The US aerospace industry predicted an increase in overall sales for 1996. It is a tiny increase, only a fraction of one per cent in constant dol-lars, but the significance lies in the fact that it is a gain and it will be the first in this decade.
Industry leaders see it as a signpost proclaiming a bottoming-out of a sharply declining activity curve and the start of a new business upturn. That view was reinforced by a spurt of orders in 1995-96 for civil jetliners, confirmation that the world's airlines are resuming their long- deferred re-equipment programmes. The Aerospace Industries Association projects continuing increases in commercial aircraft sales that will reach all-time record levels in the first decade of the new century.
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An increase of orders for civil jetliners in 1995/96 was confirmation that the world's airlines are resuming their long-deferred re-equipment programmes BOEING |
However, this very welcome upturn does not signal the end of the decade-long period of industry transition, a time of often painful adjustment and restructuring occasioned princi-pally by sharply reduced defence procurement funding. The indicated upturn is in the com-mercial segment of the industry's operations. In the no-longer-dominant but still important defence segment the activity curve continues to head downward and it appears that the industry will have to weather at least another decade of uncertainty and adjustment before it can regain some form of stability.
The transition period has been a very difficult time for the US aerospace/defence industry. It began in 1986 with a government decision to reduce the national budgetary deficit by trim-ming defence appropriations and scaling down the defence force structure. Initially it appeared to be just another valley in the peak-and-valley activity profile that has characterised the history of the industry.
That view was quickly dispelled. Continuing pressure for a reduction of the national deficit coupled with widespread perception of a diminished global war threat brought several revisions of the defence restructuring plan, each steepening the rate of decline in defence industry activity.
| Aerospace Industries Association projects there will be continuing increases in commercial aircraft sales and these will reach all-time record levels in the first decade of the new century |
The US defence force structure has been reduced by approximately one-third. Annual defence appropriations are 40 per cent below the level of the mid-1980s. The procurement account has dipped more quickly, it is down 72 per cent in real purchasing power since 1986.
The impact on the US aerospace industry has been very severe. It has been forced to deacti-vate scores of production and R&D facilities, it has lost thousands of low-tier suppliers and it has lost 553,000 of its employees, 42 per cent of the labour force in place at the peak in 1989.
The defence segment of the industry has an important role in the US government's defence restructuring plan that contemplates a small but nonetheless potent defence force made possible by continual modernisation. It falls to industry to conduct technology development, to produce modernised weaponry and to main-tain a defence industrial base capable of expan-sion should a new global threat emerge.
For all the problems attendant on nine consecutive years of declining sales to the Department of Defense, the defence segment of the industry has remained viable, technologically strong and financially healthy. But it cannot continue to maintain viability unless there is an early turn- around in the defence procurement picture.
Viability demands a measure of workload suf-ficient to maintain an adequate force of skilled employees, a body of competent suppliers and a complex of warm R&D/production facilities. Such a level is by no means assured within the existing government philosophy of focusing defence outlays on current readiness at the expense of future readiness.
There are a number of factors that will influ-ence the question of whether the US defence industry will be able to maintain the essential defence industrial base. Three procurement-related issues are of particular importance and each is an area of uncertainty. Positive resolu-tion of uncertainties is of vital importance to the future structure and capability of the US defence industry.
The first is modernisation procurement that is lagging badly. The current defence restructuring plan, announced by the Clinton Administration in 1993, contemplates a military force barely more than half the size of its Cold War era counterpart. However it is still a powerful force capable of simultaneous combat action on two fronts. The key to this smaller-but-stronger concept is the force-multiplying effect of a con-tinual flow of advanced weapon systems and support equipment.
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It falls to the defence segment of the industry to conduct technology development, to produce modernised weaponry and to maintain a defence industrial base capable of expansion should a new global threat emerge HUGHES SPACE & COMMUNICATIONS COMPANY |
The restructuring programme is proceeding on schedule with respect to force reduction, but the all-important modernisation effort has fallen victim to the nation's top priority objec-tive; reducing the annual national budgetary deficit. Both the Democratic Administration and the Republican-controlled Congress are strongly committed to deficit reduction and that means ever-tighter defence budgets. In this climate the Administration has resorted to using modernisation funding to maintain opera-tional readiness and deferring the main thrust of the modernisation effort until another time.
A little arithmetic illustrates the extent of the problem. The defence procurement level for the past fiscal year was just above $42 billion; for the current fiscal year, that began October 1 1996, the Administration plans only $39 billion. The accepted magic figure, the funding necessary to support an adequate modernisation programme, is $60 billion a year (compared with the Cold War peak of $138 billion). According to the US Department of Defense Future Years Defense Plan, procurement funding will not reach $60 billion until fiscal year 2001.
It is a serious problem for the military services because they are forced to operate aircraft, missiles and other systems that are based on technologies developed 20 to 30 years ago. It is a serious problem for the US defence industry. Most existing production programmes have been stretched out and reduced to very low level production rates and many of them are winding down altogether. With very few new systems being ordered into production, the industry faces the possibility of a serious pro-duction gap that could trigger further personnel layoffs and plant closures.
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Procurement decreases have impacted the US aerospace industry severely. It has been forced to deactivate production and R&D facilities, it has lost thousands of low-tier suppliers and it has lost 553,000 of its employees, 42 per cent of the labour force in place at the peak in 1989 BFGOODRICH AEROSPACE |
Oddly, this all-important matter is not a subject of raging debate. Some members of Congress have warned of a hollow force and have pro-posed modernisation procurement increases, but at levels far below what is necessary. There is no public clamour in an election year, the voters are far more interested in such subjects as the national deficit, tax cuts, employment security and health care. The subject may heat up when it becomes widely apparent that the defence restructuring effort is not restructuring, just downsizing. Until this matter is resolved, the defence segment of the industry will be hanging by its nails.
A second and closely related procurement matter that demands early resolution is pri-vatisation or outsourcing that, by definition, is the transfer of functions previously performed by government to an outside provider, a private sector firm. The US defence industry has long held that greater outsourcing could save the government billions annually in just one area: maintenance of weapon systems and platforms, a $13 billion-a-year workload now performed largely by a vast complex of military depots. Less than 30 per cent of the work is outsourced to industry.
| An aircraft cooling fan is assembled by an AlliedSignal Aerospace worker |
A four-year public debate and a Department of Defense investigation and cost-benefit survey has established that expanded outsourcing to cost-effecting providers can save billions. This finding has inspired the department to con-sider a greatly expanded outsourcing effort that would include depot maintenance and such other functions as data processing, communi-cations, logistics management, finance and accounting and a variety of related operations.
The broad and diverse expertise of US aero-space/defence companies makes them prime candidates for outsourced workload. Some of this work would directly strengthen the defence industrial base. Some depot maintenance workloads, upgrading weapons platforms for example, are closely related to original equip-ment production processes. Other workloads would permit retention of large numbers of skilled industry personnel, enhancing the capa-bility for expansion in an emergency.
| There must be sufficient workload to maintain an adequate force of skilled employees, competent suppliers and a complex of R&D/ production facilities. Such a level is not assured with the existing government philosophy of focusing defence outlays on current readiness at the expense of future readiness |
Once sceptical of the potential of outsourcing, the Department of Defense now is vigorously championing the concept. It appears to be an answer to a very big defence dilemma. Since reduction of the national deficit makes large-scale increases in defence appropriations all but impossible, the money for modernisation procurement must be found within existing budget ceilings. The Department of Defense is counting heavily on savings from outsourcing as a prime source of modernisation funding, a Defense Science Board report projects savings up to 30 per cent on outsourced functions.
In 1996 the Department of Defense launched the first step towards establishing a compre-hensive outsourcing programme with a request for Congressional approval of a depot mainte-nance outsourcing plan that would significantly increase the share of workload contracted to industry. The Congress threw up a roadblock; some members, seeking to protect government depot jobs in their districts, succeeded in blocking repeal of existing laws that prevent a large-scale shift of depot work to industry. One, for example, reserves at least 60 per cent of all depot maintenance workload for per-formance by federal employees. As a result, the military services' ability to manage depot maintenance efficiently is impeded and imple-mentation of the broader outsourcing pro-gramme that requires further Congressional approval currently is stalled.
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Grounded: It appears that the US defence industry will have to weather at least another decade of uncertainty and adjustment before it regains stability MCDONNELL DOUGLAS AEROSPACE |
But not permanently. The Aerospace Industries Association believes that the Administration and the Department of Defense will continue to seek the savings potential of expanded out-sourcing and that Congressional opponents of the plan will find it increasingly difficult to justify their roadblocking actions when the moderni-sation funding shortfall escalates into a full-grown national issue. Although the questions of how soon and how much are impossible to answer presently, it is believed that industry will be allocated a greater share of depot maintenance workload and also will move into different areas of defence privatisation.
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The new LOSAT (line-of-sight antitank weapon system) on the armoured gun system (AGS) chassis is C-130 transportable, giving early entry forces an intimidating anti-armour weapon. LOSAT is being developed to provide early entry forces with a formidable force multiplier LORAL VOUGHT SYSTEMS |
A third procurement matter is acquisition reform that is governmentese for overhauling and streamlining a badly worked government procurement process that purports to seek the lowest possible procurement prices but in prac-tice promotes exactly the opposite effect.
With regard to defence equipment, the acqui-sition process was never a model of efficiency, but (beginning in the mid 1980s) it developed into an administrative nightmare. Spurred by real and perceived instances of industry over-pricing, Congress and the Administration embarked on a legislative/regulatory rampage, correcting the perceived abuses by creating layer upon layer of new controls and more over-sight without consideration of the increased costs to industry and to the government.
This pattern of micromanagement and over-regulation continued through the 1980s and reached a point of absurdity in 1990, when some in Congress recognised that the pro-curement process was approaching statutory and regulatory gridlock. There was wide recognition that the requirements imposed on the contracting process were increasing the costs of government acquisition by anywhere from 20 to 50 per cent.
This prompted a Congressionally-mandated review and an analysis of more than 600 defence acquisition laws by a panel of experts. Recommendations were made by the panel as to how to streamline and simplify the acquisi-tion process. Congress responded by passing the Federal Acquisition Streamlining Act in 1994 and in 1996, a follow-up law that directed further reforms.
Given that legislative base, the Department of Defense has proceeded to make the regulatory revisions necessary to implement the provisions of the laws. The upper levels of the Defense hierarchy are pursuing reform with enthusiasm because, according to a department statement, "the Department of Defense will not be able to carry out [the defence restructuring] blue-print without dramatic changes in the acquisi-tion processes". In other words, this means that in this tight-budgeted era, funding for expanded weapon system procurement must come from savings within the ceilings imposed.
| Research and development must continue: The McDonnel Douglas MD-90-30 was the first of a new family of quiet and fuel-efficient twin-jet airliners powered by International Aero Engines V2500 engines. The first test aircraft, T-1, had its first flight in 1993, the start of a thorough flight test programme |
Successful acquisition reform is immensely important to the US defence industry. Obviously it will have a strong bearing on the industry's future workload. But it goes much further: it promotes dual-use production, shorter pro-gramme times, reduced oversight, greater contracting flexibility, simplified cost accounting, reduced record-keeping and reporting require-ments and, generally, elimination or easing of scores of restrictions that impair industry's ability to operate at utmost efficiency.
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Funding for weaponry testing is essential for the military. Here a B-2 drops the first Northrop Grumman GPS-Aided Munition (GAM) in 1995 at China Lake Land Ranges in California. Northrop Grumman performed a number of successful GAM tests in 1995 and explored all aspects of the GAM weapon footprint. GAM testing continued during 1996 and first operation weapon delivery to the US Air Force was scheduled for the same year USAF |
The savings potential to both government and industry is enormous. There are no reliable esti-mates. If savings are to be measured, the degree of improvement in acquisition efficiency must first be established and that will take years.
The existence of new laws and new regulatory guidance from the top level of the Department of Defense does not automatically gener-ate concrete savings. Effective reform demands dedicated pursuit of new objectives at the upper levels of defence officialdom and at all levels of the vast defence acquisition complex.
That will not come easily. Traditionally bureau-cracies resist change. In the case of the defence acquisition workforce, there is a need for a complete cultural change, a positive acceptance of the objective to replace the cau-tious, sceptical attitudes developed over a decade and a half of micromanagement and excessive controls. That will be difficult and it will take a long time, but it is of vital importance to the government and the defence industry. The degree to which cultural change is effected will dictate how much of the potential savings will become real savings and play a big part in shaping the structure of the de-fence industrial base in the 21st century.
