By Calvin Biesecker
The aerospace industry is projected to generate scant 1 percent sales gains this year and next, with growth in 2010 driven by military aircraft sales and in 2011 by a rebound in the commercial market, the Aerospace Industries Association (AIA) says in its annual year-end review and forecast.
The expected growth in 2010 and 2011, while slight, is a turnaround from a year ago when AIA forecast a flattening in the aerospace sector for this year followed by a decline next year (Defense Daily, Dec. 17, 2009). Last year, AIA said higher military sales in 2010 would be offset by a drop in the commercial aerospace market and that in 2011 the fall-off in the commercial sector would outweigh improvements in defense business.
Indeed, sales of civil aircraft are down this year and are expected to come in at $48.2 billion, a 6 percent decrease from 2009, but military aerospace sales are seen rising 8 percent to $64.5 billion, more than offsetting the commercial decline.
Overall in 2010, AIA estimates aerospace sales to be $216.5 billion, representing eight consecutive years of record growth. And in 2011, the forecast is for $219.2 billion in sales, driven by gains in both commercial and military aerospace.
In the military market, aircraft sales in 2011 are seen rising 2 percent to $65.8 billion, offset somewhat by a 1 percent decline in missile sales to $26.5 billion. AIA says that the Defense Department’s FY ’11 budget will be limited to 1 percent growth at best, resulting in flat sales in the near-term.
That’s because the costs for personnel and operations will consume any top line defense budget increases, resulting in cuts to the procurement account, which in turn makes exports of military aircraft even more important for U.S. firms, AIA says.
AIA Chief Marion Blakey warned that budgets for U.S. military aerospace products could also suffer as the Defense Department focuses resources on the reset of equipment that comes out of Afghanistan and Iraq as the U.S. draws down forces over time.
“If there’s enough spending on reset, it could reduce money that’s going to be available for new procurement to some degree and of course that affects all the R&D (research and development) in the pipeline,” Blakey said at the annual AIA luncheon to release the year-end forecast.
To help protect the Pentagon’s investment accounts, Blakey said that AIA believes that procurement and research and development should “consistently be 35 percent of the total budget, because if we look at this historically it’s very clear that that figure would ensure a healthy industrial base as well as a well equipped and strong military.”
She said the 35 percent benchmark would be a better indicator for keeping the U.S. defense industrial base healthy than the oft-mentioned benchmark that defense spending should account for 4 percent of the nation’s gross domestic product.
AIA is also concerned that defense cuts could lead to “greater economic turmoil as well as undermining national security.”
Still, despite pressure on the defense budget, U.S. spending on military aerospace products will remain at high levels in FY ’11 and FY ’12, which “means high output through 2014, at least,” AIA says.
Defense exports are estimated to rebound this year by 5 percent to $11.2 billion after declining each of the past several years. Exports are being driven by parts for aircraft and engines, and by demand for missiles, rockets and related parts, AIA says.
In the commercial market, aerospace sales are expected to increase by 4 percent in 2011 to $50.2 billion, driven by demand for new, more fuel efficient aircraft. AIA also says the outlook for commercial aircraft is bolstered by demand in Asia for single-aisle aircraft as low-cost carriers expand service and for twin-aisle aircraft, such as Boeing‘s [BA] 777 and 787 planes, for new non-stop routes.
Still, uncertainties exist in the commercial arena.
AIA points to two factors that could help or hinder recovery, including financing for international sales of aircraft built in the United States and the implementation of environmental regulations, particularly in Europe where an emissions trading scheme could cost U.S. airlines “several billion dollars in 2012 alone,” says AIA, citing estimates from the Air Transport Association.
In the space market, sales are projected to remain flat this year at $45.5 billion and then edge down nearly a percent in 2011 to $45.1 billion. AIA points out that beyond 2011 NASA’s budget is expected to grow nearly 3 percent annually through 2015 while DoD and the Director of National Intelligence are supposed to set plans for a national security space strategy to “maintain critical satellite constellations, while advancing U.S. efforts in research and development and smaller satellites.”
AIA also says that the U.S. space industry’s best opportunities for growth will be from international customers, pointing to opportunities in India, South Korea, the Middle East and other countries to “strengthen relationships with strategic partners.”
Two positive indicators of the strong position the U.S. aerospace industry is in overall are healthy order flow and backlog, AIA says. For the first time in two years, orders are seen increasing in 2010 to $195.7 billion, up 16 percent, led by civil aircraft and parts orders.
Backlog at the end of 2010 is projected to be $421.5 billion, up slightly from 2009, and more than double that of 2004. AIA notes that in the last 10 years Boeing’s customer backlog by world region has become more distributed, “reducing dependency on any one market.”
Aerospace employment, which AIA said is “closely tied to production and sales,” will be down 3 percent this year. Still, this is better than the job picture in other industries, AIA says. It adds that already in the third quarter of 2010 employment ticked up, marking the first quarterly gain in two years and possibly a sign that the bottom has been reached.