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Wednesday, February 1, 2012

Flat Is The New Growth

President Obama and military leaders in Washington in early January outlined a new, streamlined military strategy, following the end of the war in Iraq, which sounded very much like an earnings call of a Fortune 500 company.

The words might be slightly different but the themes are very similar — gaining efficiencies; working smarter, not harder; do more with less.

Following a decade of war, the military will “reshape its defense priorities,” strengthening our presence in the Asia Pacific and continuing to invest in global partnerships like NATO. At the same time, the strategy will put greater emphasis on sea and air forces, and will de-emphasize ground troops, all the while cutting $487 billion in the next 10 years.

“I think it’s important for all Americans to remember, over the past 10 years, since 9/11, our defense budget grew at an extraordinary pace. Over the next 10 years, the growth in the defense budget will slow, but the fact of the matter is this: It will still grow, because we have global responsibilities that demand our leadership,” Obama said at Jan. 5 press conference in Washington, flanked by a dozen or so of the military’s top brass.

“The Department of Defense will play its part in helping the nation put our fiscal house in order,” Defense Secretary Leon Panetta said.

According to an economic analysis done by George Mason University at the request of the Aerospace Industries Association (AIA), more than one million American jobs could be lost as a result of defense budget cuts if the deficit reduction select committee fails to reach agreement on alternative balanced budget solutions and total cuts to defense reach $1 trillion.

This report comes on the heels of the AIA’s much-anticipated annual review and forecast, released in December. Annual 2011 sales were expected to top $218 billion, marking the eighth consecutive year of growth. The bottom line was 2011 looked decent, but the association warned 2012 could be a different story based on the projected draw downs in military spending, despite relative strength in the civil aviation sector. “Given the numbers we’ve projected for 2011, you could make the assumption that it will take years to reverse the growth trend that continued this year,” AIA President Marion Blakey said. “Unfortunately, we’re projecting that 2012 will be a much different year. Looking ahead to next year, we expect aerospace sales to decrease by about half a billion dollars.”

Just this year, several civilian organizations with defense ties have announced restructuring, realigning, facility closures and new divisions, related in some way or another to recent Defense Department cutbacks. For example, Boeing in January announced the closure of its Defense, Space & Security (BDS) facility in Wichita, Kan., facility by 2013, and Curtiss-Wright combined two divisions into one, reflecting the new strategy in defense spending.

As one Curtiss-Wright executive said, “flat is the new growth.”

Military has been the bright spot in the industry for at least the past few years. Cutbacks of any kind are never well timed, but these defense cutbacks come at a particularly tenuous time for the aerospace industry as it looks to bounce back from the economic recession. Those on the civil aviation front were just starting to see some peaks of sunshine through the dark clouds. (Avionics, November 2011, pg. 4).

The restructuring of the military announced in January isn’t surprising; secretaries of defense have been preaching fiscal conservatism for several years at least, and the war in Iraq is over. But military cutbacks, coupled with an already shaky recovery in the civil aviation sector and in the economy in general, could spell a rough few years for the aviation industry.

I’ll leave the crystal ball, navel-gazing to the analysts, but these cutbacks do give me some pause. How long will flat be the new growth? What has to happen for growth to be the new growth? Does the aviation industry have to wait for the economy to get better?

No one knows for sure, so we’ll all just have to wait and see, taking a measured approach to our business until there is some clear indication of the direction. Until then, I’ll just keep hoping for flat.

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