- The U.S. Air Force submitted the FY 2015 budget proposal.
- The budget proposal end the drastic cuts of the previous years.
- For aerospace manufacturers 2014 is still a difficult year.
- However sequestration is the largest risk.
The U.S. Air Force submitted their budget proposal for FY2015. The worst seems to be over compared with the drastic cuts of the past few years. This is good news on the long term for aerospace manufacturers such as Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Raytheon (NYSE:RTN).
For the short term, 2014 will still be a difficult year as the aerospace industry will continue to be affected by budget cuts from previous years. The Air Force favors quality over quantity, which will make it a smaller Air Force. Sequestration, however, is the biggest risk.
U.S. Air Force FY2015 budget proposal
The U.S. government is the largest customer for the defense divisions of the U.S. aerospace manufacturing industry.
The USAF is responsible for the largest part of the revenue pie. Budget cuts are a good indicator of the impact on future revenue and profits.
The FY 2015 Air Force budget sacrifices capacity to meet minimum capability requirements. Important choices which affect aerospace manufacturers are:
- When aircraft are divested the support will also be cut;
- New development programs are favoured over upgrading older aircraft types;
- A major risk is budget sequestration. If this happens it will have a serious impact on revenue.
Compared to FY2014, the worst seems to be over when compared with the drastic cuts of the previous years. There is still a small cut, but nothing compared with the dramatic cut of FY 2014.
Procurement of new aircraft and missile systems
FY 2015 is the first year since 2012 with a positive change for the procurement of new aircraft. The cuts from previous years are not all in the results yet. Budget (or budget cut) for a given year doesn't indicate production in that same year. These are added to the backlog and manufactured at a later stage. Budget cuts may also remove existing orders from the existing backlog when projects are cancelled.
New projects favoured over older aircraft types
Compared to previous years, the budget cuts for 2015 are much less compared to 2014. The Air Force has chosen to keep the programs for new aircraft intact. The major programs are:
- LRS-B (B-3) new strategic bomber which will be developed by Boeing/Lockheed Martin;
- Boeing KC-46 tanker aircraft to replace the aging KC135 fleet
- Lockheed Martin F-35 Joint Strike Fighter
But with the exception of the new strategic bomber even these spear point programs have cuts.
When the government isn't allowed to spend as happened in 2013, the Air Force will be forced to:
- divest Boeing KC-10 tanker aircraft
- divest Northrop Grumman RQ-4 block 40 UAV's
- cut in the Boeing KC-46 tanker program
- cut in the Lockheed F-35 Joint Strike Fighter program
Influence on Aerospace Manufacturers
The major aerospace companies depending on the U.S. Air Force are Boeing, Lockheed Martin, Northrop Grumman and Raytheon.
Revenues show a declining trend, which isn't surprising considering the budget cuts and (almost) finishing of operations in Iraq and Afghanistan.
Profitability is surprisingly high considering the size of the budget cuts. It doesn't seem to be affected a lot by the budget cuts.
The decision to favor new aircraft programs over existing aircraft types, will put the 2014 results under pressure.
In general, in the aviation industry, the margin on new aircraft is lower than on parts of/upgrades for existing aircraft.
Missile systems are not really hit by budget cuts. Due to the deployments to Iraq and Afghanistan, existing stocks have been depleted. Replenishment and modernization of missiles have priority over keeping a quantity of (older) aircraft in active service. Without missiles, the use of combat aircraft is very limited.
The revenue and especially the EBIT aren't hit as hard over the years as should be expected by the sheer size of the budget cuts and ending the deployments to Iraq and Afghanistan.
The biggest risk, however, is sequestration or lowering the existing budget proposal. If this happens, the U.S. Air Force will be forced to cut even more in new programs and divest (older) aircraft types. Especially phasing out of aircraft will hurt because when they are taken out of service it is unlikely that they will become airworthy again. Both parts and maintenance sources will not return.
1. The financial data used is retrieved from published results of the companies. The charts are created using this data.