerospace Industries Association (AIA) said yesterday in its annual Year End Review and Forecast.

Sales this year are expected to reach $218.1 billion, nearly 4 percent higher than the $210.6 billion in 2010, AIA reported. The top line growth is translating to strong bottom line results, with net profits forecast to be $18.4 billion, up nearly 12 percent from $16.5 billion in 2010 with margins increasing 80 basis points to 7.6 percent, according to the forecast.

The profit and margin figures for 2011 are the highest since 2007 when the industry earned $18.7 billion with margins at 8.2 percent, both high water marks based on the information provided by AIA that goes back to 1992.

“The U.S. aerospace industry booked a relatively strong performance in 2011, remaining one of the most significant contributors to the national economy,” AIA said.

However, in 2012, AIA sees an end to the eight straight years of growth in the industry. The sales forecast for next year is $217.7 billion, ever so slightly less than expectations for 2011.

While each of the key market sectors AIA focuses on is up this year, the lead driver is military aircraft, which is up nearly 7 percent to $66.5 billion, on higher V-22 tilt-rotor and F/A-18 fighter aircraft deliveries.

The civil aircraft sector is next in line, up 3 percent to $49.7 billion, led by demand for regional and fuel-efficient jets, partially offset by lower sales on helicopters and general aviation planes.

Sales of missiles and space systems are expected to be up 2 percent this year while growth in related products and services is pegged at 1 percent.

In 2012, the outlook for the various sectors is mixed, with sales gains expected in commercial aerospace and declines seen in defense. More specifically, increases in civil aircraft, and related products and services will be more than offset by declines in space systems, military aircraft and missiles, AIA said.

Even the outlook is clouded somewhat by budget uncertainty and the degree of optimism in the commercial sector.

“A mounting sense of urgency to address high levels of deficit spending by the U.S. is expected to induce cuts to the U.S. defense budget,” AIA said. “However, rising commercial aircraft sales could offset these drags on the market and may spur the commercial aviation sector to increase spending on new equipment.”

On the defense side, AIA said there is a need to reset a variety of defense equipment due to heavy use in Iraq and Afghanistan. Moreover, some assets are just getting long in the tooth.

The potential budget cuts are coming as the U.S. “military aircraft fleet is nearing its maximum life limits,” said Marion Blakey, president and CEO of AIA. “The current U.S. fleet, in fact, is the oldest in Air Force history.”

The budget uncertainty surrounding the U.S. Defense Department extends to other agencies and countries as well.

“While outlays are currently positive for military fixed-wing aircraft and rotorcraft programs, funding for new program starts is highly uncertain,” AIA said. “Missile and munitions demand also looks vulnerable, as weapons stockpiles are often cut first when combat operations and defense budgets trend downward.”

Regarding the potential for budget sequestration, Blakey said that “Not only are the defense cuts unsustainable, but domestic discretionary programs could be cut by about 7 percent, including deeper cuts to NASA, NOAA (National Oceanic Atmospheric Administration) and critical FAA (Federal Aviation Administration) programs like NextGen.”

Under sequestration, the Defense Department faces an additional $600 billion in cuts over 10 years beginning in January 2013, on top of a planned $450 billion reduction to its budget under the Budget Control Act, according to the Pentagon.

Defense contractors are already beginning to curtail investments amid the storm clouds gathering over the defense budget, Blakey said.

The various positives behind continued growth in the commercial aerospace sector include rising fuel prices, which are spurring demand for more fuel-efficient aircraft, and growing global air traffic, AIA said.

AIA noted that both Boeing [BA] and Airbus, the commercial aircraft making arm of the European Aeronautic Defence and Space Co., have backlogs six to seven years deep at current production levels and are beginning to increase production. On top of that, the business jet market is expected to “improve modestly” in 2012 and that the aftermarket for both business jets and commercial aircraft is in a “solid recovery.”

Orders and backlog are continuing to climb upward, with orders expected to reach $204.8 billion this year and backlog $462.7 billion, increases of 4 percent and 5 percent, respectively, over 2010, AIA estimates.

The U.S. aerospace industry continues to have a strong impact on the nation’s economy and is expected to post a robust $57.4 billion trade surplus this year, AIA said. That’s down from the $60.6 billion peak in 2007 but still up 12 percent from the $51.2 billion recorded last year. The higher surplus this year is being driven by an increase in aerospace exports that is outpacing growing imports, according to AIA.

Aerospace employment this year is expected to remain relatively flat, with 624,400 employees versus 624,000 in 2010.