Analysis: Sequestration plays second fiddle in aerospace industry to previous cuts

Monday - 7/29/2013, 3:13pm EDT

On the Federal Drive, Richard Aboulafia talks about sequestration's effects on the aerospace industry.

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By Melissa Dawkins
Special to Federal News Radio

Pre-sequestration budget cuts are hitting the aerospace industry the hardest, said Richard Aboulafia, Teal Group Corporation analysis vice president, in an interview on the Federal Drive with Tom Temin and Emily Kopp.

While sequestration is impacting the aerospace industry, the brunt of the budget cuts result from the Budget Control Act of 2011 as well as reduced requirements for providing logistics support as troops withdraw from Iraq and Afghanistan, Aboulafia said.

"Well, there's been some job losses. But to be truthful, sequestration isn't nearly as bad as the natural cyclical budget cuts, as well as the Budget Control Act, that have already hit," he said. "You look at the Defense budget. It really peaked in fiscal 2009, fiscal 2010. It's really come down quite a bit since then. [It] wouldn't be pleasant at all if sequestration took another chunk off of that, nine percent what have you. But frankly, a lot of the damage is behind us."

New programs play a key role in determining how much of a hit aerospace contractors will face as a result of budget cuts and sequestration, Aboulafia said.

"It's kind of interesting on the sequestration argument, a lot of the focus has been on jobs and of course money and all these other things," said Aboulafia as part of Federal News Radio's special report, Private Side of Sequestration. "I would argue behind the scenes much smaller numbers: the research-and-development challenge for new-start programs are really what's a threat in terms of maintaining the industrial base's ability to design and create new product."

Contractors are hoping that the F-35 ramp-up, set to increase production of the Lockheed Martin joint strike fighter in fiscal 2015, happens as planned, Aboulafia said. Even with new-start programs, though, DoD is at risk of utilizing only one provider in the future, he said.

"It's kind of brittle. There's historically, 'Well we have to go from seven contractors to four. We've never gone from, you know, three to one just like that.' And I'm not really sure people have looked at the implications for the industrial base," Aboulafia said. "And this is also true at the subcontract level. With the radars and engines and electronic warfare and all these other things, in many cases, we're at risk of going to one provider. And I'm not really sure we've adequately looked at what's at stake there. One problem is that procurement accounts and operations and maintenance accounts tend to have a sizeable labor footprint, a sizeable industrial constituency. And, of course, politicians will go to bat for that. But when it come to new start R&D programs, it's harder to get people to speak up for you just because there's fewer jobs involved."

And as industry weathers budget cuts, it is more difficult to maintain skills and experienced design teams, Aboulafia said.

"And even then, the complication as you ramp up production and get away from development, those engineers begin to go away. In other words, you might not have the ability to design an all new six-jet plane unless funding is provided in the next five or six years," he said.

The most prominent aerospace victim of budget cuts is the F-22 fighter, Aboulafia said. DoD also is decreasing procurement for the C-17, and the fixed-wing production lines in the aircraft industry could decrease to two, if current budget trends persist, he said.

Melissa Dawkins is an intern for Federal News Radio MORE FROM OUR SPECIAL REPORT, PRIVATE SIDE OF SEQUESTRATION:

Part 1: Contractors confronted with new type of waiting game due to sequestration

Part 2: Federal 4th quarter spending spree offers contractors hope for return to normalcy

Part 3: Sequestration plays second fiddle in aerospace industry to previous cuts

Part 4 Prime contractors show strong earnings despite sequestration

Part 5: Contractor hiring, morale take sequestration hit

Part 6 : Small contractors struggle from, rise to the challenge of sequestration

Part 7: Planning for the worst: Companies aim for sequestration-easing strategies

Part 8: Small firms feel first bite of DoD budget cuts as large contractors' stock soars

Part 9: Contractors adapting to post-sequestration environment

Part 10: Fed furloughs leave imprint on procurement process, contractors say

Survey: Contractors speak out about sequestration's impact

Data Analytics: Sequestration's impact on contractors by-the-numbers

Column: Sequestration creeps outside the Beltway

Audio Interview: Government market ground zero