US defence cuts deeper than they look

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With a deal weeks away that threatens cuts of up to $1 trillion, the Aerospace Industries Association (AIA) has joined union officials to warn US lawmakers that the consequences could far outweigh the budget savings they seek.

The AIA and the International Association of Machinists and Aerospace Workers (IAM) funded a study by George Mason University to calculate the effects of the worst-case scenario.

If the 12-member "super committee" in Congress fails to strike a deal by 23 November, automatic cuts would lower defence ­spending by about $600 billion over 10 years - coming on top of about $350 billion in previously announced cuts.

aircraft mechanic, lockheed martin

 © Lockheed Martin

She won't keep her job in 2012, either

Under that scenario, the payroll of US aerospace and defence companies would fall by 35% - or about 350,000 jobs. Another 650,000 jobs would be lost throughout the economy.

National unemployment would rise by 0.6%, and GDP would drop by $86 billion, said Stephen Fuller, director of the center for regional analysis at George Mason.

"This should bring some ­sobriety to the debate," said AIA chief executive Marion Blakey.

BASED ON ASSUMPTION

The study's findings are based on general assumptions, rather than hard data. The economic impact on aerospace and defence companies is driven by an assumed ­annual cut of $45 billion.

That figure represents the ­proportion of procurement spending in the military budget - excluding personnel costs - that the AIA believes are likely to be exempted by the super committee. But the study provides a glimpse of the worst fears of industry leaders if the super committee fails to strike a deal - automatic cuts that US defense secretary Leon Panetta has called a "doomsday mechanism".

The US defence industry has been through cyclical downturns before. The latest one started in the late-1980s, gathering momentum after the Soviet Union collapsed. As military budgets ­plummeted, the US defence ­industry consolidated into its current structure.

But industry leaders are not worried that a new cyclical downturn will spark another wave of consolidation at the prime contractor level. The Department of Defense encouraged the consolidation frenzy in the 1990s, but now wants more ­competition in the industry.

Instead, the AIA and IAM are both concerned about maintaining US leadership in aerospace. Blakey said that there are already signs of technological erosion, noting that the US military has no new rotorcraft aircraft in design, and risks losing the ability to ­design fixed-wing combat aircraft. He also pointed to France's decision to buy the Dassault/­Israel Aircraft Industries (IAI) Harfang, over the General Atomics Aeronautical Systems MQ-9 Reaper, adding: "When France needed to buy drones in recent years, they went to Israel."

The US industry's largest ­combat aircraft programmes are also at risk under the new round of spending cuts. Thomas Buffenbarger, IAM president, raised the alarm about the future of the Lockheed Martin F-35 - a so-called fifth-generation fighter, ­because of its combination of stealth, agility and integrated sensors, adding: "If we give up on a fifth-generation fighter, we're done. China's not giving up on it and Russia's not giving up on it."

DIVERSITY IS KEY

But the aerospace industry is not completely dependent on military budgets to remain healthy. Engine manufacturer Pratt & Whitney, for example, is ramping up its employment drive, thanks to the success of its PW1000G-­series of geared turbofans for commercial airliners.

Moreover, the job losses ­discussed by aerospace companies have not always materialised. In 2009 Lockheed predicted that cancelling the F-22 would cost 100,000 jobs, but a year later the company boasted that employment was booming at the F-22 plant in Marietta, Georgia, where production of the C-5M and C-130J programmes was ­ramping up.

However, Fuller added that pulling a projected $45 billion out of the economy every year for 10 years will lead the whole ­industry to suffer - whatever happens to production sites and programmes. He added: "If you pull back anywhere, you get less [overall] than if you had not."