Aerospace lifts off after decline

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Thanks to robust spending by the U.S. Department of Defense for military aircraft, missiles and space projects, the U.S. aerospace industry generated $161 billion in sales in 2004, according to the Aerospace Industries Association. Revenues should continue their upward climb this year, with the AIA projecting the industry will grow another $12 billion.

But perhaps more important, profit margins reached their highest level in five years-an estimated $10 billion. "When it comes to profit margins, the long-term industry commitment to Lean Manufacturing [a process pioneered by Toyota's Taiichi Ohno in the 1950s] is really starting to reap rewards," said Bill Lewandowski, the AIA's VP-supplier management. "Also at play is the fact that prime [contractors] are increasingly turning more manufacturing responsibilities over to lower-tier, specialized component and systems suppliers. Instead of handling all the R&D, manufacturing and assembling themselves, which they did just a decade or so ago, the primes focused on becoming systems integrators, a move which has significantly helped boost margins."

Lewandowski said that today roughly 70% of the value of an aerospace product-an aircraft, a missile, a satellite-comes from work farmed out by the prime contractors, including Boeing Co., General Dynamics Corp., Northrop Grumman Corp., Lockheed Martin Corp. and Raytheon Co. "But the next tier of manufacturer-suppliers, such as Honeywell, General Electric [Co.] and Crane Aerospace [& Electronics], are huge companies, too, that also farm out work down the chain to the raw materials suppliers. Dynamic supply chain management has helped thousands of suppliers along the chain increase margins and opportunities."

A majority of these suppliers work for both the commercial aviation and defense industries. Some also manufacture, assemble and integrate components for NASA and civil space projects.

Commercial aviation suffered immensely in the aftermath of the 9/11 attacks. "As air travel waned, most airline carriers pulled planes out of service and canceled or delayed orders for new aircraft," said Craig Fairfield, director-aerospace business for CRM software giant Siebel Systems.

The domino effect hurt primes such as Boeing, which up until that time had been developing and building planes at unprecedented levels, and it devastated less stable suppliers. "Some 15% of our associate supplier members went out of business after 9/11," the AIA's Lewandowski said. "The bigger companies were able to ride it out better, but virtually any outfit that had all its eggs in the commercial aviation basket failed."

Today, the commercial sector is on the rebound. "Traffic is up to 90% of what it was before 9/11," Fairfield said. "Parked planes are being put back into service, which means a healthy jump for the aftermarket and MRO side of the business. But an even better indicator is that new planes-specifically the Airbus a380 and the Boeing 787 `Dream Liner'-have moved from the drawing board into reality." (The a380 will enter service in 2006; the 787, in 2008.)

Commercial aircraft sales, which include engines and parts, increased modestly to $35 billion in 2004, according to the AIA. Even with forecast growth of more than $4 billion this year, sales will still be at the third-lowest level in eight years.

Increased Defense Department spending in 2004-roughly 15% to $46 billion for aircraft, parts and services, and 10% to $14.8 billion for missiles-demonstrates its commitment to the military actions in the Middle East, Lewandowski said.

Future spending is expected to focus on creating new or overhauling old aircraft programs to ensure the military remains on the cutting edge of preparedness, according to the AIA. 

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