Manufacturers Brace for Sequestration Impact
March 5, 2013
Sequestration is now in effect. While it remains to be seen whether the budget-cutting measure leads to meaningful reductions in federal spending, defense and aerospace manufacturers say the threat of disruptions to research and development, procurement, and programs is greater than the economic impact estimates.
Manufacturers in the aerospace and defense sectors estimate that sequestration could result in the loss of 2 million jobs and result in supply-chain instability, the postponement or cancellation of key programs, and compromised national security.
The initial phase of sequestration involves $85 billion in spending cuts evenly divided between defense and other federal programs, excluding select entitlements. While $85 billion is only 2.3 percent of what the federal government will spend in fiscal 2013 and barely registers when compared to the $16.6 trillion U.S. debt, the long-term effect on defense and aerospace could be far more serious, sources told Industry Market Trends.
Cutbacks and delays or cancellations of programs will affect work in research and development, as well as product manufacturing, distribution, and maintenance. Companies could be forced to make layoffs and close facilities if funding is cut. The cuts would, in turn, affect smaller manufacturers and service providers that work as subcontractors. In the end, gaps would appear in supply chains that could result in severe economic losses.
“The decision about how to reduce defense spending must be made carefully, taking into account the strategic and tactical implications it will have… and the need to preserve a strong industrial base that supports the equipment, technologies, and services our forces need,” Kristin Gossel, a spokesperson for defense contractor BAE Systems, told IMT. “Compared to the thoughtful defense spending reductions of nearly half-a-trillion dollars [in the next decade] that have been realized over the past two years, the indiscriminate nature of sequestration would have a devastating impact on the defense industry.”
According to BAE Systems, the aerospace and defense industries generate $324 billion in annual economic revenue, employ 3.5 million people directly and indirectly, account for $89.6 billion in export revenue, and ring up a $42.2 billion surplus in foreign trade. Moreover, many products that aerospace and defense companies produce can predict and pre-empt armed conflict or have vital civilian applications.
Most defense contractors and aerospace OEMs had received little direction from federal agencies since the sequestration went into effect on March 1. “We don’t know what we don’t know,” Boeing spokesperson Todd Blecher told IMT.
“We share the concerns many have voiced…that implementation of the cuts in current legislation for sequestration would be negative for the U.S. aerospace industry,” Blecher added. “There is no guidance on how programs will be cut, and at the program level it’s inarguable that the cuts will be detrimental to the aerospace industry and to U.S. military capabilities.”
In a statement released prior to the sequestration deadline, Raytheon urged the nation’s elected officials “to reach a bipartisan solution that would ensure long-term fiscal stability without requiring sequestration. As our country moves forward in a challenging economic period, it is critical that we continue to make vital investments in innovation, maintain a strong industrial base, and support the creation of highly skilled jobs for the R&D that is essential to our national security.”
Gossel said cuts would impact BAE Systems’ business across the board. For example, cutbacks in the Navy’s operations budget could delay or cancel scheduled ship maintenance; the Army may cancel depot maintenance and reset orders intended to restore equipment to combat capability, along with other operations and modernization programs; non-mission-critical training and travel could be canceled, as well as routine facility upgrades; and establishment of investment review processes would delay development of weapons programs.
As a result, BAE Systems could be forced to lay off 4,000 employees – or 10 percent of its U.S. workforce. Industry-wide, BAE Systems estimates that 1 million to 2 million jobs related to aerospace and defense could be eliminated by sequestration, based on studies from George Mason University, Deloitte, the Congressional Budget Office, and the Bipartisan Policy Center.
The impact of sequestration will also be felt by organizations whose programs protect the welfare of civilians, including NASA and the NOAA (National Oceanic and Atmospheric Administration). Their work employs satellites that monitor major and global weather threats, such as Superstorm Sandy last October.
A recent study by the Aerospace Industries Association (AIA) found that mandatory cuts “are the single greatest threat to our space programs’ continued success.” In the study, George Mason University economist Stephen Fuller estimated that an 8.2 percent cut in NASA’s budget this year from sequestration would cost more than 20,500 private-sector jobs. It would also affect companies that design and build spacecraft and threaten industry clusters around the country that advance space activity.
Sequester-related cuts in the National Oceanic and Atmospheric Administration’s (NOAA) budget would slash $154 million, cost 2,500 jobs this year, and delay the launch of polar-orbiting weather satellites, said AIA spokesman Dan Stohr. The satellites, of which there are now five, generate 90 percent of the data used nationwide in three- to seven-day weather forecast reports.
Last October, NOAA data allowed U.S. meteorologists to accurately predict Superstorm Sandy’s inland turn and strike on the eastern U.S. several days in advance. “Accurate weather predictions are dependent on polar-orbiting-satellite data,” Stohr said.
Gaps in satellite coverage are expected in 2017. Normally, NOAA would launch one or more replacements. Sequestration, however, could delay that by 18 months. And while it is possible that the satellites could transmit beyond 2017, if one or more went dark, the impact on travel and commerce would be significant. The AIA study pointed out that in 2008, almost $500 billion in U.S. GDP was affected by weather.
Stohr warned that the sequester could also delay implementation of the Federal Aviation Administration’s Next Generation Air Transportation System, which is designed to replace ground-based radars with satellite-generated GPS data to manage air travel. NextGen, slated to be operational in 2025, would relieve congestion and delays at airports, but needs to be phased in over time, and delays could postpone full operation by a decade.
There is the possibility that Congress will develop an alternative to sequestration. The clock is, in fact, ticking toward the next deadline, March 27, when the Continuing Resolution, signed by President Barack Obama in September to fund the federal government, expires. Unless a meaningful resolution is reached, aerospace and defense industries will likely face even greater uncertainty in their near-term planning.
As Jennifer Allen, a spokeswoman for contractor Lockheed Martin, noted, “Until sequestration is permanently eliminated, there will be an overhang on our industry that stifles investment in plants, equipment, people, and future R&D essential to the health of our industry.”