Newsroom

The Industry is in a Solid Shape

by John W. Douglass, Retired AIA President & CEO
Originally appeared in Military Technology, June 01, 2007

MT US Editor, Marvin Leibstone recently had the privilege of developing an interview with the President and CEO of the Aerospace Industries Association (AIA) of America John Douglass. The discussion presents a comprehensive state of the industry view of America's defence aerospace industry status, and related goals and objectives for future growth and cooperative participations as a component of global aero-space progress.

MT: Which are the data points that best reflect a current "state-of-the industry profile" of America's defence-aerospace industry, for example, percentage contribution within overall aerospace industry portion of GDP, total annual profit margins, growth or declines in sales to the DoD and other defence ministries, recent technology innovations, increases or decreases in US/allied nation teaming?

Douglass: The US aerospace and defence industry is in solid shape, and it looks to stay that way for the foreseeable future. For years analysts have been predicting a decline in US defence spending, basing that almost solely on historic statistical trends. However, I do not foresee a spending decrease on the horizon for one very big reason -- the world is a dangerous place, and it is not becoming safer. No matter the particulars of the "global war on terror," the US military will need the capability to dominate the enemy in the sky, on the seas, and on the ground in addition to controlling supply routes.

These tasks clearly require investment in the hardware that makes them possible, and which our industry manufactures. I don't hear any of the candidates for next year's presidential race from either party advocating a reduction of defence spending. The US aerospace industry was highly successful in 2006, with total deliveries surpassing $184 billion, up more than 8% from last year's $170 billion. While sales increased across the board for nearly all product and customer categories, most notable was a 21% surge in the civil aircraft sector. Once again the aerospace industry was a major contributor to the nation's foreign trade balance, with exports jumping to $85.2 billion.

Combined with relatively flat imports of aerospace products, the net trade surplus for the sector should surpass $55 billion. AIA projects aerospace industry sales will grow another $11 billion to over $195 billion this year, as the Defense Department's purchases and the space sector increase slightly while commercial aircraft, engines and parts deliveries jump another 15%.

With respect to the military aircraft sector, sales of military aircraft, engines, parts, and services were relatively flat from 2005 levels, with an increase of around 5.5% to $52.8 billion in 2006. Increased foreign deliveries of military helicopters, transports, aircraft engines and parts account for much of the increase. New Foreign Military Sales this year would imply a continued boost to this sector in the next two or three years. Missile sales declined slightly to $14.9 billion, or about $400 million. This was in spite of an increase in exports of missiles, rockets, and parts. AIA anticipates that this account, which includes ballistic missile defence R&D, test and evaluation of around $9 billion a year, will rebound in 2007. As for exports, foreign sales of aerospace products jumped sharply for a second year, totaling nearly $85.2 billion, an increase of $18 billion over the previous year's $67 billion. The increase is dominated by civil aircraft exports, particularly commercial transports, which increased from $28 billion to nearly $38 billion.

General aviation aircraft exports also enjoyed another good year, increasing by a third to $3.2 billion, again setting a new record. Military aircraft exports experienced a healthy 40% increase to $3.4 billion, although in absolute terms military exports only account for 15% of total aerospace exports. Now as to imports, these increased modestly to $30.4 billion in 2006, even though imports of complete civil aircraft declined slightly to $10.5 billion. That decline was more than offset by an 11% increase in aircraft engine imports to $3.6 billion, and an increase in imports of aircraft and engine parts of 15%, or $14.6 billion.

These changes are largely due to a sharp increase in the domestic production of civil transports and business jets for sale to foreign customers, while purchases by domestic carriers of completed transport aircraft were relatively weak. On the subject of trade balances, exports of US aerospace products soared to nearly $85.2 billion in 2006, while imports remain relatively flat at a bit under $30.4 billion, producing a record trade balance for the aerospace industry of $55 billion. This continues the track record of the industry as a major net export earner for the US, helping to offset the overall chronic trade deficit. And, aerospace industry employment continued to increase for the third consecutive year, with the total workforce ending up at 635,000. That is up from 625,000 at the end of 2005.

For 2007, AIA forecasts US aerospace industry sales to grow 6%, or $11 billion, to a record $195.4 billion. Once again, the increase will be driven primarily by increased delivery of civil aircraft, engines, and related parts and components. On the other hand, sales to the DoD will show modest gains in 2007 from funds already appropriated. Obviously a new Congress, events in Iraq, and new management at DoD will affect the composition and value of defence programmes in FY08 and beyond. Finally, it would appear that we are on a modest upward cycle for the space sector, particularly as demand for commercial satellites is on the increase.

MT: As you see it, what are today's more pressing issues that treated inappropriately could weaken US defence-aerospace industrial capacity as a world competitive entity and as a national security component?

Douglass: Here are some of AIA's top defence-related priorities for this year. First, Promote the long-term vitality of the aerospace industrial base and sustain US military pre-eminence. The United States aerospace and defence industry is a strategic national asset. It provides capabilities to the US military that no current or potential adversary can match, and leads the world in innovation.

However, the changing global security situation and demographic trends challenge the industry's long-term viability. Without sustained government investment and close partnership with the private sector, the US will lose the ability to design, develop, and produce the advanced weapons and systems needed to defend the country, advance our national interests, maintain our economic strength, and keep the industrial base (and workforce) healthy and vibrant.

For more than 50 years, the US military's ability to field technologically superior weapons systems has been recognized as critical to national security. To this end, the industrial capability for weapons systems development has been kept relatively robust. Today's advanced state of civilian and military aerospace technology is a direct result of large and sustained investments in defence capabilities made years ago. These resulted in dramatic technological superiority over military adversaries, yielding a much more efficient and capable national defence, and to worldleading civilian aerospace research and products.

At government's direction, the defence industry consolidated significantly following the Cold War, resulting in a much smaller, but more efficient industrial base. Investments in systems and technologies were sized to meet projections of a less challenging security environment. The number of prime military contractors and their engineering workforce each fell almost 80%. Aircraft production and Navy fleet size decreased 50%.

The 2006 Quadrennial Defense Review confirmed that the US expects to acquire fewer major military platforms in the future, while encouraging industry to increase R&D and keep production facilities available as a hedge against possible future needs. This is the most challenging scenario for industry, requiring continued investment without corresponding sales. The projections of stability and decreased security challenges have proven optimistic, and the new threats require increased innovation from industry.

The rise of terrorism, increasing capabilities in developing regions, emerging global competitors, and other factors all indicate that the years ahead will require novel thinking and sustained investment to meet America's security needs. At the same time, human capital poses a significant challenge. Engineers attracted to aerospace during the space race and Cold War defence build-up are leaving the workforce fully 27% will be eligible to retire in the next five years.

Meanwhile, potential new engineers are choosing other professions, lured by vibrant civilian technology markets and a perceived lack of national security challenges. The result is a shortfall of aerospace talent, with hundreds of thousands more positions available by 2011 than qualified candidates to fill them. AIA is actively working with Congress and the administration to identify key industrial base and workforce issues facing both industry and government and articulating the need for the administration and Congress to maintain essential national industrial capabilities. AIA has also actively backed bills in Congress boosting Science, Technology, Engineering, and Mathematics education initiatives.

Second, Support a robust US national security space programme. Sustained and adequate investments in US national security space (NSS) programmes must continue so that the nations warfighters can rely on state-of-the-art communications, navigation, and intelligence, surveillance and reconnaissance assets. While cost overruns and schedule slips remain as significant challenges to the viability of some such programmes, chronically unstable funding profiles hinder performance and execution. Rather than shift resources away from the NSS infrastructure, Congress and the Defense Department should focus their management and oversight efforts to ensure realistic mission requirements, stable programmes, and technology development milestones.

In 2004, the DoD revised its space acquisition policy to address congressional concerns about the efficiency of the space acquisitions system. In the meantime, Congress continues to reduce funding to key programmes, while increasing management review requirements. In addition to the revised policy, the DOD has initiated a "back-to-basics" block development approach that seeks to define requirements for technology insertion and limit dependence on future technologies during initial stages of programme life cycles. Critical to this approach are the parallel development of systems currently in the pipeline and the maturation of technologies to be used in the future. Science and technology would be vectored to contribute mature technologies into the acquisition spiral at the appropriate point. To ensure the US maintains the competitive advantage it affords in space, AIA supports stable and comprehensive funding for our national security space systems, including the proper investment in research and development.

AIA continues to work with industry and government to identify the root causes of space systems acquisition problems and shepherd a process resulting in actionable recommendations for improvement. A focused look into cost estimating practices is already underway. We are advocating for the maintenance of stable funding profiles for NSS programmes as an essential requisite for improved programme management in the future. AIA is also promoting science and technology funding for cutting edge technologies that support space systems development. Technology insertion at the proper time in systems development requires strong funding for basic and component research and field demonstrations.

MT: Enhanced US/allied nation defence-aerospace industry cooperation seems an imperative if common security attributes for future multi-national coalition and treaty missions are to succeed. What is AIA's take on current and projected progress in this regard? What seems to be working to get allied nation industries teamed and cooperating more, and what is not working? What needs to be done to grow better projects and practices?

Douglass: I believe cooperation with our international friends and allies is good, but we could make it even better.

There are several barriers that stand in the way of closer ties and greater interoperability. Foremost of those barriers is an export control system that badly needs to be modernized. One of AIA's top issues this year is to promote the development of a modern export control system.

The current 20th century export control licensing system prevents the nation from realizing the full security, technological, and economic benefits of aerospace trade and cooperation. In the globalized world of the 21st century, where the United States faces threats from terrorist groups, rogue states and others, national security export controls remain essential. These controls keep our most advanced technologies, weapons and equipment out of the hands of our adversaries and rivals -- an increasingly difficult task. And in an era where trans-national threats rank with traditional ones, and new challenges continue to emerge, the cooperation of friends and allies has become even more critical.

If we are to keep the nation secure and advance our interests abroad, building interoperability trust, and a working relationship with our global partners is no longer a luxury, it is a requirement. The United States promotes these partnerships through a number of political, diplomatic, and military means. Another important pillar of cooperation is defence trade and technology sharing. This component leverages the technological competitiveness and innovation of US industry to build the interoperability, trust, and capacity that are critical to coalition warfare. At the same time, this cooperation strengthens America's technological edge, sustains the defence industrial base, and enhances our economic security.

Technology cooperation gives our warfighters the best weapons and equipment at the best value for the American taxpayer. And by providing access to our trading partners' markets and innovations, we also sustain American jobs. Currently approximately 40% of all US aerospace production is exported. Unfortunately, our current export control system does not manage defence trade and technology cooperation in an efficient, predictable, or transparent manner. The system also hampers companies marketing civil or dual use products in the international marketplace, even though the restricted technologies have little or no military or intelligence applicability.

The net result is the current export controls system prevents the US from realizing the full security, political, and economic benefits prudent and effective of aerospace trade and technology cooperation with our friends and allies abroad. This is why developing a modern export control system is not only urgent, but imperative. Industry wants to partner with the executive branch and Congress to develop an export control system that not only keeps sensitive technologies out of the hands of our adversaries, but one that also facilitates trade and cooperation with our allies and partners in both mature and emerging markets.

In the short term, with rigorous management and adequate resources, our current export control system can be made more efficient, predictable, and transparent. Suggested improvements the administration can undertake now are measurable, attainable, and meaningful, but require leadership and sustained engagement by the administration working with industry. AIA is committed to working with the administration, in consultation with congressional committees of jurisdiction, to fine-tune and implement these improvements.

Going forward, improvements to the current system alone will not be successful in adequately meeting the security and economic challenges of the 21st century. AIA has joined with partner groups to form the Coalition for Security and Competitiveness to push for export control modernization. The coalition has given administration officials a list of changes to improve the system and is working with them to work toward instituting as many as possible.

In a second phase to the modernization effort, AIA and partners will propose a package of legislative, regulatory, and policy proposals for a system that will effectively govern the export of aerospace, defence, and dual-use products.

MT: Mr. Douglass, thank you very much.