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Tuesday, January 1, 2013

Editor's Note: Fiscal Cliff

Emily Feliz

Editor Emily Feliz
As I write this, the country is perched on the edge of the so-called “fiscal cliff,” a series of deep budget cuts prompted by an impasse in budget talks. Politicians on both sides are pointing fingers, both saying the other side won’t budge and claiming the other’s plan will lead to economic ruin for the country.

And, again, as I write this in mid-December, Congress is lodged in a fierce debate on the topic. The clock is ticking down, but I do believe Congress will come to an agreement to avoid falling over the fiscal cliff. No politician wants to be associated with “falling” or “cliffs” after all.

“We’re getting closer to a ‘Thelma and Louise’ moment, when we careen off into the void,” Aerospace Industries Association (AIA) President and CEO Marion C. Blakey said in early December at the association’s annual forecast luncheon. AIA has been particularly vocal in recent months in its urging of Congress and the President to reach an agreement to avoid sequestration.

Politics and rhetoric aside, the picture of the aerospace industry in the aftermath of sequestration is cloudy, to say the least. The industry, in a sense, has been holding its breath since before the presidential election, and may only pause to take a quick breath after the first of the year. Sequestration has been avoided. Now what?

“Sequestration would, of course, hit the aerospace and defense industry very hard as it will be difficult to address the irrational approach to these cuts in the short term,” said Northrop Grumman President Wes Bush. “But it will also have very negative impacts in the long term as it will also damage our industry’s ability to attract and retain the kind of highly-trained technical talent our nation needs to help keep its technological superiority in security and defense second to none.”

The U.S. aerospace industry has become so tentative in recent years that it seems unwise to think about anything longer-term than the next quarter. Resources are stretched so thin that even a hint of uncertainty has the potential to lead to layoffs and/or share price drops. Worse yet, the uncertainty seems to have many in the industry paralyzed, unable to move forward until something, positive or negative, happens.

“Sequestration has created uncertainty in the marketplace over the past year and has had a real impact on jobs, investment and innovation. Uncertainty is forcing companies to defer investments and hiring today, when we need it most. And, if sequestration goes into effect, the long-term impacts could prove devastating to our national defense, economic well-being and global competitiveness,” said David P. Hess, president of Pratt & Whitney. Hess was one of 130 aerospace and defense CEOs who signed a letter to President Obama and Congress in early December “urging them to work together on a deal to avert sequestration and adopt an approach that addresses the country’s long-term fiscal challenges.”

I don’t believe that once sequestration is avoided, and again, I think it will be, that companies’ money bags will magically open and they’ll begin spending billions in new product development, hiring sprees, etc. But when the election, sequestration, and for that matter, the long-awaited, long-term FAA funding paradigm passed in early 2012, become part of the past, rather than the future, I think it’ll go a long way to providing some stability to the industry. And, outside the fire-and-brimstone sequestration talk, there are some reasons for optimism for this industry. AIA said 2012 aerospace and defense industry sales are projected to increase by 3.4 percent from $210.8 billion in 2011 to $217.9 billion. The sales increase, along with a healthy expansion of aerospace and defense exports from $85.3 billion in 2011 to an estimated $95.5 billion in 2012, is largely due to strong civil aircraft sales, AIA said.

This is all speculative on my part, of course, because I’m writing this on this side of the financial cliff. The news on Capitol Hill changes by the minute. I could be completely off base, and we could careen off the cliff, ala Thelma and Louise. Regardless, I’ll see you on the other side.

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