Trimming the Wings on Mil/Aero

The budget for this year is over $500 billion for the U.S. Department of Defense (DoD), and $187 billion for Iraq and Afghanistan operations. The second figure includes a portion of the reset and rebuild costs for (especially) Army equipment being worn out in operations overseas. This budget actually covers most of the 2009 calendar year, as the government operates on a fiscal year-to-year. Projected budgets for the next three years are flat, with limited increases and fully half the monies already allocated.

As to the political outlook, with a Republican presidency, there actually may be some trimming in major Navy shipbuilding, the Army’s Future Combat system, and a gradual lowering of force levels, especially in Iraq, but overall spending proposals should mirror those of the past five years. With a Democratic victory, look for a 15 percent to 20 percent reduction in proposed military budgets overall, with few cuts in actual monies devoted to Iraq and Afghanistan, as no politician wants to be labeled as “not supporting the troops.” There are estimated to be cuts in some new Navy ships being built, a potential of one or two carrier groups being taken out of service, a move to cut all funding for the Army’s Future Combat Systems, and a slowing in major aircraft programs, such as JSF (Joint Strike Fighter), P-8 Orion Navy patrol plane, and a move to cut funds from the “Star Wars” Ballistic Missile Defense Shield.  We must always be aware in this defense sector, all of the senators and congressmen have to face the voters on a regular basis, and even the most staunch Democrat would have difficulty in explaining to laid-off defense workers why they voted against key programs that employ large numbers of their constituencies. Several key Democrats are actually pushing the Navy and Air Force for additional spending for F-18E and F-15E fighter bombers from Boeing, as they feel the F-35 (JSF) will take more than 10 years to get into full production, and the current air fleet is going to need replacement aircraft just to provide the bridge for current forces, carrier air groups, and defense forces until the JSF begins to be built in large enough numbers. Politicians are constantly pushing big defense programs that especially impact their home areas.

Army
This service will get a large share of the budget, as they are the focus force in the Iraq and Afghanistan wars. Personnel costs, equipment repair and replacement, and new program costs are the driving forces in this sector. In vehicle upgrades and repairs alone, over $15 billion is being devoted just to this area. Thousands of vehicles and trucks have been used up or are being used at a rate three times that of normal service without active combat. Those need to be replaced in not only active division depots, but also for all the National Guard and Army Reserve bases throughout the United States and overseas. The Army also has active new air transport, helicopter programs, and new soldier technologies which are fully funded for years to come. The ongoing costs of the war will also greatly affect the Army’s long-range programs, such as the Future Combat Systems, a $160 billion dollar armament and technology program, already late and over budget.

Navy
Navy resources are also being stressed by the war, as various aircraft carrier battle groups are constantly deployed to provide air support to both theatres. Also, groups are kept in readiness in the Far East, where the Navy sees China as a real threat to U.S. position and assets. These vessels and equipment all need overhaul and maintenance, and the deployments especially impact the Navy’s personnel and costs. The Navy also has several classes of ships in construction, the DDG-1000 and Littoral Combat Ship. Both are far over budget and late in completion. These could both be in danger of budget cuts. As a stopgap, the Navy is planning on rebuilding and overhauling several classes of their in-service ships as an option to losing these two major programs. They also have several aircraft programs that are being built, and they seem to have key bi-partisan support.

Air Force
The major Air Force program is the F-35 Joint Strike Fighter being built by Lockheed Martin. This program is also late in development and test schedule, and has had large amounts of money cut from its budget. But there is little doubt it will be built, and in very large numbers; almost 1,800 for the Air Force alone. They also are being hampered by the high use factor of deployment of many of its F-16 and F-15 squadrons, and the age of many of these planes is being adversely affected by its war use. Recently, over 400 of the F-15s were grounded with severe fatigue cracks in their airframes. This is the reason for the proposed “bridge” program mentioned earlier in this report. The cost of these bridge programs could be as much as $20 billon. The service is also waiting for the delivery of over 170 new supply/tanker aircraft, as the current fleet of KC-135s is growing older and their service life is being used by current deployments to support air activities in both Iraq and Afghanistan.

Homeland Defense/Coast Guard
With a budget of over $32 billion, this sector will continue to be fully funded. Washington does not want another incident like 9/11 to happen, where blame could be laid at the feet of Congress if they did not approve the money needed to prevent another such attack. Large amounts of security equipment, emergency vehicles, detection equipment of all kinds, and police, fire, civil defense, and border control equipment are being ordered and delivered.

Commercial Aviation
This sector is going to be affected by the sudden spike in fuel costs more than any other. Until recently, airlines were mainly concerned with getting new, more mileage-efficient airplanes into service as quickly as possible. That is why the order books and production schedules at Boeing, Airbus, Bombardier, and others are full for years to come. While aviation fuel has been going up gradually, flights have been reasonably full, and the airline’s losses have been due to fuel costs, rather than load factors. Generally, ticket prices and fees increased in small, mostly unnoticed increments as “fuel surcharges.” Now, with a barrel of crude oil at nearly $140, the airlines have reacted much more drastically. They feel that overall air travel will decline, as energy costs and most every other expense is going to increase for businesses and the consumer. The airlines see this as a two-fold problem. The leisure or vacation traveler will not be buying tickets for long-range vacations, and businesses are going to curtail or cut all types of business travel, especially by air. So, many of the airlines just recently raised ticket prices considerably, and are also removing from service many of their older, less efficient aircraft. Another move is to cut service to small and some medium-sized airports, where load factors just do not justify the cost of making flights and offering service to these locations. 

Airlines and aircraft leasing companies have loaded up with orders for the latest Boeing and Airbus aircraft. Boeing has orders for over 950 of their new 787 Dreamliner, a new highly efficient passenger plane that was supposed to be through FAA approvals at this time. Many obstacles have caused Boeing to delay deliveries of this new plane until late in 2009. However, they are delivering close to 40 of their 737 planes every month, and have almost 1,000 on order. Airbus has over a thousand orders for its popular A319, A320 series of single-aisle planes. Their problems have been solved on the A380 super transport, and they are moving ahead with major design work on their A350, which will compete directly with the 787.

This situation is very complex and dependant on what happens with fuel costs. Airlines plan on taking as much as 35 percent of their aircraft out of service. It is rumored that Ryan Air of Europe may ground as much as 50 percent of its total fleet of Boeing passenger aircraft after the summer travel season. Airlines will cut service and people at many of its main hubs and remote locations, and pilot layoffs are a real possibility, as they try to withdraw many of the oldest and least efficient airplanes. Five airlines have ceased operations in the past six months in the U.S. Where the major airlines have low-cost competitors, they will try to hold fare increases to a minimum. But, in remote or secondary airports, costs will increase rapidly and flights will be eliminated.

If the fuel situation remains as volatile as it has been recently, we could see the major aircraft makers see order delays or even cancellations. Airlines need the newest fuel-efficient aircraft, but if fuel costs continue to go up, they will simply not be able to afford to buy or lease these new aircraft being built. That could ripple through the economy, affecting not only the major airframe makers, but literally hundreds of system and sub-suppliers throughout the world in the commercial aircraft sector. The job cuts could be in the hundreds of thousands.

The same scenario applies to the commercial helicopter and business aircraft market. While this area is currently a booming sector, increasing ticket and operating costs could cut into company investments into their own aircraft. Gulfstream is sold out in production for all its aircraft classes through 2011. Higher fuel costs make it a better investment, in some cases, for larger companies to own aircraft which are fully under their control. But costs for operation of these are going to increase. The helicopter sector also has solid backlogs for all its rotorcraft, but much of theirs is for law enforcement, homeland defense, and military use. This sector could also see a downturn if fuel costs continue to escalate.

Scott Clay, Director Military & Aerospace, Bishop & Associates Inc.
Scott Clay has worked for more than 25 years in the connector and wiring systems markets. He has held various positions in field applications and marketing for Molex, Tyco, Methode, and ITT. For the past 15 years, Clay has focused on the military/aerospace sector, and five years ago formed his own company for consulting and application engineering. He has worked on design-in and electronics on F/A-18E/F, F-22, F-35, C-130J, C-5M, C-27, P-8, A-10, and numerous other aircraft. Some of the Navy programs Clay has participated in are SSN-774 Virginia class subs, CVX, DDG-1000, and the Littoral Combat Ship class. He has extensive expertise in land vehicle systems, and has worked closely with the worldwide locations of GD, BAE, AM General, and other key manufacturers. He is currently working on variations of MRAP, JLTV, upgrades for the Bradley fighting vehicle, M-88 recovery vehicle, FMTV, and other platforms in the wiring and systems areas, plus portions of the future combat systems.