A SPECIAL REPORT ON THE SOUTHERN CALIFORNIA ECONOMY : THE SOUTHLAND’S INDUSTRIES : Aerospace Firms Holding Altitude Despite Cuts

The hot-forging presses at Aluminum Precision Products in Santa Ana are running two 10-hour shifts a day, sometimes six days a week, turning out structural parts that go into virtually every aircraft made in the United States.

The small aerospace company, one of only a handful of precision forges in the industry, is adding new presses and expanding its work force of 270 to meet increasing demand for commercial and military parts.

What ever happened to the aerospace industry downturn that has been so widely heralded as the military buildup undertaken early in the Reagan Administration fades into memory?

“We don’t see any cuts,” said Mike Spinelli, Aluminum Precision’s general manager.

Few Cutbacks

So far, few large or small aerospace companies have seen the cutbacks, despite nearly two years of what appears to be declining defense spending that by some estimates has cut weapons procurement budgets by 15% to 18% on an inflation adjusted basis.

Big cuts in Pentagon spending may be coming, but they have not yet worked their way through the pipeline, experts say. Just as it took the defense buildup about two years to reach the industry after its inception, the downturn is taking an equal amount of time to hit local contractors.

But when it does, “the impact on procurement will be severe,” said Paul Nisbet, aerospace analyst at Prudential-Bache Securities. “I don’t think this is well appreciated.”

Nisbet expects Congress to provide $270 billion in Defense Department budget authority for fiscal 1988, which began Oct. 1, about $10 billion to $15 billion less than many analysts have been estimating recently.

At $270 billion, the Pentagon would be hard-pressed to expand or even continue some existing programs. Under its fiscal 1987 budget, the Pentagon received $283 billion, which was well below Administration requests.

“Unless we get a big increase in budget authority at some point, activity will drop severely,” Nisbet said. “A dozen and a half programs need hundreds of millions of dollars in increases.”

That’s because the Reagan Administration defense buildup was front-loaded with lots of new programs that now need big budgets to begin production. Such locally important programs as the Advanced Tactical Fighter, C-17 transport, Advanced Technology Bomber, Advanced Tactical Aircraft and the T-45 trainer all need to make a transition from multimillion- to multibillion-dollar funding in the near future.

Even though Pentagon budgets have shrunk, no major programs have been scuttled. But that could change.

The budget authority for weapons procurement voted by Congress has dropped to $76 billion in 1987 from $93 billion in fiscal 1985 (stated in constant 1984 dollars), according to an analysis by McDonnell Douglas.

But budget authority is not what buys weapons, as most students of military spending know. The widely quoted budget authority figure represents the future financial commitments that Congress allows the Pentagon to make during a fiscal year.

The funds that the Pentagon actually spends are called outlays, and that story is much different. While budget authority dropped precipitously in the past two years, outlays--based on previous commitments--actually increased to $73.4 billion in fiscal 1987 from $67.9 billion in fiscal 1985 (in constant 1984 dollars). Moreover, outlays expected in fiscal 1988 are not likely to drop, even though budget authority for future spending will be sharply reduced.

Commercial Boom

Analysts now believe that several factors could mitigate the effects of the expected downturn in defense spending.

The commercial aerospace industry is booming, thanks to bulging backlogs at Boeing and McDonnell Douglas. The Douglas Aircraft plant in Long Beach has orders for 443 MD-80 jetliners and derivatives, more than the entire number of MD-80s it has delivered so far.

Boeing, meanwhile, holds an estimated backlog of $31 billion in commercial aircraft orders, and California is the leading recipient of Boeing subcontracts. Northrop, for example, builds the Boeing 747 fuselage in Hawthorne.

Another mitigating factor is the Southern California aerospace industry’s recent success in winning a larger number of government contracts. Historically, California has received about 20% to 22% of Defense Department spending. Recently, that has increased; that should insulate the area from major distress if those new programs survive the budget ax.

For instance, the C-17 cargo jet, the Advanced Technology Bomber and the Advanced Tactical Fighter are three giant programs that are guaranteed to be located in the Los Angeles area.

California will also benefit substantially from the large proportion of its industry that does defense electronics work. According to a recent 10-year forecast by the Electronics Industries Assn., defense electronics will continue to take a larger percentage of the defense budget. Such companies as Hughes Aircraft, TRW, Litton Industries, Rockwell International and Lockheed are all major players in defense electronics.

The Strategic Defense Initiative, or “Star Wars,” has become a major source of activity in California’s defense electronics industry. The top five SDI contractors are based in California.

“Electronics should do well, and the main reason for that is that when you have a budget crunch, you tend to lengthen the life of existing (ships and airplanes by updating) them with new electronics,” said James Lee, manager of market analysis at Hughes Aircraft. “If the total budget goes down and electronics content goes up, we think the outlook for defense electronics will be basically flat.”

Regardless of defense cutbacks, other substantial questions hang over the Southern California aerospace industry. The most significant may be whether companies will be forced to move operations elsewhere because of rising costs and a shortage of expansion space here.

Northrop, for example, recently located a new missile production facility in Georgia. McDonnell Douglas built a new aircraft sub-assembly plant in Utah and a new rocket assembly plant in Colorado. Hughes Aircraft has shifted some of its work to Florida.

“We don’t want to get too much bigger than we are here,” Douglas Aircraft President William T. Gross said in a recent interview. “We need to meet our development needs. The amount of expansion we want to do in Southern California is limited. We have great environmental problems. And this is not the lowest labor rate area in the country.”

What’s more, recent growth has left the company bursting at the seams at its Long Beach Airport facility, with little room to add new office space and parking lots.

Similarly, many defense firms are growing faster in their California locations than in their remote locations that were established as growth centers. In part, that is because the technical talent pool remains largely in Southern California, and state officials have been making efforts to address some of concerns about rising costs and regulations, observers say.

A broader threat for the industry may be the effect of recent defense industry reforms. Cancellation of programs could be more devastating than in the past because some contractors were forced to pay more costs that would be recouped during production. The government, for example, always paid for tools, but managed to get some companies to agree to a 50-50 split in some recent programs with no cancellation provisions in the contract.

“The commitments that the industry has made to keep these programs running in an era of budget cuts could come home to roost,” Nisbet said. “We would have big writeoffs and financially a very weak industry afterward.”