AIA 53rd Annual Media Luncheon

AIA 53rd Annual Media Luncheon
Thursday, December 14
David F. Melcher
President & CEO, Aerospace Industries Association
Remarks as prepared for delivery

Good afternoon. This is the third time I’ve had the privilege of addressing the aerospace and defense media in the presence of staff and executives from many of our member companies, and I’m pleased to be here. And congratulations to our Lyman Award winner Rick Kennedy. I’m so glad you and your wife Jane are with us today.

As this is my last opportunity to speak to you as AIA’s President and CEO, this is a good time to look back at the year of 2017, contemplate our present state-of- affairs, and gaze forward into the future. Today, I’ll share some thoughts about how America’s great aerospace and defense industry is so important to those who serve our nation in many different capacities and to our nation overall.

I look forward to discussing why AIA has had a successful year in its advocacy for policies and regulatory changes that will help our industry contribute to a stronger, more secure and more prosperous America. And I’d also like to share my hopes for the future, as AIA heads toward its 100th anniversary celebration in 2019, amidst an incredible technological revolution.

But not all my remarks will be upbeat. I’m very concerned about how our nation has come to accept several anchors that are dragging our industry down. This industry’s capacity to rapidly respond to urgent national needs is imperiled by many factors. These include unnecessary and costly burdens placed on innovative companies and the cumulative impacts of years of budget austerity.

Our nation’s acceptance of lowered expectations worries me because the threat of a technological Pearl Harbor is ever present. Nor can we ignore the growing geopolitical tidal waves now on the horizon. I’ll describe our problems in greater detail, and offer potential solutions later in my remarks. First, however, I want to stress AIA’s vital role in addressing these and future challenges.

AIA will soon be turning a century young…and it is still nimble, focused and impactful. The association is blessed with strong corporate governance leadership from our CEO-led Executive Committee. And, we have a talented and dedicated staff who constantly strive to do their very best for our industry.

It’s been my privilege to work with three outstanding AIA chairs, GE Aviation’s David Joyce, Lockheed Martin’s Marillyn Hewson, and this year, Boeing’s Dennis Muilenburg, who’s been a superb advocate for our industry. Next year Dr. Tom Kennedy of the Raytheon Company will be our chairman, with Bill Brown of the Harris Corporation serving as Vice Chairman.

This great leadership team will work closely with our new President and CEO Eric Fanning—who starts work on January 1st— to advance our industry’s objectives into the new year and beyond.

In Eric Fanning, AIA will have a dynamic leader who’s served his nation with honor and distinction. In addition to being our 22nd Secretary of the Army, he’s been Chief of Staff to the Secretary of Defense, Under Secretary of the Air Force and Deputy Under Secretary of the Navy. He also has extensive Hill experience. I’m confident that under Eric’s leadership the AIA team will continue to be incredibly impactful as it advocates and promotes for this essential industry in the years ahead.

As for me, I view my time at AIA as the culmination of a long career that’s been enriched along the way by our great aerospace and defense companies.

Throughout the various stages of my career, I’ve constantly been reminded of the noble work done by our selfless and patriotic aerospace and defense professionals. These hard-working men and women are extremely devoted to ensuring safe air transportation systems, making America more secure and extending the horizons of exploration.

Our people don’t join this industry solely for material rewards, although I’m proud the industry’s pay and benefits are well above national averages. They do so out of a higher calling which is reflected in American flags that travel through the ocean’s greatest depths, move swiftly in combat across the surfaces of land and sea, fly majestically through the clouds and to distant planets, and hang throughout our factories.

It’s because of our workforce and their passion to invent, innovate and imagine paths never taken, that we are on the cusp of some fantastic developments as AIA nears our centennial year.

Today, industry research and development investments are making possible the low noise, low emissions supersonic jet air transport of the future. We’re enabling high-speed highly maneuverable autonomous drones that will support our fighter aircraft and ground troops in combat.

And in modern factories that combine the latest developments in additive manufacturing and leveraging concepts such as the Internet of Things, augmented reality and digital transformation, we’re developing the next generation of aircraft, launch systems, satellites and deep space exploration vehicles.

Without doubt our industry’s passion for innovation helps explain why we’re such a critical contributor to U.S. leadership in the global economy. Last year the industry set a record for export sales of over $90 billion dollars of civil aircraft, space systems and military systems; 2017’s export sales should be on par with last year’s levels. And, we’ve seen our gross exports increase by 52 percent over the past five years.

This year has also been a most productive year for AIA’s advocacy on behalf of the industry. I attribute our gains to the fact that AIA just doesn’t settle for lowest common denominator solutions. We’re always trying to raise the bar higher and achieve aims that contribute to the greater good.

You can see evidence that our industry’s voice was heard in several policy actions taken this year in Washington. Congress voting to significantly increase defense spending is prominent among them. The new NDAA makes a substantial commitment to recapitalizing our armed forces after 15 years of combat and extended deployments, and six years of insufficient funding under the Budget Control Act of 2011.

A national security topline which makes a healthy down payment in line with the current threat environment is more than called for. It is a fact of life necessity.

We’ve also won key legislative victories on proposed changes to the defense acquisition system. We prevented the return of the Blacklisting Executive Order. We turned back a proposal to make losing parties in bid protests pay the government’s costs – a provision even the GAO opposed. We worked in coalition with other associations to achieve a more realistic and flexible “Truth in Negotiations Act” threshold for cost and pricing data to relieve burdens throughout the aerospace supply chain. These acquisition reforms will enable our companies to focus more on product and less on paperwork, leading to greater efficiency and innovation.

Turning to civil aviation, although this is not headline making news, it’s worth noting the close and productive working relationship we’ve developed with the FAA to enhance aviation safety.

Indeed, we’ve entered a period of unparalleled cooperation with our regulators. The FAA and its certification office is transforming how we do business, by taking a risk-based approach to the certification of new products. This enables the FAA to improve their oversight while maintaining the safety of the system and allowing industry to focus more on the airplanes of the future. That’s a very positive but little noticed development.

What has certainly been noticed this year is the first major tax reform in a generation. Throughout this year, AIA has urged Congress to pass business supportive tax legislation in line with key principles approved by our membership. Significantly, these principles are firmly embedded in both the House and Senate bills. These include 1) the transition to a territorial taxation system; 2) repatriation of overseas revenues; and 3) a permanent reduction in the maximum corporate income tax rate. Yesterday’s conference agreement on the bill now makes it clear we are on a path to greater industry investment in innovation and job creation. That’s a significant achievement for our industry and the business coalitions we’ve worked with.

2017 was also a year of progress for advancing security cooperation efforts, a subject we’ve emphasized greatly in our communications with the current and past Administration. In FY 17 the State Department licensed over $110 billion dollars in U.S.-origin defense equipment for direct commercial sales, and notified Congress of over $32 billion dollars in Foreign Military Sales. This development will enhance our nation’s defense alliances and help bolster our economy.

At the same time, we continue to ask if the system for reviewing and approving these sales is properly resourced and operating in a predictable, efficient, and transparent manner. After all, the recent track record of defense export success does not address the growth of foreign competition and influence in the global defense market. Nor does it answer the question of whether we are missing opportunities to build partner capacity in the manner and timeframe most beneficial to American interests.

The space arena has also seen positive developments. This week, by directing that NASA once again return to the Moon, as part of its long-term space exploration program, the President has given the space agency the clear focus it needs. And we hope this initiative is adequately resourced, just as the Administration is requesting a badly needed funding boost to replenish our aging national security space assets.

The new directive on space exploration underscores the importance of the Administration’s action this summer to restore the National Space Council, with Cabinet level involvement. The Council has the useful charter to develop strong policies across the board for civil, commercial and national security space activities to help ensure continued U.S preeminence in space. Several of our member company leaders addressed these subjects at the Council’s first public meeting in November. We appreciate the opportunity for our industry to have a seat at this important table.

But amidst all this good news about our industry, candor requires me to return to the cautionary note I raised at the outset. Consciously or unconsciously our nation continues to have low expectations for changing significant policies that drag our industry down. In too many ways, we accept the status quo and the slow pace of change, instead of taking a hard, fresh look at what we’re doing to ourselves.

Today, for example, as American civil aviation and space systems manufacturers face fierce international competition, it is hard to believe that the U.S. still doesn’t have a fully functioning Export-Import Bank.

This is a source of great frustration for me; when I came onboard at AIA, the Ex-Im Bank lacked an authorization and was under threat from a few ideologues in Congress. And today, still, it lacks a full complement of Directors and can’t approve export deals over $10 million in value.

This may seem like an esoteric issue, but consider the consequences of Ex-Im’s current impasse. In the five years from 2011 to 2015 when Ex-Im was fully operating, the Bank supported on average $9.5 billion in export sales a year. Now that figure is down to 0.6% of that at a paltry $57 million. Think of all the jobs that are being lost at exporting aerospace companies because of the new status quo. Think about the deals we are leaving on the table for our competitors to take unopposed.

Why do some in Congress consider this state of affairs acceptable? I can tell you with certainty, that it is not acceptable to AIA. We’re eager to work with the Administration and the Senate to get Ex-Im working as it should for the American people at full functionality.

With respect to national security concerns, where we also don’t have the luxury of complacency, we must remain vigilant about asymmetric threats from terrorist groups and other non-state actors. We witness China’s growing military power with justifiable concern. And we face the immediate challenges of North Korea’s brazen nuclear missile program and Iran’s aggressive actions in the Mid-East.

As much as policy makers hope our industry can come charging to the rescue if global market trends deteriorate or if a military crisis occurs, we must ask some pointed questions. These questions go to the heart of the harm caused by our lowered expectations.

First question: What if budget austerity has so frayed the industrial base that we can’t rapidly mobilize in a national emergency? That’s not an idle scenario, and we should take great pause before passively accepting four more years of the Budget Control Act caps.

Recently, the Center for Strategic and International Studies completed work on a report commissioned by AIA about the BCA caps’ supply chain impact. The report’s findings are stark. Clearly, the decade-long defense drawdown has resulted in lost suppliers, changes in competition and market structure, and further industrial base turmoil.

I’ll share some specifics with you, which paint a picture of how this market shock had had a considerable impact on the industry. The study found that during the recent defense-drawdown the number of vendors doing business with DoD declined by 17,000 or almost 20 percent. The land vehicles sector in particular suffered a serious decline during the draw-down, losing almost a third of its vendors. Other industry sectors such as military aviation suffered a whipsaw effect in which solid business growth suddenly switched to share decline, then back to growth.

Fortunately, the ongoing government-wide assessment of the industrial base’s health, spurred by President Trump’s July 2017 Executive Order, is starting to ask the right questions. We hope the assessment, and its ensuing policy recommendations will provide a strong roadmap for strengthening industrial base health.

AIA has an important role to play in the assessment. We are coordinating and leading industry information sharing and advocacy with the Administration. We’re sharing the CSIS study, for example, and related actionable information on industrial base weaknesses, endangered capabilities and workforce issues that need to be addressed.

We’ve also produced a two-page summary that details how we’re organizing industry’s response to the Executive Order. We have identified four general areas of interest: budget, acquisition policy reform, key capabilities and people.

Among our key advocacy points is that we need a defense budget large enough to buy back readiness capability lost to the BCA cuts. Also needed is a balance between today’s readiness and operational requirements of today and procurement and modernization investments for tomorrow.

Regarding regulation, we believe the DoD should rescind or revise several policies that increase the price DoD pays for goods and services without appreciable national security benefit. We specifically want DoD to:

  • Streamline or eliminate unnecessary or redundant certification requirements
  • Normalize and streamline its acquisition of commercial items
  • Better leverage the use of performance based payments
  • And finally, work to protect company investments in Intellectual Property, while providing greater competitive and innovation opportunities through open architecture approaches to major systems.

Through our industry response to the Executive Order we also intend to help pinpoint vulnerabilities in the supply chain affecting key capabilities. AIA also intends to identify ways of using defense and commercial trade to bolster the manufacturing and defense industrial base.

And when it comes to people, there’s a big issue out there that requires greater attention. Right now, the security clearance backlog for highly qualified workers seeking to aid the nation’s defense is over 700,000 people. Some security reviews routinely take longer than a year. This is another case where the status quo is totally unacceptable.

For all these issues related to budget, regulations, capacity and people, we’ll keep making the case for action, and equally important, for recognition of the key problems and solutions. There has to be a better way forward for our nation.

I’ll now turn to an area where we must raise our expectations for the way rule makers adapt to the rapid pace of technological change. As applications of Unmanned Aircraft Systems continue to grow, AIA will keep advocating for policies that enable this transformative technology to safely operate in the skies.

Early next year we will publish a market study conducted by the Avascent Group providing a broader view of the UAS platform and how it can be integrated into the U.S. airspace and abroad. We hope policy makers who read the report will conclude that our nation needs to act swiftly to break down regulatory barriers to the full range of UAS operations that are now coming into view. This is our attempt to inform the debate and help find a new direction.

Each of us should feel a palpable sense of urgency about the need to tackle all these issues. One of the reasons I feel this way, is our Team America Rocketry Challenge youth participants. Every year at AIA, many of us have had the pleasure of spending a day out at Great Meadow in the Plains, Virginia watching teams comprised of seventh through twelfth graders compete in the AIA-sponsored Team America Rocketry Challenge. Over 70,000 young men and women have participated in this program in its 16 years of existence.

These kids, from all 50 states and U.S. territories have an unbounded energy for aerospace and defense, and are eager to join our industry’s ranks. They have high—not low—expectations for our industry and what it can do with their participation to extend America’s greatness. We owe something very precious to these young adults. As a society, we must do what’s necessary now to put our industry, which is so essential to America’s strength, security and prosperity, on a more sustainable, healthy footing. That’s why I’ve devoted so much attention to our industry’s unfinished business today, even in a year of great achievement.

That’s all I have for my formal remarks. I’d like to conclude by thanking all the companies present for the tremendous support you’ve given me during my tenure, and the AIA staff members in attendance for your dedication to the association. It has been a privilege and an honor for me to carry the AIA torch forward these past two-and-a-half years. I wish everyone a wonderful holiday and safe and prosperous year in 2018.