The commercial aerospace and UAS markets will lead the industry with significant growth in the coming years, while military aircraft will lag behind.
Many items go into determining the amount of growth the aerospace industry will see during the coming years. For example, many companies are expecting a declining workforce during the next decade as baby boomers retire. According to Seattle, WA-based Boeing officials, half of their workforce is eligible for retirement within five years, which may cause problems trying to fill the vacant positions they leave. Currently, workforce estimates show hundreds of thousands of high-level manufacturing jobs are going unfilled due to a lack of qualified employees.
Another contributing factor is The Budget Control Act of 2011, which cuts $492 billion in automatic defense spending during the next 10 years, beginning with $55 billion in January 2013.
All of these factors, as well as the economic unrest in Europe and the United States, affect the future of the aerospace industry, coinciding with a high demand for new aircraft during the next 20 years.
According to a recent study by the Federal Aviation Administration (FAA), more than one billion commercial passengers will fly per year after 2024, and will continue to grow at an annual rate of 3.1% through 2032.
In order to accommodate the increasing number of passengers while replacing older aircraft, Boeing officials predict the industry will need nearly 34,000 new aircraft by 2031, with an estimated value of $4.5 trillion. More than 12,000 of those aircraft will go to the Asian market, as countries such as China and India continue to see robust growth.
While the Asian market is responsible for approximately a third of all aircraft production during the next 20 years, many of the components for those aircraft will be manufactured in the United States, as Airbus plans to double the $12 billion it currently spends with U.S.-based suppliers.
A large share of the production increase will come in Ohio and California. The increase in Ohio is due in part to an agreement between Airbus and a Dayton-area business group, while the company plans to double the more than $1 billion it currently spends in Southern California. Airbus Americas Chairman, Allen McArtor, made that announcement in front of more than 100 local manufacturers at an educational summit in Los Angeles, trying to attract new supplier companies for Airbus’ first U.S. facility in Mobile, AL. When at full capacity, employees at the facility will be able to produce eight aircraft a month starting in 2016.
Hitting Record Levels
The jetliner market, which is more than half the world aircraft market by value, continues to hit record highs. Even the growth rates are at record highs. Jetliners did better than any other part of the world manufacturing economy through the Great Recession, growing by almost 22% in 2008-2011, with a remarkable 18% deliveries increase (by value) in 2012.
These delivery increases are out of line with relatively weak airline traffic growth. Instead, third party finance – that is, financial institutions bankrolling jet transactions – is a key driver here, along with high fuel prices. Historically, when the economy has been weak, fuel prices have fallen. Yet during the past four years, fuel has stayed stubbornly expensive.
Meanwhile, cash has become very inexpensive. Interest rates are at or near record lows, and financial institutions have few other safe places to invest their cash. Therefore, an airline that wants to re-fleet to save on fuel can get financing on very attractive terms.
As a result of these trends, we expect growth to continue through 2014, after which there will likely be a small dip as customers opt to wait for the next generation single aisle jets, Airbus’s A320Neo and Boeing’s 737MAX. However, if anything changes with fuel prices and/or interest rates, we could see a more significant drop.
Richard Aboulafia, Vice President, Analysis, Teal Group Corp.
Another positive sign was from the 2012 Farnborough International Air Show, where aircraft manufacturers such as Airbus, Boeing, and Bombardier signed more than $72 billion worth of deals for 758 aircraft. The deal is a 53% increase from the 2010 show, with Boeing responsible for more than 50% of the aircraft sales.
Regarding commercial aircraft, Nicolas Boutin, partner and managing director, The Boston Consulting Group, Boston, MA, says the large accumulation of unfilled orders, built up during the past few years, should offset declining demand for the next three to five years. Beyond this period, there is a possibility that future orders will drop off.
Boutin does note that one distinctive characteristic of this economic crisis is that backlogs are larger than ever, therefore, the severity of the downturn will largely depend on how these backlogs hold up.
“There is no doubt that current economic conditions will affect the aerospace and defense sector, even if most of the impact will occur one or two years after the drop in demand in the air transportation industry,” Boutin notes.
In that respect, the ability of aircraft manufacturers and export-credit agencies to compensate for the decline of financing from banks and leasing companies will be a critical factor. In the longer run, China (currently responsible for 15% of the production) should remain the largest market for new Boeing and Airbus commercial aircraft.
Although Congress has signed in to law a bill to avoid the fiscal cliff, sequestration was not included, pushing Marion C. Blakey, president and CEO, Aerospace Industries Association (AIA) to make a statement on the failure to fix sequestration in the fiscal cliff deal.
In the statement, Blakey states, “While we are pleased Congress made some headway on tax elements of a deal to avert the fiscal cliff, we are concerned that they could not agree to a long term solution to fix a problem no serious person wants – sequestration. We are relieved that the heavy axe of sequestration will not fall today and we expect Congress will use the next two months to find thoughtful alternatives to ill-conceived, indiscriminate budget slashing. More than 2 million Americans across all sectors of the economy will lose their jobs if our political leaders fail to fix the self-inflicted wound of sequestration and the dangers it poses to our war-fighters and national security.”
Since the sequestration plan is still in place, there are currently several Department of Defense (DOD) programs slated for termination during the upcoming year, including the RQ-4 Global Hawk Block 30, C-27J Spartan Joint Cargo Aircraft, C-130 Avionics Modernization Program (AMP), and the Medium Range Maritime UAS. Elimination of these programs will save nearly $10 billion through 2017. In addition, the restructuring of the F-35 Lightning II and other programs will provide a savings of more than $41 billion.
All told, terminations and restructurings of these programs will provide more than $50 billion in DOD savings through 2017, helping offset nearly $13 billion of the required $50 billion in reductions through the next four years.
Current numbers show more than 3,150 aircraft currently on order through the next 10 years, totaling more than $210 billion.
|Transports/Special Purpose: 500
Aircraft funding will decrease from $54.2 billion in FY2012 to $47.6 billion in FY2013, reflecting a new defense strategy, as noted in The United States Department of Defense Fiscal Year 2013 Budget Request.
According to most organizations, UAVs or UASs, depending on how you refer to unmanned aircraft, continue to be the sector with the largest area of growth.
According to “World Unmanned Aerial Vehicle Systems, Market Profile and Forecast 2012”, from the Teal Group, UAS spending will almost double during the next decade from current worldwide UAS expenditures of $6.6 billion annually to $11.4 billion, totaling more than $89 billion in the next 10 years.
Philip Finnegan, Teal Group’s director of corporate analysis and an author of the study explains that, “The UAS market will continue to be strong despite cuts in defense spending. UASs have proved their value in Iraq, Afghanistan, and Pakistan, and will continue to be a high priority for militaries around the world."
Steve Zaloga, senior analyst, Teal Group says, “The study predicts that the United States will account for 62% of the worldwide RDT&E spending on UAS technology during the next decade, and 55% of the procurement.”
The study also projects that the U.S. military UAS market will grow at 12% CAGR during the next five years, reaching $18.7 billion in 2018 and generating $86.5 billion in revenues through 2018.
In order to help improve the UAS market the industry is currently waiting for the approval of six test sites for experimental UAS aircraft.
“Our target was to have six test sites by the end of 2012, however, increasing the use of UAS in our airspace also raises privacy issues, and these issues will need to be addressed as unmanned aircraft are safely integrated,” says FAA Administrator, Michael Huerta.
Under current aviation rules, the FAA allows no UAS into civil airspace without an explicit certificate of authorization. Such authorizations to date have included cumbersome requirements, including dedicated air traffic controllers and required chase aircraft.
While Airbus prepares to break ground on its manufacturing facility, the company must prepare to find qualified employees. This problem is not limited to Airbus or the Mobile, AL, area. There are currently more than 600,000 unfilled, high-skilled manufacturing positions within the United States.
According to a recent ManpowerGroup survey, 34% of worldwide employers are experiencing difficulty in filling high-tech manufacturing positions. However, the difficulty of hiring qualified high-tech employees is most evident in the United States where 49% of U.S. employers report difficulty in meeting staffing needs.
Broken down by job role, the largest gaps are in professions requiring a high degree of technical proficiency. Noted from the survey is that engineering positions are the hardest to fill in the United States, followed by technicians, skilled trades workers, and production operators, all of which are imperative to the aerospace industry. The inability to fill these roles has a negative effect on customers and investors, with 41% of employers reporting a medium or high impact on stakeholders.
The reason for the majority of these job openings is that businesses are very lean today and do not have the resources to provide extensive on-the-job training. Therefore, job candidates need to be well qualified before they are hired – which means having basic computer skills, with the knowledge and experience to set up and run today’s complex CNC machinery.
Technical and vocational schools are finding it difficult to recruit high school students because manufacturing is perceived as a dirty workplace with limited prospects. The reality is that lean manufacturing has cleaned up the workplace and students are entering employment earning a decent wage.
The current skill-gap number is a substantial one, and will continue to grow with the upcoming retirement of many baby boomers. Without addressing this problem, it is suggested that the number of unfilled, high-tech manufacturing jobs could grow by 10 times the current number by the end of the decade.
A Positive Future
Although there are some negative factors involved – the number of unfilled, high-skilled manufacturing jobs, and the sequestration – the overall aerospace market is poised for growth through the next decade and beyond, with commercial and UAS markets looking to carry the industry.
Why Manufacture in the U.S.?
Adam M. Pilarski, Ph.D., Senior Vice President, AVITAS
Globalization has been changing the world for the last few decades. Reading popular press and listening to people on the street it seems that all manufacturing jobs are moving to China. This is not the case. High tech jobs are not moving to Haiti. Germany and Switzerland, despite high wages, are doing quite well. The same reality exists in aviation. Airbus and Boeing are by far the largest aircraft manufacturers in the world and are located in the highest income/highest wage regions. Turns out that low wages are good enough to acquire a semi-monopoly position in the production of simple toys. However, what matters in aircraft manufacturing is a different set of skills where the hourly wages is just one of the components. Productivity is most relevant and is a skill acquired through experience.
In the mid 1980s, I was involved in setting up manufacturing of MD80s in Shanghai, China. I remember our president being very impressed that workers were making less than a dollar a day. As everybody knows we did not transfer all manufacturing to China but rather painfully produced in Shanghai the units bought by Chinese airlines. In fact, during my annual visits to China, I observe a continuous increase in standards of living and wage rates so that Chinese labor is no longer very cheap. So why did we produce those aircraft in China? Obviously, these were marketing/strategic considerations. “If we provide high tech jobs there, they will buy more of our products,” was the thinking. This is how it usually works. Embraer established a facility in Harbin, China, and all OEMs are buying parts from China. This follows the long established principle of offsets, which mandate purchases in the country buying aircraft by the sellers.
The principle of offsets still applies, especially in government contracts. Therefore, when Airbus was actively pursuing the tanker replacement program of the U.S. Air Force (KC-X), serious attempts were made to guarantee sizeable employment opportunities in the United States, specifically in Alabama. That program was awarded upon appeal to Boeing, but Airbus still pursued its Alabama interest and announced it will open a manufacturing facility to produce some of its narrow body aircraft. The question is why Airbus continues on that path even if the KC-X program is a ship that has sailed. Obviously, the U.S. Congress may be motivated by local jobs in the United States, but a U.S. airline in Chicago, IL, will not be impressed at all by having its aircraft produced in Alabama.
U.S. labor is quite efficient and by some European standards fairly cheap. Establishing the facility in the South with weak unions, similar to Boeing’s plant in Charleston, SC, may also provide less risk of labor trouble. Producing aircraft close to the customer base also has advantages. The major reason for the Airbus Alabama facility, in my view, is the current bubble in worldwide aircraft orders. Laying off employees in Europe is very difficult. Airbus now will have two facilities in Europe (Hamburg, Germany and Toulouse, France), one in China (Tianjin), and one in Mobile, AL. They can oversell, knowing full well, that if the bubble bursts they can easily reduce capacity by cutting expansion plans in the United States and also shutting Tianjin down. If the current large-scale orders are justified the four plants will be able to produce them all. If I am right and the bubble bursts, there is spare capacity that can easily be cut.