We have previously posted articles discussing the near-term future of the aerospace/defense industry.  We have reported on immediate US Department of Defense (DOD) funding shortfalls.  We have discussed a reported downturn in the global A&D marketplace.  And we have noted that A&D corporate leadership may not handle workforce reductions in the same manner as it did in the previous market downturn. To summarize, times are going to be tough, but there is some reason to think that many leadership teams remember mistakes made from the last major workforce restructuring, and will do better this time around. But the A&D marketplace is dynamic and we are constantly searching tea leaves for new insight and information regarding how businesses will be affected by changes to the overall environment.

On December 9, 2009 Aerospace & Defense News (ASDNews) published a story entitled, “A New Era for the US Defense Market” that forecasts a near-term spending plateau, followed by a “steady decline” in the forecasted future.  Further, while the Pentagon has asked for a 2 percent increase real growth to its “regular” budget, the Obama Administration has indicated that its initial plans call for spending to remain “essentially flat.” The ASDNews story is based on a new report from Forecast International that gives a more detailed projection of the industry’s near-term future.

And while current plans call for the current Iraq force drawdown to result in a complete withdrawal of US forces by December 31, 2011, President Obama announced on December 1, 2009 that he is sending an additional 30,000 troops to Afghanistan.  With troops (and presumably support contractors) withdrawing from Iraq but ramping up in Afghanistan, one might think the two efforts would wash, but that assumption in not correct, according to the Forecast International report, as well as this article by the Spokane Examiner, which compares and contrasts the two “surge” strategies.

According to the Forecast International report, “"Redeploying U.S. assets in Iraq will be a complex and costly process, and the need to repair or replace equipment damaged or lost in theater will only add to the near-term investment. … as combat operations wind down and troops leave Iraq by the thousands, the overall financial burden on the U.S. will slowly begin to ease.” Given the current U.S. economic situation, however, as well as the continued economic pressure of Medicare and other entitlement programs on the budget, the easing is not expected to result in more funds available for non-combat defense activities.

Meanwhile, the DOD’s 2010 Quadrennial Defense Review (QDR) is almost complete and will be given to Congress in early 2010.  The QDR is a legislatively mandated review of DOD’s overall strategy and threat prioritization.  As such, its results will drive DOD’s needs assessments, budget requests, and program funding.  According to the DOD’s QDR fact sheet, “Key security challenges include violent extremist movements, the spread of weapons of mass destruction, rising powers with sophisticated weapons, failed or failing states, and increasing encroachment across the global commons (air, sea, space, cyberspace).” Thus, even with a flat or declining budget, programs may be deferred, restructured, or even terminated based on the results of the QDR.

According to the Forecast International report, "Complicating the entire matter is an acquisition system that is often plagued by severe cost growth and schedule delays."  The ASDNews article concludes that, “while the acquisition system as a whole is not broken, the fact that many of the Pentagon's most important - and costly - programs continue to face the same challenges year after year only strengthens the impetus for change.” This, of course, may be our most recurring theme in our postings:  programs that fail to execute well will be put on the chopping block, while those that do meet cost, schedule and performance/quality objectives will be spared.

To summarize, a consensus is emerging that the U.S. A&D industry is entering another of its cyclical downturns.  The growth of the past eight years—fueled by the response to the 9/11 terrorist attacks and the resulting “global war on terror”—is abating.  Funding will be in short supply, and will be given to the programs that are the best fit with the QDR strategic needs assessment.  Moreover, programs that struggle with cost growth or schedule will become fodder for those that succeed in that area.