By mid-2001, airline and aerospace executives knew they were in trouble. The economy was slowing. Overall air travel and high-yield business traffic were declining. As a result, the airlines were forecasting losses of up to $2.5 billion. Then came September 11. Last summer's "downdraft in business travel and yields" was bad enough, recalls Robert W. Baker, vice-chairman of American Airlines Inc. (AMR
), "but 9-11 finished us off."
If the terrorist attacks decimated commercial airlines, they have had the opposite impact on America's defense contractors. Virtually overnight, downward pressures on the defense budget evaporated. Industry optimists now predict that the real jackpot will come in February, when the Pentagon is slated to unveil spending priorities for the next five years.
Indeed, the double-edged effects of the September tragedy are striking mixed chords at some giant aerospace conglomerates. Prior to 9-11, planners at Boeing Co.'s (BA
) commercial division had been counting on a soft economic landing. Now, the unit is shedding up to 30,000 jobs, or one-third of its workforce, cutting production by nearly half--and as of December, writing off $700 million to cover the economic impacts. Top suppliers of tires and engines, such as Goodrich (GR
), General Electric (GE
), and Pratt & Whitney, have likewise shaved thousands of jobs because the airlines have parked some 800 big, expensive airplanes and cut flights by at least 20%.
Boeing's defense division, in contrast, stands to get a lift. And the same goes for Northrop Grumman Corp. (NOC
), which had begun to shake off its low-grade image on Wall Street even before the terrorist attacks. In a vivid turnaround, Northrop consolidated its leadership in electronics and sensors by acquiring Litton Industries Inc. Then it beat out rival General Dynamics Corp. (GD
) to acquire Newport News Shipbuilding Inc. (NNS
) But Boeing's year ended on a glum note: Lockheed Martin (LMT
), the nation's No. 1 defense contractor, was picked to build the Joint Strike Fighter--at upwards of $200 billion, the richest defense contract in history.
Overall, though, estimates from the Aerospace Industries Assn. (AIA) do not bode well for the coming year. Net profits for suppliers of both commercial and military hardware climbed more than 5% in 2001, to $8.7 billion, on $151 billion in revenue. That marked the sixth straight year the industry has earned profits above $7 billion. But this year, the association predicts that total sales will drop by 4.6%, to $144 billion, as the full impact of September 11 begins to hit commercial plane deliveries in 2002 and 2003.
Demand for civilian jets and related services could decline sharply over the next two years--and perhaps longer. The AIA expects Boeing to cut production from 522 airliners in 2001 to 375 this year. Analysts and airline executives expect even bleaker numbers for 2003, ranging from 200 to 260 planes. Revenues from sales of commercial jets should decline to about $25 billion, from roughly $35 billion in 2001. American Airlines' Baker now predicts the U.S. airline industry will lose upwards of $5 billion in 2001--and is unlikely to see black in 2002. "What we're doing is negotiating the cancellations and deferrals of airplanes," Baker says. "The Boeings and Airbuses of the world will produce far fewer airplanes in the next few years than they had planned."
Some analysts do see positive trends emerging from the gloom in commercial aerospace. Large aircraft builders have been shrinking their sprawling cold-war-era factories to build planes more cheaply and quickly. The downturn will give the companies time to streamline factories further and make production lines more efficient. Layoffs will also be easier to justify, says Jon B. Kutler, chairman and CEO of Quarterdeck Investment Partners. "September 11 provides domestic political cover, which will help them in the long run."
With slowing sales, Boeing's battle with archrival Airbus Industrie will intensify, and both companies will feel the pain. Although U.S. aerospace exports last year jumped 13% over the previous year, imports soared to their sixth straight record, according to the AIA. U.S. imports of Airbus jets rose $1.9 billion last year, to $14 billion. But the economic slump could force Airbus to cut production, from about 320 planes in 2001 to a predicted 289 this year. By 2003, it might be building as few as 275 jets.
On the military side, the key question is how the Pentagon will spend its budget increase. Because of the costs of the Afghanistan conflict, the Pentagon brass will have an even tougher time funding all of their pet projects. Despite the AIA's optimistic forecast of a 10% hike in spending on military planes, Gerald E. Daniels, CEO of Boeing's military-aircraft and missile-systems unit, expects procurement will remain flat compared with last year. Research and development will rise, he says, but most of it will be absorbed by the various ballistic missile defense initiatives.
The war on terrorism and heightened concerns about domestic security can only complicate the perennial contest among the armed forces for a beefier share of the defense budget. Among the hard choices facing the Bush Administration are whether to emphasize bombers over fighters--and how much to shell out for homeland security vs. the military's basic operating expenses, already stretched by the war. "Is there really a source to fund all the trends?" asks Daniels. In total, the AIA says Pentagon aerospace buying will rise $5.1 billion, to $54 billion, in 2002.
The Afghan crisis and fear of additional domestic terrorist attacks have propped up the outlook for defense stocks. But commercial aerospace shares were sent into a tailspin. This year, the military's bright new image could translate into new dollars--for such high-tech marvels as the unmanned Global Hawk surveillance planes, or for replacing the Air Force's aging tanker fleet with modified Boeing 767 airliners. No such luck for commercial aircraft builders. For them, the best hope is that the situation doesn't get worse.
By Stanley Holmes in Seattle, with Stan Crock in Washington, D.C.
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By mid-2001, airline and aerospace executives knew they were in trouble. The economy was slowing. Overall air travel and high-yield business traffic were declining. As a result, the airlines were forecasting losses of up to $2.5 billion. Then came September 11. Last summer's "downdraft in business travel and yields" was bad enough, recalls Robert W. Baker, vice-chairman of American Airlines Inc. (
