The $500 billion cut to the US military budget looming in January 2013 is threatening to reshape the defence industry, but the impact of the so-called sequestration mandated by Congress through the Budget Control Act of 2011 remains largely unpredictable.
David Baxt, global head of aerospace and defence at Jefferies investment bank in New York, says the problem for industry leaders trying to work out how their companies might be affected is that while the law as it stands demands that spending be slashed, such cuts are, in Baxt's view, unsustainable.
He sees little or no prospect of Congress changing the law before the US general election in November, and doubts that clarity will follow the voting. Were the incoming administration to be Republican-led, the legislative priority would be the repeal of the Obama administration's healthcare funding bill and not the restoration of defence spending.
One area of relative clarity, though, is spending on unmanned systems. "A theme is to do more with less," says Baxt.
But with the world's largest military equipment customer poised to make dramatic cuts while airlines are investing heavily in new, fuel-efficient aircraft, the industry on the eve of the Farnborough air show is characterised by an extraordinary contrast. Simply, says Baxt: "We've never seen so large a divide between the prospects of the civil and defence sides."
While defence manufacturers wait for guidance from Washington, the huge order books at Airbus and Boeing provide six or seven years of visibility. And, says Baxt, Jefferies sees the civil supply chain as well-enough capitalised to keep pace with the airframers' output rate demands.
Farnborough, he adds, should be interesting for airliner orders, and Jefferies expects Boeing to have a very good show. "It's the year of the Max," he says, with the revamped 737 likely to head up a full-year tally of 1,000 orders for Everett.
But ultimately, he says, no industry can sustain a book-to-build ratio of two-to-one. So despite well-founded airline demand for more and more fuel-efficient aircraft to meet growing Asian demand for travel while driving down fuel consumption, the next few years should see a return to annual orders totalling about 1,000 aircraft between the two major suppliers.
Source: Flight Daily News
