AIA annual forecast: defense spending still dangerously low

WASHINGTON. Officials at the Aerospace Industries Association (AIA) released their annual “Year End Review and Forecast” for the aerospace industry and AIA President and CEO Marilyn Blakey cautioned that the downward spiral of defense spending and government investment in research and development (R & D) will lead to a “dangerous decline in our highly skilled aerospace and defense workforce.

“We’re telling Congress it’s high time they relegate the budget caps to the dumpster of bad policy ideas,” Blakey said. “The decade-long defense modernization holiday based on the dangerous illusion that history’s zealots have gone on holiday simply must end.”

She went on to say that Congress needs to put an end to the 2011 Budget Control Act (BCA) spending caps. Unless additional relief from BCA caps happens defense companies may continue to downsize or abandon the defense market altogether, according to the AIA.

Blakey also said the AIA wants to ensure in the coming year that the Pentagon moves forward on needed defense acquisition system reform. “Ash Carter is no stranger to this issue. We’re looking forward to his confirmation and we’re expecting he’ll provide the clear leadership that we need to achieve meaningful changes to a very cumbersome and inefficient system. The current system hurts our smaller firms, inhibits innovation and makes it harder to get needed equipment in the hands of our war fighters.”

Forecast numbers

According to the AIA forecast aerospace and defense companies stayed fairly profitable in 2014 when compared with 2013. The AIA forecast an increase in sales is to $228.4 billion for 2014 – up from $219.4 billion in 2013. Aerospace exports continued their upward trend, improving by nearly $8.1 billion in 2014, “with this growth mainly in the civil sector,” according to the forecast. “However, continued effects of budget cuts on industry and the Defense Department are adversely stifling innovation, resulting in significant layoffs” across the industry and especially with small-to-medium sized suppliers. AIA officials expect these market and budget pressures to continue throughout this year.

Overall, total military sales were flat in 2014, at $87.3 billion, according to the AIA forecast. only increased slightly at 0.8 percent, or $420 million, to $52.6 billion in 2014. Missiles went down 4.1 percent, or $840 million, to $19.9 billion; and DoD space spending went up 5.5 percent, or $2.6 billion, to $48.8 billion.

“The reductions in DOD spending were partially offset by strong growth of 9.2 percent in defense exports,” according to the AIA forecast. However, AIA officials state that “defense export growth will not offset declines in domestic procurement spending.”

While the Bipartisan Budget Act of 2013 reduced some of the effects of for 2014 – and will, to a lesser extent, in 2015 – investment accounts will remain under significant pressure going forward. Modernization funding will continue to be hardest hit due to its immediate accessibility.

Regarding this trend the AIA forecast cited a report issued by DoD last April titled “Estimated Impacts of Sequestration-Level Funding.” According to the AIA the report stated “’if Congress does not provide the $115 billion of relief
that DOD is requesting over the 2016-2019 timeframe,
the defense industry can expect the following major
reductions:
- Reducing one squadron of aircraft
- Eliminating the fleet of KC-10 tankers
- Cutting operational surface combatant ships by 7 in
FY 2019
- Cutting procurement of 8 ships across the FYDP
- Divesting the Block 40 fleet
- Divesting the fleet beginning in FY 2016
- Eliminating planned purchases of Reaper unmanned
aircraft in FY 2018 and FY 2019
- Reducing Service readiness funding by $16 billion
over the FYDP to include approximately $9 billion
in depot/ship maintenance, which would further
increase Service maintenance backlogs.’

“In total, DoD is projecting that over the 2016-2019 timeframe the procurement and research and development accounts – the lifeblood of defense industry will be cut by more than $86 billion,” according to the forecast.

For the full report and numbers on commercial and civil markets click here: http://www.aia-aerospace.org/assets/2014_AIA_Annual_report_web.pdf.