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Aerospace


Industry Outlook 1999 -- MANUFACTURING

Aerospace

Forget all the downbeat headlines about cutbacks and layoffs in the aerospace industry--at least for now. Those trends aren't due to make much of an impact until the millennium.

And with defense spending finally turning around, 1999 is shaping up as a banner year.

Although sales may blossom, the bouquets could go to fewer companies. Merger mania is far from over. Second-tier U.S. players are scratching for critical mass, and consolidation in Europe is set to take off. The next phase could be transatlantic megamergers. "Everyone is either a buyer or seller," says Jon B. Kutler, president of investment banker Quarterdeck Investment Partners Inc. "There's no future in standing still."

Despite woes at Lockheed Martin Corp., industry revenues this year are expected to grow 3.2%, hitting an all-time high of $145 billion, according to the Aerospace Industries Assn. (AIA). And analysts figure that earnings also could top 1998's record $7.4 billion--providing Boeing Co. and Airbus Industrie keep their pledges to focus on the bottom line. Better financial controls might even stem the industry's three-year tumble in operating margins. They slipped to 5% in 1998, down from 5.6% in 1996.SOFT CHOPPERS. Nearly every category is due for growth. Aircraft sales will rise 4%, to $80.9 billion. Revenues from commercial space gear, such as satellites, have tripled since 1991,to $8.4 billion in 1998, and are looking up again. There isone soft spot: helicopters. Civilian chopper shipments will slump almost 10%.

On the military side, the Pentagon is shifting from development to procurement in such key weapons as Lockheed Martin's F-22 fighter. As a result, AIA pegs Defense Dept. purchases of aerospace gear at $41.5 billion, up $1.3 billion from 1998. European countries in compliance with the strict Maastricht budget requirements now may have flexibility to sweeten defense budgets, too.

These incremental gains seem sure to be overshadowed by news on the merger front, though. Despite Washington's thumbs-down on a Lockheed Martin-Northrop Grumman Corp. combo, analysts expect more moves such as B.F. Goodrich Co.'s $1.5 billion bid for Coltec Industries Inc., now under review by the Justice Dept. Companies on the prowl include General Dynamics, Litton Industries, Northrop Grumman, and TRW.

Across the Atlantic, consolidation also is in the wind. British Aerospace PLC and DaimlerChrysler Aerospace, among others, are mulling Continental marriages. And BAe or General Electric Co. PLC might even be coaxed into unions with, say, Lockheed Martin or Northrop Grumman.

After 1999, the outlook is less rosy. If the global economy doesn't pick up, commercial orders and defense spending could come back to earth. But for 1999, the aerospace business will be flying high.By Stan Crock in WashingtonReturn to top

TABLE

Positives and Negatives

POSITIVES

-- Defense spending is likely to rise in the U.S. and abroad, pushing revenues to all-time highs

-- Better financial controls should stem the three-year tumble in operating marginsNEGATIVES

-- International customers, led by Asia, are canceling commercial-aircraft orders

-- If consolidation in Europe takes root, trans-atlantic competition could intensifyReturn to top

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