Industry Overview: Aerospace and defense related industries
The Soviet Union and the Cold War are things of the past, but the world is still a dangerous place -- as the conflicts in Iraq and Afghanistan and the tensions in the Middle East, Iran, and North Korea readily attest. The US military, by far the world's largest purchaser of weaponry, has reacted to the changing times by creating a military that is lighter, more flexible, and higher-tech than its Cold War predecessor. The aerospace and defense industry was struggling to maintain profitability even before September 11, and fears of further terrorism, the conflicts in Afghanistan and Iraq, and a weak economy combined to devastate the commercial aerospace industry over the next couple of years. More recently, however, the wars in Afghanistan and Iraq have bolstered the coffers of defense companies and commercial aircraft orders reached record levels in 2005.
The mother of all defense deals occurred in 2001 when Lockheed beat out Boeing for the $200 billion Joint Strike Fighter contract, the largest defense contract ever. Spread out over almost 30 years, it may be the last major deal for a major manned fighter program, as the success and sophistication of 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 aircraft and making it unnecessary to risk pilots' lives in combat.
A desire to be smart, fast, and mobile has replaced the "more and bigger" doctrine of the Cold War. To that end, several companies, including Lockheed Martin, Northrop Grumman, and General Dynamics have invested in hardware and software companies that focus on government customers. The top defense contractors are Lockheed Martin, Boeing, Northrop Grumman, BAE SYSTEMS, Raytheon, General Dynamics, Thales, and EADS.
Some large-scale projects such as the Boeing and Sikorsky Comanche stealth helicopter and the United Defense Industries Crusader have been cancelled, and other high-profile and high-dollar programs -- including the F/A-22 Raptor and the F-35 Joint Strike Fighter -- may also be scaled back as the Pentagon and the US government fight over how to best dole out defense money. The world's largest defense contractor, Lockheed Martin, won the potentially $200 billion-plus contract to build the upcoming F-35 Joint Strike Fighter in 2001; Lockheed is also the builder of the Air Force's darling, the F/A-22 Raptor, an air-superiority fighter.
In addition to Lockheed Martin's F-35 JSF and F/A-22 Raptor, Lockheed also makes the venerable F-16, the F-117 (the world's first stealth fighter), and the C-130 Hercules transport. Boeing, the world's #2 defense contractor, makes the F/A-18 Super Hornet, the F-15 Eagle, the AH-64D Apache helicopter, the C-17 Globemaster transport, the AV-8B Harrier, and the V-22 Osprey.
General Dynamics' Land Systems subsidiary makes the US army's only main battle tank, the M1A1/M1A2 Abrams as well as many armored vehicles such as the Stryker. Competitors include BAE Systems Land and Armaments (formerly United Defense Industries), maker of the Bradley infantry vehicle and artillery equipment; and Krauss-Maffei Wegmann, maker of the LEOPARD main battle tank, artillery pieces, and armored vehicles. As IUDs (improvised explosive devices) unleash havoc on coalition forces by way of roadside bombs in Iraq, unfortunately more demand is created for the armored vehicles made by the likes of AM General, Oshkosh Truck, and Armor Holdings.
Makers of guided weapons, including missiles and smart bombs, include players such as Raytheon, Lockheed Martin, Boeing, MBDA, BAE SYSTEMS, and Northrop Grumman.
Lastly, fancy bombs and missiles are all well and good, but soldiers on the ground need bullets and tanks need shells. Leading munitions suppliers include Alliant Techsystems, General Dynamics, and Raytheon.
On the commercial side, airlines -- by far the biggest customers in the sector -- have lost billions since 2001. By way of illustration, the top nine airlines lost $10 billion in 2002, almost $6 billion in 2003, and about $4 billion in 2004, and several airlines have filed for bankruptcy protection. As mentioned previously, September 11 and subsequent travel fears dealt a devastating blow to a commercial aircraft market that was already reeling from a market slowdown. That market, which accounts for about 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 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.
Aircraft orders picked up in 2003, 2004, and 2005, however, as Boeing and Airbus duked it out for airline orders; 2005 in particular was a banner year, with Boeing notching a record 1,002 orders just behind Airbus' record of 1,055 orders. Business for Boeing has since begun to make a comeback. Boeing booked more aircraft orders than Airbus in 2006 - the first time since 2000. Boeing booked 1,050 while Airbus only managed 824. Airbus (and parent EADS) have been harmed by production snafus for the A380 which repeatedly have postponed Airbus' targeted delivery dates. The delays have irritated some customers to the point of them firing Airbus in favor of Boeing.
Boeing is working on its long-range, fuel-efficient, mid-sized, 787 Dreamliner (due in 2008); Airbus countered with its A380 (due in 2008), a 550-passenger behemoth. Airbus then upped the ante by announcing that it would build the A350 (due in 2010) to compete directly with Boeing's 787.
The maintenance, repair, and overhaul (MRO), jet engine, and business and regional aircraft markets have suffered right along with airlines and large commercial aircraft makers. The biggest regional aircraft makers are Bombardier, Gulfstream, and Textron's Cessna unit. GE Aircraft Engines, Rolls-Royce, and Pratt & Whitney, and are the three largest jet engine makers.
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, however, leading Boeing and Lockheed to merge their rocket launch services in 2006 as a joint venture, United Launch Alliance.
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