Like much of the economy, the aerospace and defense industry was struggling to maintain profitability even before September 11. Needless to say, the terrorist attacks of September 11 and their aftermath have had a profound affect on the aerospace and defense industry, especially for companies that depend upon the commercial aerospace sector. The defense market accounted for about 50% of the aerospace and defense industry's sales in 2000 (the latest available figure), but that number will grow as a result of the commercial aerospace meltdown, the war on terrorism, and the war in Iraq. President Bush's newest proposal for the US Department of Defense's budget calls for a spending increase of about 15%, for example, and that figure doesn't include the $78 billion War Supplemental Appropriations bill. The benefactors of the increased spending will likely be the large companies that dominate the market: Lockheed Martin, Northrop Grumman, Boeing, Raytheon, BAE Systems, General Dynamics, EADS, Thales, and United Technologies.
Speaking of large, the large got larger throughout the 1990s in the defense market and that trend continues in the new century. In all, defense companies spent nearly $30 billion on mergers and acquisitions in 2002, with Northrop Grumman making the most aggressive moves so far, purchasing both Litton Industries and Newport News Shipbuilding in 2001 and acquiring TRW in 2002.
In 2001 Lockheed beat out Boeing for the $200 billion contract to build the Joint Strike Fighter, the largest defense contract ever. The contract, which is spread out over almost 30 years, may well mark the last one for a manned fighter as the success of the unmanned drones (as evidenced in Afghanistan with the use of General Atomics' Predator) is expected to continue, supplanting the need for the more expensive manned jets and making it unnecessary to risk pilots' lives in combat.
September 11 dealt a devastating blow to a commercial aircraft market that was already reeling from a market slowdown. That market, which accounted for just over 40% of aerospace and defense industry spending, is divided into four segments: large commercial aircraft (planes of 100 seats and more); maintenance, repair, and overhaul (MRO); jet engines; and business and regional aircraft (less than 100 seats). In 2001 Boeing and Airbus, the world's only two large commercial aircraft makers, saw orders plummet by 45% and 28%, respectively. Airbus recently surpassed Boeing in orders, but the former's 2002 deliveries dropped 7% from 2001. Boeing meanwhile experienced a staggering 28% decline in deliveries from 2001. As a result of the drastic fall-off in business, Boeing cut about 30,000 jobs or roughly 30% of its commercial aircraft workforce in 2002. Both aircraft makers expect deliveries to dip further in 2003.
The MRO and jet engines markets have also suffered; GE Aircraft Engines, Pratt & Whitney, and Rolls-Royce are the three largest. The outlook for the business and regional aircraft market is a mixed bag -- while the regional aircraft market has taken a hit as a result of travel concerns, the business jet market might not deteriorate as much because of the perceived safety and convenience of non-commercial travel. The biggest players in this market are Bombardier, Gulfstream, and Textron's Cessna unit.
The space market is made up of two primary segments: satellites and rocket manufacturing and launch services. The major players include Boeing, Lockheed Martin, Northrop Grumman, Alcatel Space, Astrium, Orbital Sciences, and Arianespace. Expectations for the long-term profitability of the space market continue to outstrip the short-term realities, but companies continue to invest in this area. Even before the terrorist attacks, Boeing, for example, was placing more emphasis on this market in its strategic thinking, proposing a sweeping overhaul of the world's air traffic control system. It would seem that September 11 will only increase the likelihood of more investment in this area.
