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Aviation & Defense


Industry Outlook -- Basic Industries: AVIATION & DEFENSE

AVIATION & DEFENSE

Aircraft makers are set to fly even higher, with earnings likely to surpass the records set in '96. The only sore spot: Belt-tightening at the Pentagon

The aviation business is soaring as sales of commercial aircraft continue to climb. Earnings in 1996 rose 65%, to a record $7.6 billion, according to preliminary data from the Aerospace Industries Assn. (AIA). Profit margins in 1996 will be the highest in three decades. And industry employment may finally bottom out at about 700,000, as years of downsizing come to a close.

Credit a wave of new equipment purchases by airlines that are finally back in the black. Revenues for aircraft makers rose 6% in 1996, to $112 billion, and 1997 might be even better for this cyclical business. The AIA expects civilian sales to fuel an additional 11% revenue rise in 1997, to $125 billion. With high production rates, profits could jump even faster, says Merrill Lynch & Co. analyst Byron K. Callan. Cost-cutting will help, too: Boeing Co. says it can wring $1 billion in annual costs out of its planned combination with McDonnell Douglas Corp.

DEFENSE DRAG. Military programs may be the only drag on the booming industry. Daniel M. Tellep, retiring chairman of industry leviathan Lockheed Martin Corp., predicts defense revenues will be "flat at best." With the drive to balance the federal budget, Northrop Grumman Corp.'s B-2 and other aircraft may come under fire. There's not enough money to fund all the fighter programs that the Defense Dept. is gearing up for: Lockheed Martin's F-22, McDonnell Douglas' new F/A-18s, and the $200 billion Joint Strike Fighter project, which Lockheed and Boeing are competing to build. "We're facing a crisis," says Representative Curt Weldon (R-Pa.), chairman of a House national security subcommittee.

The saving grace for aerospace will be the commercial side, including the thriving satellite-based entertainment and communications business. Salomon Brothers Inc. estimates that 1997 aircraft deliveries will climb 52%, and the AIA says helicopter deliveries will jump 31%. Led by Boeing, which is doubling production, sales will zoom from $27.7 billion to $40.6 billion. And even though Boeing is spending heavily on development of a new 747, profits could rise, too. Indeed, the prosperity could create headaches if suppliers can't ramp up fast enough. "Shortages will begin to become an issue," frets BT Securities analyst Wolfgang H. Demisch.

Industry consolidation will continue. Lockheed Martin has shown the benefits of bulking up, winning seven straight bids since it bought Loral Corp. in 1996. In the wake of the giant Boeing/McDonnell merger, smaller players such as Raytheon Co. and the defense unit of GM Hughes Electronics may seek partnerships with fellow defense contractors to cut costs and improve productivity. So, even the defense downturn won't take the luster off another boffo profits performance.By Stan Crock in Washington, with Andy Reinhardt in San FranciscoReturn to top

TABLE

Prognosis 1997

POSITIVES

-- Commercial orders are running at full throttle, and employment is leveling off Profits are strong

-- The industry will benefit from the boom in satellites for communications and entertainment

NEGATIVES

-- Budget-cutting could squeeze defense procurement

-- Government airwave auctions could drive up costs of satellite projects

-- The easy cost-cutting from consolidation is largely overReturn to top

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