Air Defence Spending Gains Force

22 December 2009 (Last Updated December 22nd, 2009 18:30)

War in Afghanistan and booming export markets should ensure that military contractors enjoy another bumper year in 2010. Anthony Beachey reports.

Air Defence Spending Gains Force

Military suppliers have enjoyed boom conditions over the past few years with 2010 set to be no different. The surge in US defence spending, which accounts for well over half of all global military expenditure, has boosted aerospace defence contractors over the past decade. Rocketing US defence spending in turn reflects the impact of the wars in Iraq and Afghanistan.

Teal Group vice-president of analysis Richard Aboulafia says that 2010 should be another good year with the global economic downturn having little impact on military aerospace suppliers. "Historically, there is no connection between the economic cycle and defence spending. Indeed, the only correlation you can find is between higher resource prices and defence spending. Surprisingly, in light of the global slowdown, the price of commodities has held up well," he says.

In addition, recessions tend to have a tiered impact on the aerospace sector. "Business jets are the first area to be affected, followed by jetliners, while defence is the last area to be hit and, if the global economy makes a robust recovery within a few years, military suppliers may escape with minimal damage," Aboulafia says.

Here come the helicopters

Two factors are likely to influence the market for military aircraft in 2010, the booming demand for helicopters, reflecting the nature of the wars in Afghanistan and Iraq, and the US military's disengagement from Iraq.

"The surge in US defence spending has boosted aerospace defence contractors over the past decade."

"Helicopters are the fastest-growing sector of the global military aerospace market at the moment. Indeed, they are the brightest spot in the entire aerospace business," Aboulafia says. Helicopters fleets have worn out faster than expected because of the intensity of combat operations in Iraq and Afghanistan and this is leading to massive demand for maintenance and upgrades, as well as new builds.

The exit from Iraq will undoubtedly have an impact on defence spending in the US. Although the basic defence budget is not under threat, supplemental spending to pay for combat operations in Iraq has been a key driver of the increased defence spending that has taken place in recent years.

President Barack Obama has pledged to fund future wars out of the annual budget, and while the recently announced troop surge in Afghanistan will have an impact on defence spending in 2010, the war in that country will prove far less costly than the military operation in Iraq, according to Aboulafia.

While overall US defence expenditure may fall in 2010, spending in other areas of the world is likely to accelerate, partly as a result of the aforementioned link between the price of resources and military spending. Air force contractors in developed markets will therefore increasingly turn their attention to regions such as the Middle East, where oil revenues remain buoyant, and Latin America, which commodities from natural gas to copper.

Crucial contracts

A number of major new developments in terms of projects and contracts are likely to occur in 2010. The year will certainly be a crucial one for the joint strike fighter. Lockheed Martin said in early December 2009 that the single-engine fighter, the Pentagon's costliest acquisition programme, was exceeding expectations in early test flights.

At the time Lockheed Martin executive vice-president of the aeronautics business unit Ralph Heath said: "We have never seen, ever, success in terms of avionics stability and maturity this early in a programme."

"The exit from Iraq will undoubtedly have an impact on defence spending."

But the test-flight programme is behind schedule and, in November, the Pentagon unveiled a number of initiatives designed to speed the programme's development. Following the decision to cancel additional production of the F-22, the Obama administration is banking on the F-35 to modernise the US fighter fleet. The Pentagon wants to buy up to 2,458 of the fighters to replace F-16s, A-10s and AV-8B Harrier aircraft. Foreign partners plan to buy around a further 650 jets.

2010 could also prove to be critical for the Airbus A400M military transport jet, which finally made its maiden flight in December 2009. The aircraft is now four years behind schedule and some of the European governments involved in its development are becoming increasingly impatient with the project.

Failure to make significant progress in 2010 could see the project abandoned. In the US, the Globemaster military transport could remain in production 'indefinitely', according to Aboulafia, given the government's failure to come up with any plans for a replacement.

Buoyant exports

In 2010, India is likely to announce an order for 126 fighter aircraft that could prove to be the biggest export fighter contract in history. India could buy the F-16 and F/A-18E/F from the US but it is also considering the Dassault Rafale, Saab Gripen, Typhoon and MiG-35.

The fact that Washington is a serious contender for a major military export order from India reveals how much the world has changed. For decades, New Delhi avoided buying US defence products. Conversely, a few years back it would have been unthinkable that Japan would buy a frontline combat aircraft from a non-US supplier.

"Rocketing US defence spending reflects the impact of the wars in Iraq and Afghanistan."

The Eurofighter Typhoon consortium is however also aggressively courting Tokyo and is hoping to win an order for around 40 aircraft in 2010. Japan is also considering the F-35.

In early 2010, Brazil will announce the winner of a multibillion-dollar contract to build 36 jet fighters. The contenders are the Dassault Rafale, Saab's Gripen and the F/A-18 Super Hornet from Boeing. Meanwhile, Saudi Arabia and the US are discussing the purchase of a range of items, including the F-15s and Patriot air / missile defence equipment. Saudi Arabia may still opt for the Eurofighter over the F-15, however.

Washington's poor reputation for releasing technology could prove a stumbling block to its export sales in 2010. Brazilian Defence Minister Nelson Jobim raised the issue in the midst of the battle to secure the fighter contract. Meanwhile, British defence chiefs were reportedly 'furious' over the US's refusal to share sensitive software codes for the F-35 fighter jet, which is being developed with the UK and a number of other countries.

It is clear that before the end of 2010 the majority of these wranglings will need to be resolved before more money is pledged to no-go ventures. The direction which governments will turn, however, is still anyone's guess.