Aerospace & Defense
‘Win some, lose many’ for Defense Sector
Defense spending in the U.S. reached $668.6 billion in 2008, after growing at a healthy rate (CAGR) of 9.3% during 2004-08. This growth, henceforth, is expected to drop to a CAGR of 1.8% over the next five years and touch $729.8 billion in 2013.
Thanks to the ongoing military commitments in Afghanistan, the defense suppliers can expect continued demand for spares, overhauls and retrofits for that region. But, troop withdrawal from Iraq will ease demand and operational pressures on the defense budget. The industry expects a phased decline in U.S. defense spending under the new administration. Overall, the outlook for the security and defense sectors remains sound, although there is likely to be a refocusing of priorities across different programs.
After the cuts in some of the long running defense programs by Defense Secretary Robert Gates, the defense companies are looking to international sales and acquisitions to fill the gap. Many are seen vying for contracts to maintain and sustain aircraft for U.S. military services and foreign countries, an increasingly attractive market given that budget woes are keeping many aircraft in service longer than expected. At the Paris Air Show, industry insiders have reportedly indicated that they expected U.S. defense spending to flatten after years of strong growth.
The head of Boeing’s defense business has acknowledged that some big Boeing programs (such as the Future Combat Systems Army modernization program, the Air Force's Transformational Satellite program, and the C-17 transport plane) were hit by the Gates cuts, but added that the FY2010 budget plans also pointed toward some future opportunities.
The signing of the emergency war-funding bill by President Barack Obama is a case in point. The bill which includes nearly $2.2 billion spending for eight more of Boeing's C-17 transport planes, has assisted Boeing’s final assembly plant in Long Beach, California. Also, the aircraft parts facility at St. Louis, which could have faced closure by January 2011 if the company received no more U.S. orders, would now be kept running well into 2011.
Boeing, which is also the second-largest U.S. defense contractor, is bidding for many foreign contracts and expects the share of global sales in its total defense sales to increase to 20% by 2010 from 16% in 2008, and 5% in 2004. The company is also taking part in fighter jet competitions in India, Denmark, Brazil and Greece during 2009-10. South Korea is expected to buy 40 more fighters and Australia has remained interested in the F/A-18 Super Hornet. The company has also cited foreign interest in Boeing's C-17, Chinook CH-47 helicopter, and Apache attack helicopters.
Lockheed Martin Corp., a leading multinational aerospace manufacturer and advanced technology company, has strong expectations for the new radar-evading F-35 fighter jet, which is expected to replace up to 13 different current fighters.
However, under the new administration, U.S. defense budget is unlikely to grow at the same rate as witnessed since the start of the century.
Meanwhile, under the proposed 2010 Defense Department budget, Lockheed would receive a crucial boost for a more financially important airplane program, a new jet called the F-35 Lightning II.
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