Things haven't been easy for the aerospace and defense industry since the terrorist attacks of 2001. And 2004 will bring little relief, as sales are expected to remain basically flat. The Aerospace Industries Association (AIA) predicts that total 2004 sales for military and civilian planes will rise less than 1% to $148 billion, with the military side accounting for all the growth. In fact, jetliner sales will continue to decline in the coming months.

Recent budget increases to prepare the U.S. military for the war on terrorism will do little to stimulate growth. Moreover, many of the Pentagon's weapons programs—in particular, those that are intended to boost the country's status as the only superpower in the world—could be delayed for financial or other reasons.

Still, a modest 1% uptick in sales is good news for the industry. It beats the steady decreases of recent years. For example, the 2003 total sales of $147 billion represented a $6 billion drop from the previous year. And while the commercial side remains weak, it's now declining at a slowing rate, indicating that the worst may be over. This year, jetliner sales are expected to fall by less than $2 billion, to $32 billion; in 2003, it had dropped by a much more significant $7.1 billion.

As a result, some industry observers are becoming more upbeat. "The surprising news is that the slump is not nearly as sharp as predicted a year ago," says AIA president John W. Douglass. He expects civil aviation to recover by 2006. Other experts, however, are not as optimistic. They point to several factors that could further stifle travel demand and prevent a recovery from gathering steam—from another terrorist strike to another SARS outbreak to a lethargic economic turnaround. "Recovery is in sight, but the downside potential is a lot worse than any upside," Richard L. Aboulafia, aerospace analyst at Teal Group Corp. consultants, tells Business Week.

The two largest jetmakers—Airbus and Boeing Co.—are expecting things to improve, despite reporting the lowest profits in eight years. While Europe's Airbus is developing the world's biggest jetliner, Boeing is putting an end to its 10-year innovation drought, securing board approval in December to construct the 200-seat 7E7 jetliner. Both companies say deliveries will likely bottom out this year and then start to rebound, with 2005 deliveries increasing by 6% to 605 jetliners. "I would be in a state of shock if 2005 is not better than 2003 and 2004," Airbus sales chief John Leahy tells Business Week.

Defense contractors, meanwhile, will likely enjoy continued growth, but it's expected to slow down from the robust double-digit spurts of recent years. "It's hard to say that it will continue at that kind of growth rate," Henry J. Driesse, senior vice president of ITT Industries Inc. and president of its defense unit, informs Business Week. A 3% increase in the Pentagon's fiscal 2005 budget for procurement and research and development will enrich the industry by more than $144 billion. However, that's much less than the 8% hike of the previous year. And defense-industry analysts caution that delays or cutbacks in current programs are likely. But in the long term, defense spending should remain strong, experts say, especially with the growing emphasis on high-tech weaponry.

In summary, the aerospace sector seems to be on the slow path to recovery, but roadblocks remain numerous—from the uncertainty of government contracts to the vulnerability of travel demand.

Source:

Defense & Aerospace: More Plane Pain, But Help from Uncle Sam
Stanley Holmes and Stan Crock with Chris Palmeri
Business Week, January 12, 2004
www.businessweek.com/index.html

Primer Links

Associations

American Astronautical Society www.astronautical.org

Aerospace Industries Association aia-aerospace.org

American Institute of Aeronautics and Astronautics www.aiaa.org

National Science Foundation www.nsf.gov

Publications

Air & Space www.airspacemag.com

Design News www.manufacturing.net

National Defense Magazine www.nationaldefensemagazine.org

SPACE.com www.space.com