While the last couple of years have been a fruitful period for aerospace and defense sectors worldwide, the emphasis on the “global war on terror” continues to influence much of today’s government spending on technology and R&D. Where and how are these funds being allocated?

The Bush Administration’s defense budget request, released in early February 2007, would commit $645-647 billion to national defense in fiscal year 2008.

Congress already has begun debating the defense request.

Some Wall Street and defense analysts, as well as former government officials, claim mounting costs of ongoing conflicts — including the ever-increasing costs of repairing and replacing vehicles, planes and other gear being used at a higher-than-planned tempo — will leave the next United States administration with little choice but to dramatically trim the Defense Department’s acquisition accounts.

Yet Raytheon CEO William Swanson and Aerospace Industries Association (AIA) President/CEO John Douglass disagree, saying a sharp downturn in annual defense spending is “unlikely” over the next few years, despite the skyrocketing costs of the Iraq conflict and looming bills stemming from a massive increase in the number of ground troops,” as Defense News reported earlier this month.

The president’s budget proposal also requests $439.3 billion for FY2007, a 7 percent increase from the $410.8 billion enacted by Congress for 2006. The Air Force has the highest budget request of the military branches at $130.4 billion, an increase of 5 percent from the $124.1 billion approved for 2006. The Navy and Marine Corps came in second at $127.4 billion, a 4 percent increase from the $122.5 billion enacted for FY2006, followed by the Army at $111.8 billion, an increase of 13 percent from the $99.1 billion approved for 2006. DOD agencies requested $69.7 billion, a 7 percent increase from the $65.1 billion ratified for 2006.

Modernization
The Bush Administration’s FY2008 budget request gives a significant boost to the modernization program in the core defense budget. If Congress approves the request, the 13 percent increase over FY2007 would bring modernization funding to $176.8 billion. If Congress also fills the gap in the proposed five-year defense budget, it should leave sufficient room to reach the $200 billion target for modernization in FY2014. This kind of sustained funding for modernization could provide the military with the new weapons and equipment that it will need to be a fully capable force a generation from now, according to Front Page Magazine.

IT
The Bush administration requested $30.5 billion for information technology (IT) at the DOD for FY2007, a $100 million increase from the $30.4 billion approved by Congress for 2006. Expanding the DOD’s global communications and emphasizing business transformation are key IT and management priorities for 2007. The Bush administration requested $900 million to extend satellite capabilities for war fighters deployed around the world to increase their ability to transmit data, according to DOD budget documents distributed in February (via Federal Computer Week).

Procurement
The Bush Administration’s FY2008 defense budget increases funding for the procurement account in the core defense program by more than 25 percent over the FY2007 level. All of the increase in the modernization accounts for FY2008 over the FY2007 estimate goes to the procurement account. The $101.7 billion for procurement in budget authority therefore constitutes more than 57 percent of the entire modernization program, notes Front Page Magazine.

U.S. R&D
During the early years of the Cold War, research and development (R&D) spending for defense accounted for roughly 80 percent of all federal R&D spending. Defense is no longer driving R&D, however, as private-sector R&D spending has slowly overtaken the federal government’s R&D spending, while total R&D funding by the federal government — both defense and non-defense — now trends in the direction of a closer balance, according to numbers from the National Science Foundation and the American Association for the Advancement of Science (AAAS).

The good news for defense R&D is that overall funding levels are marginally higher than they were during the latter half of the 20th century in terms of inflation-adjusted dollars, according to the AAAS. Therefore, the DOD has a significant amount of R&D money to apply toward obtaining the next generation of weapons and equipment.

In 2007, total funding for R&D is expected to increase to $338 billion, an increase of 2.85 percent over the $329 billion funded in 2006. However, confirming past trends, federal support of R&D is expected to slow, according to the joint Battelle-R&D Magazine 2007 R&D Forecast.

The DOD will receive a record R&D budget of $76.8 billion in 2007, which is up 4.8 percent over 2006 levels.

(See last month’s How the Heck Does That Get Funding?!?!)

Global Aerospace and Defense
Among the key findings of last year’s RNCOS report “Global Aerospace Market Forecast (2006-2009)” were:

• Asia will be a major driving force in the growth of global aerospace industry. From manufacturers’ perspective, China and India will lead the aerospace marketplace, due to rapid growth in civil aviation.

• In 2005, the U.S. was the most dominating player in the global aerospace industry, with 39 percent share in shipment of global aerospace industry. The U.S. aerospace and defense industry (A&D) is a leading producer of high-tech products and services and is of strategic importance to the U.S. government due to its direct bearing on national security and its sustained leadership in the global market.

• The Canadian aerospace industry provides a comparative edge. In Canada, production base is 7.1 percent cheaper compared to the U.S., as investment cost is comparatively lower there.

• Although the Mexican aerospace manufacturing industry remains in its earliest stages of growth, lower operating costs are attracting more companies that’ll help mature the sector into a full-fledged industry.

The last couple of years have been exciting times to be involved in the A&D sector. Although the industry was affected significantly by the terrorist attacks on September 11, 2001, the market is finally on its way to recovery, according to a recent report from Military & Aerospace Electronics. In fact, the outlook for the A&D industry sector remains extremely attractive thus far in 2007, reports financial services firm RSM EquiCo’s Aerospace & Defense Group.

The total value of disclosed transactions in the A&D sector reached $33 billion in 2006, comfortably the highest level since 2000, according to PricewaterhouseCoopers.

Aerospace alone was boosted last year by a surging civil aircraft market, the Aerospace Industries Association (AIA) reported in its state of the industry analysis released in December. Most of the major AIA statistical categories showed growth in 2006: military aircraft increased $2.8 billion to total $52.8; space jumped $1.3 billion to $38.6 billion; and related products went up $2.4 billion to $30.7 billion.

But the civil aircraft category stood out, increasing $8.3 billion to hit a total of $47.5 billion.

The current industry consensus is that growth will continue at least through 2009, supported by a six-year backlog of large-aircraft orders combined with growth in emerging business jet markets.

Meanwhile, India, the second largest aviation industry of the world, is “riding high with [more than] 8 percent economic growth coupled with a developing middle class, and a burgeoning base of air travelers,” says the RNCOS report. India has a rising need for amending the present fleet of fighter jets. The defense quota growing constantly, competition among the defense suppliers from the U.S., Russia and Europe is tough; this opens doors for manufacturers and global service providers (GSP) in India. Rising demand from the defense and aviation sector of India, along with its own procurement-contract offset policy, contributed to the surge in participation and alliances.

“Global Aerospace Market Forecast (2006-2009)”, published last year, said that the Indian aerospace industry is witnessing three main trends: fast growth in civil aviation; development in manufacturing, especially in the private sector; and emergence of the country as an aerospace technology-sourcing center.

As for China, “foreign manufacturers have really got no choice but to engage with China and to invest and partner with the Chinese aerospace industry because it is such a large potential market,” Bloomberg News recently reported Derek Sadubin, chief operating officer of the Sydney-based Centre for Asia-Pacific Aviation, as having said

Economies in Asia, excluding Japan, are forecast to expand 7.6 percent in 2007 and grow 7.7 percent next year, the Manila-based Asian Development Bank said in March. Asia as a whole will probably need 1,015 jets over the next two decades, half of which will be in the 100-seat category, according to Frederico Fleury Curado, executive vice president for commercial aircraft sales at Empresa Brasileira de Aeronautica SA, the world’s fourth-largest aircraft maker. China has had one of the fastest growing economies in the world.

“[Mergers and acquisitions] activity reached a level not seen since 1999′s all-time high,” Defense Mergers & Acquisitions’ Stuart McCutchan noted recently.

“Defense spending remains at historic highs, and the commercial aerospace marketplace is at full stride.”

Resources

Industry Officials: Defense Spending Likely To ‘Stabilize’
by John T. Bennett
DefenseNews, April 2, 2007

The Defense Budget: Is It Enough?
by Baker Spring
Front Page, March 30, 2007

President Bush’s FY 2008 Defense Budget Submission
Defense Link, Feb. 5, 2007

Federal research and development for national defense and civilian functions: FY 1955–2007
NSF

Federal Spending on Defense and Nondefense R&D
AAAS, February 2007

2007 R&D Funding Forecast
Battelle-R&D Magazine, January 2007

Defense, space sectors see significant upturn in demand in the U.S.
Military & Aerospace Electronics

2007 Q1 Aerospace & Defense Quarterly Industry Review
RSM EquiCo, March 1, 2007

Civil Aircraft Sales Fuel Record Year for Aerospace
Aerospace Industries Association, February 2007

Global Aerospace Market Forecast (2006-2009)
RNCOS, July 2006

Embraer Says China Will Make Up 60% of Asian Sales
by Chan Sue Ling and Leslie Tan
Bloomberg News, April 4, 2007

Flying High: Aerospace and Defence M&A
PricewaterhouseCoopers, April 2007

Defense Mergers & Acquisitions Tallies $40 Billion in 2006 Deals; 2007 Sizzles With $25 Billion in Deals to Date
Defense Mergers & Acquisitions, April 17, 2007