Small Firms in a Struggle to Stay Aloft
The factory floor at LeFiell Manufacturing Co. in Santa Fe Springs can be a lonely place.
On a recent afternoon a LeFiell employee rotated between three large machines to forge and grind a titanium rod for a Boeing jetliner, tackling the work once done by three people. The machines grew intermittently quiet, and the dull hum of a nearby freeway often was louder than the noise being generated inside.
Amid one of the worst slumps to hit the commercial aircraft business in decades, LeFiell has cut its work force by nearly half to 135 employees and slashed production to two-thirds capacity. Its executives worry daily about having to make even more reductions if a recovery doesn’t come soon.
“We really don’t have a long-term strategy,” said LeFiell Chairman George Ray, a 41-year company veteran, as he led a tour of the near-empty facility. “From day to day, our strategic plan is basically about survival.”
Surviving is the operative word for thousands of small local aerospace suppliers that have seen the commercial aircraft business crumble since last year’s terrorist attacks.
The airline industry, facing a $7-billion loss this year amid a travel slump, has taken a record number of planes out of service and new orders largely have disappeared.
Aircraft makers, such as Boeing Co. and Airbus, in turn have shed workers by the thousands.
But hardest hit in many ways have been the smaller parts suppliers -- those with fewer than 500 employees -- because they tend to make just a handful of products and rely on only a few customers.
“Half a year ago, people said this was similar or a little less severe than other downturns. But now it may turn out to be more severe than anything we had before,” said Adam Pilarski, former chief financial officer for McDonnell Douglas Co. (now a part of Boeing) and a director at Avitas Inc., an aviation research firm.
“It’s not a pretty picture out there.”
There is little doubt that Boeing and its larger parts suppliers, with their broader mix of products, will weather the downturn, analysts say. But the future is less certain for the smaller firms -- a situation that could have a noticeable impact on the regional economy.
Southern California is home to more small aerospace suppliers than any other place in the world. All told California has 26,000 aerospace firms -- a vast majority of them in the Southland -- that collectively employ nearly 300,000 workers, more than any other state.
To be sure, companies that are heavily focused on defense-related work are doing just fine. And with the specter of war in Iraq, the Pentagon budget is increasing 14% this fiscal year, marking the biggest jump in two decades.
So LeFiell and other parts suppliers are turning to a strategy used by defense contractors in the early 1990s when a dramatic slump in Pentagon spending threatened to shutter their production lines.
One-quarter of local defense contractors went out of business from 1990 to 1994, and those that hung on did so by slashing their work forces, increasing productivity and expanding into the commercial aerospace market.
This time, aerospace suppliers are repeating the first two steps, but they’ve turned the third on its head: They are desperately trying to land more defense work to offset the slump on the commercial side.
Little Optimism
Boeing -- LeFiell’s biggest customer -- said last month that it doesn’t expect a recovery in new jet orders until 2004. But it might be three or four more years before orders really pick up for companies such as LeFiell, because the Chicago aerospace giant first will look to exhaust its parts inventory.
LeFiell has long supplied new and replacement engine struts, shafts and braces for Boeing 737, 767 and 777 jetliners.
This year, LeFiell’s revenue is expected to slide to about $20 million, down from $33 million two years ago, with about half of its business from commercial orders.
Adapting to a changing market is nothing new for LeFiell. When the company opened in the 1930s, it was making metal conveyors for the meat packing industry. It turned to manufacturing high-tech rocket engine parts and missile cases during the defense boom of the 1950s and ‘60s.
In the current downturn, LeFiell engineers are hoping to use their skills at turning out slender, straw-like fuel tubes for rocket engines to expand into whole new markets.
Among them: medical devices and perhaps even artificial organs. But above all, the company is aggressively going after more military work, bidding on parts contracts for missiles and F-15 jets, hoping to double its defense revenue to about 30% next year.
A similar strategy is underway in Chatsworth at Sensor Systems Inc., which manufactures aircraft antennas for Boeing and other aircraft makers. Until the terrorist attack, about 80% of Sensor’s revenue came from antenna sales for passenger airplanes.
Responding to the slump, the family-owned company has cut its work force to 200, down from 265 at the start of the year. Meanwhile, Sensor has made a significant push to sell antennas to the Pentagon and overseas customers.
It also created a marketing department for the first time in its 41-year history and doubled its foreign sales staff to six. In the past, Sensor’s primary owner relied on his long-standing relationship with a few customers to sell his products.
Sensor also has bolstered its research activities, hiring engineers with doctorates to develop military versions of its antennas, notably for the global positioning system. GPS navigation signals can help fighter and bomber pilots figure out where they are, but the system has been vulnerable to jamming by adversaries.
Sensor is trying to land contracts to provide GPS antennas with special encryption technology. At the moment, defense contracts account for about 25% of Sensor’s sales, but the company hopes that will rise to 35% next year.
“It’s slowly chugging along,” said Frank Webb, Sensor’s vice president for operations. “We’ve been getting a lot of quotes, proposals and have been sending out a lot of samples. If our expectations come to pass, it will bring us back or perhaps even exceed what we were doing last year.”
Still, for LeFiell and other firms even a boost in their defense businesses may not be enough the fill the gap.
“Defense will be up a little, but that’s not expected to offset the loss on the commercial side,” Ray said. “There are just not enough new programs out there.”
Tough Times
LeFiell is owned by its workers under an employee stock ownership plan, and management has persuaded the staff to do all it can to help the company endure. Employees have volunteered to work only four days a week, and they’ve also agreed to a pay cut, saving 35 jobs.
“They basically wanted to share the pain,” said Venkat Raman, LeFiell’s president and chief financial officer.
At the same time, the number of LeFiell executives was cut to three from seven, and those remaining are looking at a possible drop in pay.
The company has pushed myriad other money-saving measures, as well, including retraining the remaining workers to do the jobs of those who have been laid off. So instead of one person overseeing three steps to make jet engine shafts, that employee may now handle seven steps, encompassing the entire manufacturing process.
“It’s going to take some new thinking to figure out how to survive,” said the 62-year-old Ray, who has lost count of all the aviation boom-and-bust cycles he has seen. “We’ve been through this before and I think we’ll be able to get through it again.”
