by Jeff Vedders

Continuing from the commercial aerospace trends I shared last month, this month I will focus on trends within the defense and space industry.

Defense Industry. As the U.S. is no longer in a cold war with the Soviet Union, there is no longer a need for the massive numbers of fighter jets, battle ships, and tanks that were required throughout the 1980s. The events of 9/11 also changed the future of warfare. Thus, the traditional methods of warfare are changing, and are having a significant impact on future military demand. Today, terrorists and other enemies of the U.S. realize that they will not be able to win a conventional war with the U.S. Instead the U.S.’s enemies are looking at alternative methods for attack, which include biological weapons and cyber warfare. As a result, the U.S. Defense Industry is focusing on homeland security defense initiatives and counter-terrorism strategies. Immediately after the events of September 11, defense spending increased substantially. However, for fiscal 2005 only a 3% growth in procurement and research, development, testing, and evaluation (RDTE&E) is expected due to strong political pressure to reduce the growing federal budget deficit. In the future, these trends, along with the government’s need to bolster Social Security and fund overseas peacekeeping initiatives, appear likely to keep defense spending down. Future government spending will likely be in the development and procurement of advanced electronics and software that enhance the capabilities of individual weapons systems. R&D is likely to be the benefactor of government spending.

Space Industry. The space industry is made up of two main segments: satellite manufacturing and rocket manufacturing/launch operations. Overall, the industry is highly cyclical. Demand for rocket manufacturing and launch operations is dependent on the health of the satellite-making industry. Satellites experienced tremendous growth throughout the 1990s due to the then forecasted demand for satellite-based telecommunications and broadband services. This demand never materialized; thus there is overcapacity in the satellite and rocket launch markets. Future demand for satellites is likely to come from the U.S. military, which is increasingly reliant on advanced networks for battlefield communications, weapons guidance, tracking, and reconnaissance.

Source: Standard and Poor’s Industry Surveys, “Aerospace and Defense,” Robert E. Friedman, April 15, 2004