Aerospace Industry Works to Keep America Second to None
By the Aerospace Industries Association
Editor’s Note: The following content is excerpted from the Aerospace Industries Association’s “2011 Year-End Review and Forecast,” which was presented at AIA’s 47th annual Year-end Review and Forecast Luncheon on Dec.14, 2011, in Washington, D.C.
At the luncheon AIA President and CEO Marion Blakey discussed the report and highlighted the efforts of the Second To None initiative, launched in September, to preserve America’s leadership in the aerospace and defense industries.
Reprinted with permission of the Aerospace Industries Association.
The U.S. aerospace industry booked a relatively strong performance in 2011, remaining one of the most significant contributors to the national economy. Despite persistently sluggish market conditions around the globe, annual sales are expected to top $218 billion in 2011, marking the eighth consecutive year of growth. The industry’s robust workforce also points to the vital role played by aerospace in the U.S. economy. Directly and indirectly, aerospace employs more than two million Americans. Strong aircraft orders and the rollout of major new products have contributed greatly to the industry’s performance.
At year’s end, annual sales are expected to be up across the board in 2011. Civil and military aircraft, missiles and the space sector are all expected to top their respective 2010 totals. Given that the demand for aftermarket products and services is closely tied to upstream market conditions, the U.S. aircraft maintenance, repair and overhaul (MRO) sector also experienced somewhat of a resurgence in 2011, capturing a significant share of the nearly $50 billion global MRO market. Absent a major economic downturn, the U.S. MRO market is expected to register a 3.8 percent compound annual growth rate (CAGR) over the next five years.
After a disappointing 2010, the U.S. civil aircraft sector returned to a growth position. U.S. civil aircraft sales are expected to total $49.7 billion in 2011, a 3.2 percent annual increase. Looking forward, the sector is likely to grow at a CAGR of some 3.4 percent during 2011-2013. Orders for civil aircraft are expected to rise sharply in 2011, reaching nearly $107 billion, a gain of 23 percent. The amount is far below the recent high of $224 billion in 2007, but is well ahead of the 2009 low of $23 billion.
Industry drivers in 2011 include several factors that have influenced the market for a number of years, such as the aging U.S. regional jet fleet and a growing demand for fuel-efficient aircraft that has been driven by persistently high and variable fuel prices. The introduction of new aircraft has also created demand in the commercial segment.
The U.S. large commercial aircraft market continues to ramp up at a respectable pace, yet sagging airline demand in the U.S. and Europe means that manufacturers will necessarily depend more heavily on exports to Asia, the Mideast, and other fast-growth markets. The U.S. civil industry will be lifted as Boeing ramps up 787 and 747-8 production, now that the two new aircraft have entered into service over the past few months.
The key market driver in 2012 will be the price of fuel. High fuel prices create demand for new fuel-efficient aircraft, while at the same time eroding airlines’ ability to purchase new planes. This situation places renewed emphasis on developing commercially viable alternative fuels, which could potentially dampen the volatility of fuel costs faced by operators while lessening the global airline industry’s environmental impact. The United States is a leader in alternative aviation fuel research and development, and U.S. producers have successfully completed test flights using fuels from a variety of feedstocks and are moving toward commercial production.
The U.S. civil rotorcraft market is diverse, with the bulk of new deliveries coming from mature production lines. The market encompasses emergency medical service (EMS) providers, offshore oil and gas exploration, and law enforcement applications. Following two years of significant decreases in sales, U.S. civil helicopter shipments are expected to increase to 454 aircraft in 2011, representing an annual increase of 5.3 percent. This upward trajectory is expected to continue into 2012 as demand deferred during the economic downturn reaches the market.
The U.S. military aircraft sector expanded by nearly 6.7 percent over last year, with sales estimated at $66.51 billion. The Department of Defense ordered more F/A-18 E/F Hornets and V-22s for the Navy and Marine Corps. Future sales also look promising, as exemplified by the $35 billion contract awarded to Boeing to build 179 KC-46A refueling tankers.
While 2011 was a strong year for military aircraft, domestic purchases are expected to decline in the coming years due to federal deficit reduction measures. These measures are likely to become even more significant factors as much of the U.S. military aircraft fleet nears maximum service-life limits. Anecdotally, ground crews have pointed out that today’s pilots are now flying the exact same equipment as did their fathers. The recent grounding of several combat wings due to equipment stress is impacting U.S. combat readiness. The current U.S. Air Force fleet, whose planes are on average more than 23 years old, is the oldest in USAF history. Many transport aircraft and aerial refueling tankers are more than 40 years old, and it is expected that some may reach the 70-80 year mark before they are finally retired.
As the United States increasingly seeks foreign buyers of military aircraft, it faces competition from other nations that are targeting the same opportunities. A case in point is the recent India fighter competition. That the U.S. entrants failed to win the competition is a sure sign of how effective competitors in this market can be.
The U.S. aerospace industry continued to show reasonable international strength in 2011 despite the lingering effects of the global economic downturn. In 2011, the industry contributed $87 billion in export sales to the domestic economy. The industry’s positive trade balance of $57.4 billion places aerospace in the lead, representing the largest positive trade balance of any manufacturing industry.
U.S. aerospace exports are expected to increase to nearly $90 billion in 2011, up 12 percent after falling for two years. The increase is due primarily to strengthened civil exports, which are expected to grow by 14 percent in 2011, reaching nearly $77 billion. U.S. aerospace imports are also expected to increase in 2011, driven primarily by increased purchases of foreign aircraft engines and engine parts. Overall, aerospace-related imports are expected to reach $29.6 billion, an increase of 12 percent.
In recent years, Near Eastern and Middle Eastern governments have steadily increased purchases of U.S. military aircraft. Most recently, the sale of 24 refurbished F16-C/Ds to Indonesia, along with the possibility of other sales, came out in President Obama’s announcement that the United States will expand its military ties in Southeast Asia. As tensions rise with Iran and Syria, the UAE has stepped up purchases to secure its borders and maintain the ability to deliver its recent $304 million purchase of “bunker busting” weapons in response to Iran’s nuclear program. Additionally, Saudi Arabia bought 85 F-15E fighter jets valued at $29.4 billion and the Iraqi government has agreed to purchase 18 U.S. F-16 fighters, worth about $3 billion.
This year has been a particularly challenging one for the U.S. space industry. Developments in 2011 that have directly impacted the industry include: retirement of the space shuttle, which caused the loss of thousands of high-tech industry jobs; the near cancellation of the James Webb Space Telescope; and reductions in NOAA polar orbiting weather satellites and national security space programs. Despite these roadblocks, there were some bright spots including an agreement on a way forward for an important new NASA exploration initiative, the Space Launch System, which will develop a new launch system to enable human exploration beyond Earth orbit.
Budget cuts will continue to menace the U.S. space industrial base, and an anticipated increase in competition from Indian, Chinese and Russian space programs will exacerbate the situation. Likely impacting U.S. industry’s competitive stance is the U.S. government’s increasing dependence on commercial systems to enhance U.S. space programs and launch capabilities, fostering new opportunities for the private sector.
As in 2010, 2011 proved to be a challenging year for general aviation. Lingering effects of the financial crisis of 2008 and the European banking crisis continue to effect financing for the sector. Further, several initiatives are under consideration that are tied to new taxes and increased regulations that may limit the sector’s growth. However, bright spots do exist, including a strong demand for new equipment by regional airlines operating in developing airline service markets.
As private air travel becomes more commonplace, larger business jet aircraft are leading market sales within the sector, particularly in Southeast Asia. China represents another growing market, and it has been estimated that by the end of the decade the nation will account for 20 percent of global business jet deliveries, up from today’s 7 percent. Light and medium business jets remain an area of concern, with a three-year downturn threatening to extend into 2012, and deliveries depressed for several key U.S. companies.
Aerospace employment is likely to register a slight increase in 2011, as the hardest-hit sectors of the industry find firmer footing. Total year-end employment is expected to be 624,400, up from 624,000. According to a recent study by the U.S. Department of Commerce, aerospace supports more jobs through exports than any other industry. The U.S. aerospace industry directly employs about 500,000 workers in scientific and technical jobs across the nation and supports more than 700,000 additional jobs in related fields.
Summary And Outlook
Looking forward to 2012, aspects for growth are positive in commercial aerospace and neutral in the defense sector. That said, both the commercial and military sectors remain vulnerable to numerous variables that are capable of overturning current expectations and trends. A mounting sense of urgency to address high levels of deficit spending by the United States is expected to induce cuts to the U.S. defense budget. However, rising commercial aircraft sales (up 7.5 percent year-over-year through September 2011) could offset these drags on the market and may spur the commercial aviation sector to increase capital spending on new equipment.
Volatile fuel prices continue to spur world airlines to replace older, less fuel-efficient aircraft with newer models. This demand, combined with rapid growth in air travel in Asia and the Middle East, continues to feed a growing demand for new aircraft. Moreover, the global air traffic market is expected to increase annually at a rate of 4.9 percent over the next 20 years, considerably higher than the global GDP growth rate. Consequently, in order to keep pace with the growing demand for air travel, estimates predict that by the end of 2029, the world’s airlines will take delivery of 29,000 commercial aircraft with a total value of $3.2 trillion.
Order books at Boeing and Airbus contain six to seven years of commercial aircraft production at current levels. Both companies have announced significant production rate increases that began late last year and stretch through 2014. It is expected that the business jet market, which has been battered both by difficult market conditions and political headwinds, will improve modestly in 2012. The aftermarket parts and service business for business jets and large commercial airplanes is staging a solid recovery, driven by increased flight hours for both categories.
As for the defense segment, both the FY2012 base and supplementary (“OCO”) defense budgets authorize funding for aerospace and defense procurement at increasing rates. In addition, the aging of conventional military equipment such as planes, ships and tanks necessitates equipment replacement and repair. However, the magnitude of cuts to global defense budgets is still uncertain as the U.S. Congress and national legislatures around the world attempt to reduce deficits and overall governmental spending. While the U.S. defense industry remains very concerned about potential budget cuts, 2011 deliveries reflect the strength of previous years’ budgets.
While outlays are currently positive for military fixed-wing aircraft and rotorcraft programs, funding for new program starts is highly uncertain. Missile and munition demand also looks vulnerable, as weapons stockpiles are often cut first when combat operations and defense budgets trend downward.
In space, the market continues on a reasonable plateau, driven by ongoing satellite replenishment and launch services demand. While cuts to NASA’s FY2012 budget will have a negative impact, they were less severe than those advocated by some policymakers.
The U.S. aerospace industry continues to provide significant contributions to the country’s economy and provides capabilities vital for national security. With employees in every state of the union, it generates the highest positive trade balance of any U.S. manufacturing sector. This is particularly relevant given the nation’s challenges of high unemployment, a stagnating economy and a crippling national deficit. AIA’s 2011 Year-End Review and 2012 Forecast reports increases in almost every category – from civil aviation to space. In the years following 2012 our industry will face significant challenges, particularly in the defense sector, as the government seeks solutions to an ongoing budget crisis. Our position has been firmly established – we will continue to educate the public and elected officials on the need to maintain an aerospace industry that is Second to None in the world.
The Aerospace Industries Association, www.aia-aerospace.org, is comprised of more than 300 major aerospace and defense companies and their suppliers are members of the association, embodying every high-technology manufacturing segment of the U.S. aerospace and defense industry from commercial aviation and avionics, to manned and unmanned defense systems, to space technologies and satellite communications. To download the full summary and forecast or data, videos and slide presentations given at the annual luncheon, visit http://www.aia-aerospace.org/economics/year_end_review_and_forecast/. To learn the complete details of the Second To None initiative, visit http://secondtonone.org/.