By the end of the year, about 7,000 fewer employees will work for the state”™s largest defense manufacturer, United Technologies Corp., than at the start of 2012.
In light of military budget cuts and global economic uncertainty, officials have said the company is faced with severe, near-term financial challenges, which has led to layoffs, buyouts and employee attrition.
But as the defense sector continues to shrink, a new report suggests gains in the commercial aerospace sector might be enough to make up for losses in defense revenue.
Due to record production of commercial aircraft, the global aerospace and defense industry actually grew overall by 5.9 percent in 2012, according to a performance study by Deloitte L.L.P., a professional services company.
Commercial aircraft revenue increased 16.2 percent, or $38.4 billion, last year and growth projections predict similar results for the next several years, according to the report. Passenger travel is expected to increase over the next 20 years and several airlines, including new operators in developing countries, are looking to buy more fuel-efficient airplanes to reduce operating costs.
With rapid commercial aerospace growth, industry experts are predicting defense manufacturers will increase their focus on their commercial aerospace business units. And at UTC, which makes Pratt & Whitney jet engines in East Hartford and Sikorsky Aircraft Corp. helicopters in Stratford, the trend is obvious. Between the two companies, which both produce commercial and defense machinery, nearly 800 positions have been cut within the last two months. Yet revenue projections look bright as the companies restructure.
Year-over-year net sales for UTC Aerospace Systems increased 165 percent during the second quarter of 2013, according a July 23 earnings report. In contrast, net sales increased 5 percent at Pratt & Whitney and decreased 3 percent at Sikorsky.
“The commercial aerospace arena experienced almost astonishing revenue growth,” said Tom Captain, Deloitte”™s vice chairman and section leader for global aerospace and defense. “Companies in the area, whether strictly defense or military, need to go where the money is. They”™ll find that the market”™s natural direction will be in commercial aerospace.”
By the end of 2021, the military expects to have cut spending by $487 billion under the Budget Control Act of 2011. But as the aerospace industry ramps up, additional economies of scale may be assessable for both the aerospace and defense industries, Captain said. With additional cost cutting in anticipation of defense cuts, the overall financial performance of the companies are also expected to improve.
“The defense sector will work extraordinarily hard on cost structure to make equipment more affordable,” Captain said.
UTC officials declined to comment on recent trends in advance of their earnings report.
At General Dynamics however, Rob Doolittle, vice president of communications, said he wouldn”™t go as far to say gains in commercial aircraft were enough to make up for defense losses, as Deloitte claims.
“I don”™t think you can apply that global industry model across a specific company like ours,” Doolittle said. The company splits its business units into combat systems, marine systems and information technology systems.
In 2012, the Virginia-based aerospace and defense company lost $2 billion in defense revenue. Yet not all the company”™s business units related to defense lost revenue, or lost revenue at the same rates, Doolittle said.
The company”™s Groton-based Electric Boat, which manufactures submarines for the U.S. Navy, is doing very well, he said. The Navy continues to increase its submarine orders and is looking to develop a new class of ships, which Electric Boat anticipates a role in, Doolittle said.
Though General Dynamics is one of the five highest-grossing companies in the aerospace and defense industry, the company is also one of the hardest hit by military budget cuts. Doolittle said the company has experienced some increased sales related to commercial aircraft, but that the structure of the company was too complex to see a large, direct benefit from the growing sector.
