Industry Snapshot: Aerospace and Defense

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Revenues within the US aerospace and defense industry have improved considerably after a 1.4% slump in spending on commercial aircraft caused by a weakened tourism market in the aftermath of 9/11. Increased spending during the recent Gulf War did buffer industry growth rates somewhat and the industry is expected to reach a value of $464.3 billion in 2004.

Defense expenditure is still the leading source of revenue for the US industry, essentially due to the substantial and ever increasing defense budget of the US Government. Projects such as the missile interception network and the revamp of the US armed forces account for a large proportion of this spending whilst providing welcome revenue boosts for companies such as Boeing during the decline in aerospace spending.

Increasing cost pressures within the aerospace industry have resulted in massive reform as aircraft manufacturers attempt to cut costs whilst producing cost-efficient, highly marketable aircraft to promote sales and stimulate growth within the industry. Growth in defense expenditure has served to compound the problems for the aerospace industry as leading players reduce their aircraft production in order to concentrate their resources on their defense outputs.
Major players within the US aerospace and defense markets include Boeing, Northrop Grumman, Lockheed Martin, General Dynamics and Raytheon. The initial reaction towards Boeings prototype 7E7, expected to enter service in 2008, has confirmed the huge market potential for midsize, fuel-efficient aircraft in the US whilst proving that cost-effective air travel does not necessarily rely on high capacity aircraft. However, the launch of the new Airbus A380, the worlds largest passenger jet, is expected to impact on the sales volumes of Boeings 747 in the international market.

Key Issues

Threat of Terrorism - Efforts to prevent terrorism in the US have swelled defense expenditure whilst increasing costs within the aerospace industry. New regulations, in terms of in-flight security and anti weapon systems, are increasing airlines liabilities, spreading the costs throughout the supply chain and affecting the potential purchasing behavior of airlines, reducing their expenditure on new planes.

Cost Pressure - Rising oil prices, augmented by the demand for low cost air travel, have caused deficits for airlines, which have cascaded along the supply chain. In reaction to this, aircraft manufacturers are increasing outsourcing efforts and developing longer-term contracts with more select groups of suppliers in order to cut costs. In addition, the use of alternative materials to aluminum and steel, such as composites and titanium, and the fly-by-wire concept are a growing part of the strategy to offer airlines cost-efficient operation over the lifetime of the aircraft.

Increasing Military Expenditure - The formation of the Homeland Security Department (HSD) and the creation of a missile interception network have come in a period of increased defense spending in reaction to the growing terrorist threat and the Second Gulf War. With a budget of around $40 billion, the HSD has already introduced legislation to improve the safety of air travel, with cost consequences for airlines, which will pass throughout the supply chain.

Technological Innovation - As NASA continues its development towards a next generation space vehicle, the demand for a publicly accessible space platform has prompted several initiatives within the aerospace sector to produce a viable option. Amongst other projects, the development of high-speed rocket replacement technologies such as anti-matter production chambers and ramjet engines could usher in a new era of space and air transport and possibly provide an answer to the airline industrys dependence on crude oil.

Shift from Aerospace into Defense - In response to escalating cost pressures from airlines and the reduced capacity of the aerospace industry, aircraft manufacturing companies have begun to concentrate their production efforts into the defense industry to exploit the growth in military spending and maintain revenue streams. The development of the F/A 22 and Joint Strike Fighter configurations and the production of the US missile defense network include contributions from most of the aerospace industrys leading players.

Consolidation - Reduced demand and yields within the airline industry have produced cost pressures, which have resulted in consolidation amongst the airlines. This consolidation has increased the airlines buying power, causing a downward pressure on costs, reducing margins for the aircraft manufacturers and promoting consolidation in a cascading effect along the supply chain.