Wednesday, January 14, 2009

The cloudy crystal ball

In the current economic environment, trying to figure out what will happen to aerospace programs important to the Gulf Coast is difficult if not impossible, given all the variables. But two things to watch: EADS' decision to reduce investment expenses to conserve cash, and the NASA administrator's comment that the agency may have to cut back on contractors if funding remains flat. Both have implications for the Gulf Coast.

During an annual news conference this week in Newport, Wales, CEO Louis Gallois said the European Aeronautic Defense and Space Co. decided at the 11th hour to abandon plans to purchase an unnamed defense company in the United States. The reason: It wants to conserve cash so it can offer credit financing to airlines to ensure they honor contracts. Gallois said one way to conserve money is to reduce investment expenses, according to Reuters. Bloomberg reported EADS may also cut production. (Reuters, Bloomberg, BusinessWeek)

The purchase of U.S. companies is just one sign of EADS' commitment to become a "citizen" of the U.S. aerospace market. EADS for some time now has made it clear that it plans to compete against U.S. giant Boeing for a number of aircraft platforms – perhaps even Air Force One. The most high profile competition to date has been the Air Force aerial refueling tanker. EADS and partner Northrop Grumman won that contest 11 months ago, but Boeing's protest was upheld and the Pentagon decided to punt to the new administration. Still, EADS continued looking for potential purchases, such as in the communications and sensor field.

Over the past few months both sides of the tanker fight have indicated they'll continue to pursue the Air Force project. But in the current economy, things can change overnight. Consider what Gallois said in the Reuters story: "We were on the way to sending the check and we pulled out at the last minute." It’s the old don't-count-your-chickens-before-they-hatch.

For what it’s worth, this isn’t the first time EADS backed off a planned purchase. In 2007 it opted to abandon the acquisition of a U.S. military drones designer after a split on its board, according to Reuters. In this latest target, Gallois declined to name the company but said it had recently won a Pentagon contract. The price tage on the aborted deal was in the region of $1 billion.

This belt-tightening shouldn't surprise anybody. Airbus and rival Boeing both saw new aircraft business halve last year after a record 2007. Boeing announced just last week that it's going to cut 4,500 workers form its commercial aircraft sector. There will be a lot of interest when Boeing releases its financial results for the fourth quarter and the full year Jan. 28.

So with Boeing and Airbus facing tough times, what will this do to the tanker contest?

Both sides have invested a lot of money in pursuit of the tanker project, not only through spending related directly to the competition, but additional monies spent on the advertising campaigns designed to state their cases. How much more will they spend, given the very real possibility that the loser of the next battle will likely file a protest? Certainly $40 billion is a huge prize, and that's just the start. And a default win is something I doubt anybody wants.

Consider also that EADS' already has a significant investment in this region. It operates the American Eurocopter plant in Columbus, Miss., and has two operations in Mobile - the Airbus Engineering Center and the EADS CASA maintenance operation. EADS has proven it's intent on investing in this country, but the question now is one of timing. The current recession has to make a company think twice about where to place its cash.

Is a split tanker buy beginning to look like the most viable alternative? We'll have to see.

NASA, too, is worried about finances.

During a news conference Tuesday, departing NASA administrator Michael Griffin warned that NASA would have to lay off an unspecified number of contractors if Congress freezes the agency's spending. He said Congress' decision to hold NASA spending at the 2008 level of $17.3 billion – rather than the requested $17.6 billion – could trigger cutbacks. Griffin declined to specify the locations, but did tell the Houston Chronicle cuts would largely come from the Constellation Program. (Story)

Both Michoud Assembly Facility in New Orleans and Stennis Space Center in Mississippi are highly interested in any NASA budget issues. As with other NASA facilities, they are in a state of transition between the Space Shuttle program and Constellation – NASA's push to get astronauts back to the moon and beyond. And while gearing up for the change, they can't help but be aware of the variables. There's a chance the shuttle program will be extended, a move that would likely set back the time frame for Constellation, despite president-elect Barack Obama's formerly stated desire to speed up that program.

And then there's the issue that's being debated largely behind the scenes. The United Launch Alliance, a Boeing-Lockheed joint venture, favors shelving development of the Ares I to launch the Orion crew capsule in favor of using the Atlas V or the Delta IV rockets that have been used by the Pentagon to launch military satellites. (Story)

We'll keep you posted.

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