Notes from Wharton Aerospace 2009: The Impact of a New Administration & the Financial Crisis on the Defense Industry
March 5, 2009
The strategy & business development leadership of leading aerospace & defense companies recently discussed the impact of a new Administration & the financial crisis on defense budgets during the “Strategy Panel” of the 2009 Wharton Aerospace Conference.
Panelists included BAE Systems SVP Corporate Communications Lucy Fitch, Honeywell Aerospace VP Strategic Planning & Marketing Justin Ryan, ITT Defense President David Melcher, Raytheon NCS Command & Control VP Jack Harrington,Northrop GrummanVP Corporate StrategyStan Szemborksi, & Boeing Integrated Defense Systems VP Strategy Management Bill Bonadio.
Despite some program-specific concerns, there was general consensus among the 300 executives from 130 aerospace & defense firms in attendance on a number of items:
1.Defense budgets will not be cut as drastically as many might think, with no significant impact on budgets until FY2011. Reasons include: budgets are already in place, the world continues to be a dangerous place, and even the most liberal politicians care about preserving jobs in their districts - nobody wants to close down weapons production lines in a recession.
2.Reshaping Priorities - As budget supplementals go away and future budgets see slower growth rates, here is how the Pentagon will reshape priorities:
a.New programs will be deferred or have slower production ramps. Companies whose prospects are tied to programs such as KC-X, JLTV, and CSAR-X will be accordingly impacted by these changes.
b.The biggest cuts will be in programs having execution issues that cause them to be dramatically over budget; or considered “nice to have but not necessary” given a changed threat environments. Future Combat Systems, Airborne Laser, Kinetic Energy Interceptor come to mind. The Department of Defense has a long history of “shooting its wounded” programs.
c.Affordable upgradable "75% solutions" that Companies can offer and that can be fielded in months and at lower cost will be nicely positioned against “perfect solutions” that take years and billions of dollars. An excellent example already taking place is opportunities available to legacy radio manufacturers such as Harris Corporation, whose commercially developed JTRS-compliant equipment are alternatives to what some would call “gold-plated” equipment that would otherwise be fielded under the historically troubled JTRS program.
d.High growth areas include equipment upgrades & modernization, networked communications, simulation and training, munitions navigation, advanced sensors and government services. Middle market companies involved in these areas will find themselves of great interest to the larger aerospace companies that with record levels of cash on their balance sheets, continue to have an appetite for filling technical, domain and channel gaps via mergers & acquisitions.
About Wharton Aerospace: Founded and co-presided by PCE Investment Banker Michael Langman, Wharton Aerospace is an association of senior executives and invited guests with shared ties and commitments to the aerospace & defense industries. Wharton Aerospace conducts a content-driven by-invitation-only annual conference to foster professional and social connections among members.
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