Grim forecast has one bright spot: Weapons

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The period of robust growth for the aerospace industry could be coming to an end, but analysts say it can still capitalize on limited growth opportunities by streamlining its operations.

The biggest problem facing the industry is that government and airlines are cutting spending in response to poor global economic conditions.

Alix Partners, a global aerospace consulting firm, said the industry cannot expect to maintain the pace of previous years — when growth rates reached an unprecedented 15 percent.

Last year, industry growth slid to 2 percent and could fall even lower, according to Alix.

Competition in the industry is going to become brutal, insiders say, and companies are going to need to move quickly and decisively to keep costs under control.

The major issues facing aerospace:

  • Aircraft orders dropped 70 percent in 2009 and aircraft deliveries are down globally.
  • The European debt crisis and a sluggish U.S. economy are hampering both passenger and cargo demand.
  • As the Pentagon and other defense ministries face the fallout from the global financial crisis, they’re expected to cut spending.
  • Demand for business jets are down, due to fragile corporate profits and a new sensitivity to public perception.

“The aerospace and defense industry is facing a turbulent ride going forward,” said Alix managing director Phil Toy. “The commercial sector faces a global economy that’s uncertain at best. Business jets face an even tougher environment.”

The industry performed better than other businesses last year because major players cut production capacity, he said. Wars in Iraq and Afghanistan also led to increased defense spending.

“Overall, given the uncertain demand outlook in most sectors, the industry needs to perfect operational practices and business models … and really make them work,” Toy said.

Alix found a weak outlook for the maintenance, repair and overhaul sector of the industry. Toy said the sector will need to shed 16 to 22 cents in fixed costs for every dollar of revenue lost in order to restore profit margins to earlier levels.

Airlines are increasingly taking their repair business outside the U.S, using China and India to maintain planes. Maintenance business in that part of the world is predicted to grow as much as 10 percent in the near future.

Airlines also appear to be spending too much time and money during their design phases, leading to serious cost over-runs at almost every company with a government contract. Toy says that true cost estimates are rare in the industry.

But despite the cloudy horizon, there is some good news.

Pentagon officials say spending on weapon systems is likely to grow by 2 to 3 percent during the next three years.

That’s good news for defense contractors that have offices in Colorado Springs, Lockheed Martin, Northrop Grumman and Boeing.

Some money is expected to be shifted into equipment and personnel accounts because the Pentagon is trying to cut $100 billion of overhead costs during the next five years.

Defense Secretary Bill Gates announced the Pentagon had shut off the “gusher” in defense spending since Sept. 11, 2001. But military analysts believe the decision to focus on weapons and personnel means the Pentagon is trying not to cut major programs.

The Pentagon’s $549 billion base budget request for fiscal 2011 represents an increase of about 1.8 percent over fiscal 2010, when defense spending rose 2.1 percent. Those budgets follow eight years of 4 percent average annual growth.

Congress approved $104.8 billion for weapons buying this year and is considering proposed procurement spending of $111.2 billion for fiscal 2011, which begins Oct. 1.

The Pentagon could request $120 billion in 2012, rising to $137 billion in 2015, according to comptroller’s office projections that for planning purposes.

The Pentagon plan calls for $7 billion in savings in 2012, increasing to $11 billion in 2013 and $18.9 billion in 2014, according to a Pentagon fact sheet. The largest savings are projected at $37 billion in 2016.

Amy Gillentine can be reached at 719-329-5205 or at amy.gillentine@csbj.com. Friend her on Facebook.