News & Press

Jun 04, 2012

Implications of Future U.S. Defense Budget Cuts

Background

There has been much discussion of the defense budget over the last few months, with much speculation about final numbers and the eventual outcome. But despite all the political rhetoric one thing is clear - the U.S. defense budget is likely to decline in real terms. The war in Iraq is over, and combat operations in Afghanistan will conclude in 2014, if not sooner. “Overseas Contingency Operations” have been exceptionally expensive, and ending them will lower costs. The nation’s unprecedented debt must be addressed, and the fact that defense accounts for a quarter of U.S. outlays guarantees budget reductions in the defense sector. Finally, the nature of future threats has changed. The likelihood of a large, conventional war with a comparably equipped and trained enemy has diminished, if not ended altogether. Nearly all other advanced nations have cut military expenditures by 20 percent or more and reduced forces. In 2011, according to Global Issues, U.S. defense outlays totaled 41 percent of total world military costs. That is five times more than the People’s Republic of China, in second place, and ten times more than Russia, in third. The U.S. is spending more on defense than the next 14 big countries combined, and 2.25 times more than the rest of the world combined. Nearly all of these nations are reducing their defense budgets even more in response to global economic constraints. Economic and social trends virtually guarantee that the U.S. defense budget will decline.

Amid all the ambiguities and political maneuvering an accurate assessment of the future defense budget is nearly impossible. Educated guesswork, based on evaluations that rely on the few available facts and certainties, may be the only real option available to defense industry planners responsible for long-term capital investments, independent research and development, staffing decisions and program allocations.

The Problem: U.S. Defense Cuts Will Affect International Military Support

Although the DoD may be among the last major national military establishment to undertake large budget reductions, when the cost-cutting begins, it will create a ripple effect among U.S. allies large and small around the world.

First, many nations have relied heavily on U.S. Foreign Military Financing (FMF) to purchase weapons and equipment and acquire defense support services and training. According to the DoD budget document, FMF accounts for less than one percent of U.S. defense spending, but given U.S. budget priorities that focus on domestic programs, FMF reductions will occur, especially in regions facing little or no immediate military threat. This change will reduce or eliminate many countries’ access to relatively inexpensive or even free spare parts to maintain, repair and overhaul military aircraft and equipment. These nations will have to find other ways to support their systems.

At the same time, many U.S. defense contractors will struggle with U.S. program terminations or cutbacks that may lead to defense industry consolidation and reorganization. Many large original equipment manufacturers (OEMs) will shift their emphasis from defense to commercial products, particularly in aerospace, and from the U.S. to international defense markets and try to make up U.S. revenue losses with international sales. Several OEMs may exploit competitive advantage derived from U.S. sponsorship of foreign military sales and take advantage of the popularity of products that enjoyed success in global markets by raising prices on their components and support services that will keep these platforms in service. Budget cutbacks also may engender defense industry changes that focus on low-cost and technically capable products that may curtail innovative product research and development and reduce the availability of current systems, products and components at competitive prices.

OEMs may bring many defense platform tasks such as design, engineering, research and development and subassembly manufacturing, outsourced years ago to smaller companies many of which are overseas, back in house, straining their organizational efficiencies. Investors inevitably will expect OEMS to produce positive returns, and these expectations may lead to streamlining operations that endanger industrial participation and “offset” activities, reducing the viability of international component production.
A shrinking U.S. defense industrial base, extending into Tier 2 and 3 suppliers, may create not only procurement concerns for international armed forces that must keep step with technological advances but also lead to potentially significant operational problems.

But potentially the most harmful result of the declining US defense budget for foreign nations flying US built platforms is the threat of diminished production. Because OEM’s are driven largely by share price, it is difficult for them to justify continued investment in design and engineering capacity once a platform’s production has ceased. Resources for platforms no longer in production are shifted to new more profitable areas, and capabilities are lost. Nations utilizing older military systems, especially those that have relied on OEM supply chains and the U.S. government’s Defense Logistics Agency and Foreign Military Sales program, may face difficulties in finding essential spare components and parts to keep aircraft and other military platform mission capable.

The Solution: Innovative Repair and Overhaul Capabilities

No defense product group is more important than military aircraft because they are essential elements of effective national defense operations. When the U.S. defense sector adopts new technologies and configurations that may not be standard or available in international markets, many of the aircraft that remain in service in other countries may be more difficult to maintain. As just noted, budget reductions may make mission readiness even more problematic.

Fortunately, an important defense industry sector is able to respond to these concerns and support the operational requirements for international military forces. Several enterprises have focused on support services for military systems and provide aircraft mission readiness solutions. Services include component system repair and overhaul, engineering, supply chain management, replacement parts and logistics expertise. The best support companies will be ready to take up the slack as U.S. defense budget cutbacks lead to industry consolidation as some OEMs divest their defense and government operations. The leading defense support companies may invest in development of systems and components that OEMs could decide to cease producing, and they may hire engineers and other technical specialists who leave OEMs as production programs end. Demand for aircraft support products and services is certain to grow, both short- and long-term. International forces will emphasize maintenance activities including service life extensions, modernization and capability upgrades. The decline in new aircraft development programs may even translate into increased focus on similar efforts in the U.S. armed forces.

Service support industry leaders stand apart from conventional repair and overhaul organizations. These businesses enhance provision of spare systems, components and parts with advanced engineering capabilities that enable them to create parts that are no longer available in government or OEM supply chains. The best companies manage every step of the logistics process, from part design through delivery and support, facilitating mission readiness for international military forces and ensuring flight operations are efficient, effective and safe.

ASI: A Case Study in Excellent Mission Readiness Solutions

To evaluate service and support company capabilities, considering an industry success is a useful way to determine attributes and performance likely to satisfy customer requirements.
Aeronautical Systems, Inc. (ASI) has earned a solid reputation for global leadership in military aviation support. For more than 20 years, ASI has harnessed unmatched technical and engineering capabilities with exceptional product and market knowledge and a worldwide supply network to ensure both fixed-wing and rotary-wing aircraft in international service are always flight ready. ASI takes a uniquely comprehensive approach to service support by expertly covering every aspect of the logistics process with capabilities derived from years of experience, technical proficiency and total commitment to its customers.

With strategically located regional offices, a multi-national staff, strong relationships with many commercial suppliers and U.S. military depots, and complete understanding of export licensing and U.S. ITAR regulations, ASI routinely solves the toughest customer problems, difficulties that competitors cannot overcome. Every aspect of the company’s service is focused on uncompromising quality and customer satisfaction.

Internally, ASI’s Quality Assurance Department ensures customer satisfaction by integrating quality policies and procedures with every aspect of company activities, including service and support delivery, evaluation, training, and continuous improvement.

Numerous third-party certifications validate and reinforce the quality of ASI’s service and support. The company is an active member of industry leadership organizations, such as the Aerospace Industries Association (AIA), and the National Defense Industrial Association (NDIA). The company also holds ISO 9001:2008 certification, and is fully compliant with U.S. military specifications (MILSPEC), NATO AQAP-2130 specifications, and most European Union (EU) Standards. ASI also is authorized to provide Defense Contracts Administrative Service (DCAS) inspections and does so at no additional charge. ASI quality inspectors have demonstrated their commitment to quality by completing certification examinations administered by the American Society of Quality, a professional organization dedicated to improving quality standards.

ASI provides and, if necessary, fabricates only the highest quality products. ASI is unique in its outstanding technical knowledge of all customer military aircraft, with specific focus on widely used fixed- and rotary-wing airframes, and its company-wide commitment to customer service and mission readiness for supported fleets is second-to-none. ASI’s commitment to keeping their customers’ fleets flying results in customized solutions for their customers. Aeronautical Systems offers their customers tailored solutions some of which have included tailored exchange programs for key components of both the H-3 and F-18, upgrade programs for many integral items including the F-18 AMAD, 45 day turnaround repairs where required spares are sourced and stocked prior to unit arrival, and proactive acquisition of units where market shortages are expected. As it nears its 25th anniversary, ASI has enjoyed significant market growth and expanded its technical capabilities and professional relationships. The company enhanced its F-18 and F-16 large subsystem capabilities by establishing strategic partnerships with key vendors and military depots, including a manufacturing agreement for F-18 major components. A new facility at ASI corporate headquarters in Sterling, Va., has been required to support growth, and new employees have joined the staff, bringing with them valuable U.S. Navy and international maintenance, repair and overhaul knowledge and experience. Overseas, ASI continues to establish partnerships and develop new international markets.

ASI’s success and growth in the face of declining global defense budgets and concomitant defense industry cutbacks demonstrates the company’s excellence, not only in the substantive aspects of comprehensive service support but also in management attributes. The company’s outstanding performance also makes it a paradigm for the mission readiness and service support industry, setting a standard to which competitors can aspire.

ASI Platform Focus: Keep Them Flying!

One key to ASI’s success is the company’s focus on specific helicopter and aircraft types. This emphasis includes the UH-60 Black Hawk utility helicopter; the SH-60 Seahawk maritime helicopter; the S-70 variant serving commercial markets and international military forces; the UH-3 and SH-3 Sea King helicopter and its civil variant, the S-61. Support services for these rotorcraft include repair and overhaul, parts supply and engineering and technical support. Available parts categories include airframe components, landing gear, avionics and instruments, environmental and utility systems, power plants and rotors.

Fixed-wing aircraft include such fighter aircraft as the F-16 Fighting Falcon, the F-15 Eagle, the F-18 Hornet, the F-4 Phantom and the AV-8B Harrier. In addition, the company supports the P-3 Orion maritime patrol aircraft. These military platforms are relied upon for defense by as many as 25 nations. Services range from repair and overhaul to parts supply and engineering and technical support. Comprehensive parts lists cover most of the same categories as rotorcraft and include airframes, landing gear, avionics, environmental and utility systems, and engines and gear boxes as well as flight controls and hydraulics.

ASI’s specialization in widely used military aircraft and helicopters enables the company to respond quickly to their customers needs to keep allied nations’ aircraft mission ready.