| BUSINESSWEEK ONLINE : JANUARY 10, 2000 ISSUE | ||||||||
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| INDUSTRY OUTLOOK 2000 -- MANUFACTURING
Aerospace For the defense and aerospace industry, the best thing about 2000 is that 1999 is over. Last year brought one unpleasant surprise after another, including disastrous financial performances by two of the industry's Big Three--Lockheed Martin Corp. (LMT) and Raytheon Co. (RTN.B) But this year may not be a whole lot better. The industry is expected to continue its lackluster performance. To get an accurate view of the aerospace industry, you have to dig: The past year's downward spiral doesn't show up in the overall numbers. Sales climbed 5%, to a record $155 billion in the U.S., while the sector's $10.8 billion in aftertax profits was the best ever, according to the Aerospace Industries Assn. (AIA). But more than half of the earnings came from nonoperating income, such as Boeing Co.'s sale of its light commercial helicopter line. Excluding such extraordinary items, profits plummeted 34% from 1998. The slump will continue in the coming year. The AIA projects that revenues will decline to $149.4 billion, largely because of a drop in commercial aircraft sales. Plane sales got a temporary boost in 1999 when airlines rushed to buy quieter aircraft to comply with new, reduced-noise rules. But there won't be a repeat of that in 2000. And while industry execs hope that an Asian recovery will eventually provide relief, it won't happen this year. Sales of commercial aircraft will slide 16%, to $45.7 billion, the AIA predicts. Aggravating matters, from a U.S. standpoint: Airbus overtook Boeing (BA) in 1999, winning two-thirds of big-aircraft orders as the Seattle company stopped low-balling bids to win market share. Airbus likely will transform itself from a marketing consortium into a private company this year. Then it, too, will have to watch earnings more closely. There is one bright spot amid the gloom: small corporate jets. Outfits offering jet services that are shared by several companies ''have ordered gobs of airplanes,'' says analyst Paul H. Nisbet of JSA Research Inc. That's good news for General Dynamics Corp.'s (GD) Gulfstream, as well as rivals Embraer in Brazil and Canada's Bombardier Inc. The picture is also brighter for military sales. The AIA expects military aircraft revenues to rise 5%, to $37.5 billion, as some of the programs in development move to the more lucrative production phase. These include the Navy's F/A-18E/F Super Hornet, made by Boeing, and the Air Force's F-22 Raptor, built by Lockheed Martin. PORTFOLIO PRUNING. Also, like last year, nonoperating earnings could make a substantial contribution to profits. Prime contractors will ''go through another round of portfolio pruning,'' says Jon B. Kutler, president of Quarterdeck Investment Partners Inc., an aerospace investment banking firm. Lockheed Martin, for instance, already has its Sanders electronics unit on the block. One wild card is the impact of the recent consolidation in Europe. British Aerospace took over GEC-Marconi's defense businesses to create the world's second-largest defense contractor, while France's Aerospatiale Matra, Germany's DaimlerChrysler Aerospace, and Spain's Construcciones Aeronauticas have merged to form another formidable competitor. But it's an open question whether the newly merged companies will wrest market share from their U.S. rivals or experience the same growing pains that have hampered American arms makers. Over the longer term, if the global economy perks up and Asia's comeback proves sustainable, the commercial market could rebound. Healthy airlines, for example, have the money to expand their fleets, if they choose. But the long-term outlook is bleaker on the military side. Hardly anyone believes the Pentagon budget will grow enough to bankroll the $340 billion in tactical aircraft slated to be bought over the next 30 years. Given all these trends, it's no wonder whole sections of this once high-flying industry have come down to earth. By Stan Crock in Washington, with William Echikson in Brussels _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 POSITIVES General aviation sales and the regional markets will be hot. In addition, defense procurement will rise. The commercial market could rebound if the global economy perks up and Asia's comeback proves sustainable. NEGATIVES Airlines already bought planes to comply with new noise rules. There won't be repeat purchases for noise in 2000. Despite fatter defense budgets, Washington may delay purchases of various military aircraft. INTERACT E-Mail to Business Week Online | |||
