Aerospace suppliers are turning bullish on military contracts ahead of what many see as a surge in defense spending, despite the sector taking a backseat in recent years to the commercial aircraft industry.
In the proposed national budget, the Trump administration included a $54 billion hike in defense spending. For aerospace suppliers across West Michigan, an increase in defense spending comes as welcomed news, given the age of the existing military fleet and the order backlog for aircraft such as the F-35 Joint Strike Fighter.
“There’s a lot of age (in the fleet), certainly on the F-15 and F-16 and now the F-22,” said Tom Pykosz, president of Grand Rapids-based JedCo Inc., which manufactures exhaust components for engines powering a number of military aircraft.
“With the new program on the F-35, there’s a lot of catch-up work to be done,” he said. “Military aerospace, in particular, has been somewhat underfunded for quite a while. There are a lot of planes that need parts badly.”
In the coming months, JedCo expects a strong uptick in volume for the F-35 program — surpassing 100 planes per year.
JedCo’s outlook for military aircraft platforms echoes trends in the larger aerospace industry, said Gavin Brown, executive director of the Michigan Aerospace Manufacturing Association (MAMA).
Starting in 2010, many aerospace manufacturers switched their attention from defense to the commercial sector as global conflicts wound down and major airline manufacturers announced new aircraft, Brown said. He now expects that trend to reverse amid the proposed increase in defense spending.
“The emphasis on commercial will be less and the emphasis on procuring government contracts will grow — that will be a primary switch,” Brown said, noting that doesn’t mean the commercial sector will shrink.
“It’s not a cycle-down scenario on commercial,” he said. “It’s just the upside potential is no longer going to have dramatic growth. It’s going to sustain at current levels. Whereas because of the influx and attention to the F-35 program, new requirements for the F-18 and F-16 programs around the world, you’re going to see them now focus on selling those domestically and internationally.”
Woodward Inc., a global manufacturer of aerospace components based in Fort Collins, Colo. that operates a manufacturing facility in Zeeland, also pursues opportunities in the military sector, although the company declined to speak in detail about its defense programs.
The company manufactures fuel injector nozzles and components for afterburner applications at its Zeeland facility, where it employs approximately 265 workers.
“We are involved in military programs that are growing and we’re quoting new military programs that we would consider growing,” said Joe Patterson, vice president and general manager of Woodward’s combustion group in Zeeland.
A STRONG COMMERCIAL SECTOR
Despite the bullishness on the defense side of the aerospace industry, many companies continue to capitalize on numerous opportunities in the commercial sector, primarily driven by attempts to improve fuel efficiency.
The demand for single-aisle aircraft such as the Boeing 737 and Airbus A320 has grown steadily in past years as commercial airlines look to reduce fuel consumption, which can account for the majority of the cost of operating an aircraft.
A growing emphasis on fuel efficiency has led JedCo to diversify into the commercial sector even though the bulk of its business has traditionally been on the military side of the industry.
“Commercial aerospace is growing leaps and bounds,” Pykosz said. “Last year, the industry said there was a 12,000-plane backlog. If you figure there’s two and a half engines on each plane, that’s a lot of engines. The newer engines are a lot more fuel efficient and a lot quieter. Everyone wants them, so they have a huge backlog for them.”
JedCo generated approximately $27 million in sales last year and expects to reach $40 million by 2019 as it enters the commercial sector and as its military aircraft business continues to grow. The company employs 180 people and plans to hire nearly 30 more workers in the next year.
Likewise, Woodward also predicts growth from the commercial side of its business, particularly for its Zeeland facility, which supplies roughly 35 percent of new A320 aircraft production. Patterson said production at its facility for the A320 likely will grow as production volumes for the plane are at a third of the level they will be during its peak in coming years.
Outside of jet engines, Zeeland-based Plascore Inc. has identified a growing market for retrofitting the interiors of older commercial aircraft. The company, which employs 280 workers and generates approximately $100 million in annual sales, manufactures honeycomb structures used to produce the “plywood of the aerospace industry,” said Joe Englin, marketing development manager for aerospace at Plascore.
Plascore’s honeycomb materials are bonded into sheets similar to plywood that are used to produce body panels, floors and structures that support interior overhead compartments in aircraft.
“As the fleet ages, the original interior that was designed for the aircraft is no longer appealing and you’ll see a lot of airlines replace their interiors with more modern interiors even though they’re flying 20- or 30-year-old aircraft,” Englin said. “We see a lot of that activity come through with airlines that are remodeling interiors and that’s a good business for us.”
DRIVING OUT COSTS
Even though the aerospace industry is positioned to grow, Brown of MAMA cautions manufacturers to maintain vigilance when it comes to keeping costs low, particularly as a variety of programs face price reductions and production cuts.
Lockheed Martin recently announced it would drop the price of a recent order of F-35s from approximately $115 million per plane to $85 million per plane, in light of mounting criticism for the program’s cost. On the commercial side, both Airbus and Boeing announced in late 2016 they would cut production for their larger A380 and 777 aircraft, respectively.
For aerospace suppliers, these adjustments send “jitters” through the supply chain and can put even more pressure on them to drive out cost, Brown said.
“What they’re now finding out is that as production rates go down, they don’t want to get stuck with an inventory of parts,” Brown said. “You’re going to see a slowdown in production rates on certain platform models.”
Since most components in the aerospace industry are pre-engineered by the aircraft manufacturers, it leaves little room for engineering changes by suppliers to cut costs. To comply with customers’ pricing demands, suppliers typically rely on strategies to increase efficiencies on their shop floors.
“There is a tremendous amount of price pressure on componentry,” JedCo’s Pykosz said. “It’s not as aggressive as automotive, but it’s aggressive. There has been, over the last two years, a lot of cost reduction employed into the engine and I’m sure it will continue.”
Outside of internal improvements, Brown expects more companies to work together and collaborate to improve efficiencies.
“You’re going to see not just an emphasis on suppliers taking costs out, but a focus on suppliers working more collaboratively to take it out through efficiencies rather than just suppliers having to give up profit margin,” he said. “It’s a different way than they’ve had to work before.”