Aerospace suppliers brace for defense spending cuts
The wars in Iraq and Afghanistan have been good for Frank Amador Jr.'s business, a small Buena Park machine shop where workers make aluminum parts for the B-1 and B-2 bombers.
Sales have tripled since the war began, to $8 million a year. The payroll has doubled to 28 workers.
But now, after one of the biggest military buildups in decades, Amador is among the thousands of aerospace suppliers across Southern California bracing for a downturn, a slide that could have gut-wrenching consequences for an economy struggling to recover.
“It won’t be long before we’re all scrambling for business,” said Amador, who has been through a few boom-and-bust cycles over the last three decades. “I’ve seen this before. There’s a long road ahead. I just hope we can hold on.”
Aerospace has been one of the few bright spots in the region’s dismal economy, offering high-wage engineering, manufacturing and administrative jobs at a time when construction, real estate and banking work has grown scarce.
Nearly 5,500 aerospace suppliers — many with a handful of workers — collectively employ more than 130,000 people in California. Most of these small shops depend on subcontracts from giant defense contractors, which have announced a wave of job cuts in recent weeks, citing expectations of a protracted contraction of Pentagon spending.
Northrop Grumman Corp., the nation’s third-largest defense contractor and one of the largest private employers in the region, said last week that it would eliminate 500 jobs in its aerospace division, with most of the cuts expected to hit its sprawling facilities in El Segundo and Redondo Beach. Also last week, Raytheon Co. issued pink slips to about 130 employees in its Space and Airborne Systems division in El Segundo.
Boeing Co., the second-largest defense contractor, plans to trim its military aircraft business and cut workers, starting with 10% of the group’s executives. Boeing has more than 20,000 workers in Southern California at sprawling facilities in places like Seal Beach, El Segundo and Huntington Beach.
Top-ranked Lockheed Martin Corp., which operates its famed Skunk Works research facility in Palmdale, said last month that about 25% of its executives had opted for a voluntary retirement program designed to cut costs. More than 600 vice presidents and directors applied for the program.
“Eventually, these cuts will work their way down the supply chain,” said James McAleese, a lawyer in McLean, Va., who specializes in military contracts. “Prime contractors will squeeze their suppliers to bring down their costs.”
Paul H. Nisbet, a defense analyst who has been following the aerospace industry since the 1970s, expects that many small suppliers will be forced to go out of business, merge with rivals or cut employees to survive.
That’s what happened after the end of the Cold War in the early 1990s, in a downturn that fundamentally altered the defense industry.
The last time defense spending plunged, from 1989 to 1994, the amount that the Pentagon budgeted for research and buying weapons plummeted 20%. During that period, the U.S. aerospace industry job base shrank 25% nationwide.
California saw its aerospace industry employment drop 40%, the bulk of that in the Southland, as a quarter of the local defense industry suppliers went out of business, said Jack Kyser, an economist with the Southern California Assn. of Governments.
Those that survived cut back on workers, slashed employees’ hours or got into a different line of business altogether, Kyser said. Smaller firms were hardest hit because they tend to manufacture only a handful of products and for a small number of customers.
“We’re at an inflection point in the aerospace industry,” he said. “We have our fingers crossed that we don’t see cutbacks as we did before. But there are already indications that jobs are going to be cut.”
Pentagon officials confirmed that spending would slow, although they said this downturn would not be as severe as the last one.
“This is not the 1990s,” Ashton Carter, the Pentagon’s chief weapons buyer, said during a media conference last month. “But neither is it the 2000s, when we had double-digit year-on-year growth and we could always reach for more money.”
Citing the end of combat operations in Iraq and the rising federal deficit, Defense Secretary Robert Gates said he is looking to trim $100 billion from the Pentagon budget over the next five years.
“The golden era of aerospace has passed,” said Tom Captain, principal of Deloitte’s aerospace and defense consulting practice. “There is now a siren call for businesses to transfer from a hardware-based machine shop to a software-based technologically advanced firm.”
That’s because the Pentagon is expected to invest more in high-tech systems, such as drones and cyber-security.
Indeed, San Diego drone builder General Atomics Aeronautical Inc. will hold a job fair Saturday. It is hiring up to 60 engineers, technicians and machinists a month.
But overall, most expect a belt-tightening, and that has some suppliers looking for new ways to make money.
Southern California Braiding Co. in Bell Gardens has been making electrical wiring for aircraft since 1974. But recently it created a consulting school to teach other suppliers how to deal with the impending downturn, including ways to diversify and streamline their businesses.
“Suppliers are going to be challenged, no question about it,” Craig Pfefferman, president and chief operating officer, said. “We’re showing them what paths they can take to stay relevant.”
Other suppliers said they were worried about the push from their customers to cut prices.
Diane Williams, president and chief executive at Precision Tube Bending in Santa Fe Springs, is fearful that the larger companies she supplies, like Boeing and Lockheed, will ask her to be “more affordable.”
If that happens, she may have to lay off some people at her small, 80-employee fabrication shop, which makes metal tubing that is used for cooling jet engines. The family-owned business was started by Williams’ father in 1957.
“We’re hoping that we can weather the storm,” she said. “We just need to find some work.”
Amador’s company, APV Manufacturing & Engineering Co., is hoping to become a supplier on Lockheed’s F-35 fighter jet program. The program has yet to hit full production, but it’s about five years behind schedule and billions of dollars over budget — precisely the type of costly program Gates is looking to trim.
Amador has survived cuts before, albeit barely. His company filed for Chapter 11 bankruptcy reorganization the last time the government pulled back funding for weapons systems at Cold War’s end.
“A lot of good businesses went belly up in those days,” Amador said. “We survived before. Hopefully, we’ll do it again.”