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:: August 2003 Letter ::

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Dear Fellow Industry Org Chart Inhabitants,

Every day I open my e-mail, and it’s pretty much the same thing. Two or three angry clients, one or two angry PR types (more “disappointed” than “angry”), and a letter from a junior cabinet minister in a country I’ve never heard of asking if I want to help extract some frozen government funds and politely inquiring about my checking account details. But to this unpleasant electronic mix a new arrival has been recently added—a press release from some state government official, explaining why Boeing should locate the 7E7 production line in his or her state (and inquiring about my checking account details).

A bunch of states are keen on 7E7 work. No surprise there. But it illustrates a big theme in this industry: Politicians try to cater to blue-collar workers, which has a huge effect on what gets built, and where it gets built. Why? Manufacturing, the one segment of the economy where government actually can play a big role, is hemorrhaging jobs. Manufacturing workers can yield considerable political power in aerospace. Given the state of the economy, this trend is getting worse.

Government influence in aerospace is tough to quantify, but money is a good start. From defense procurement (over $77 billion requested for FY 2005) to billions in airline aid funds to Coast Guard helicopters, at least half the manufacturing jobs in aerospace are attributable to government cash (including export orders). The indirect effects of tax breaks and infrastructure improvements—what Boeing is soliciting for the 7E7 line—are substantial too.

Meanwhile, the blue-collar guys are nervous—unless they want to retrain (an expensive proposition) they face a tough time getting similar, well-paid jobs elsewhere. Even with the current jobless recovery, service economy types—engineers, executives, whatever—face a better jobs outlook and greater options if they are laid off. Because the blue-collar guys are organized into unions, they wield power, often voting in blocks. Their voting habits tend to revolve around their biggest concern—jobs. So politicians cater to them.

Politicians are nervous too, because they’re not holding up their end of the bargain. The US lost 71,000 manufacturing jobs in July, and some 2.7 million manufacturing jobs have been lost since the slide began, in August 2000. Manufacturing sector unemployment is above 7%, a full point higher than the broader index. You can see this in our humble industry. According to the good people at the Aerospace Industries Association, aerospace manufacturing employment is falling from 311,000 in 1998 to an anticipated 209,000 in 2003. We’ve shed a third of our manufacturing workforce in five years. In this environment, a 7E7 production line is an attractive plum, for politicians and their union member constituents. In fact, you’ll soon see more loopy government efforts to secure manufacturing jobs. I guarantee it.

It’s easy to deride Congress’s defense budget plus-ups as mere corporate pork (I can’t dismiss the remote possibility that one of them is actually doing it for “national security”). But the alternative explanation that they’re seeking more manufacturing jobs for their district is far more likely. Congressmen are also more likely to favor manufacturing funding (the Procurement account) over research for new ideas (this explains the death of Transformation). Plus-ups usually mean extra Black Hawks, not extra money for radar research.

It isn’t just defense plus-ups and 7E7 lobbying. Politicians do anything they can to help their blue-collar pals, including all kinds of schemes, study groups, and outright insane gibberish, like the Buy American Act. It also adds a different dimension to arms bids. For example, when the UK was looking for a new maritime patrol plane, it didn’t matter that BAE’s Nimrod used imported high-value US electronics (resulting in few high-tech jobs for Britain). The important thing was that Nimrod’s metal bending work was done in politically sensitive UK constituencies. That factor carried the day, even though the competing Lockheed P-3 used more high-tech UK equipment.

Similarly, the current UK carrier contract debate (BAE versus Thales) is moot. The only thing that matters is that Swan Hunter gets 35-40% of the contract, resulting in blue-collar shipyard jobs. (I obtained an exclusive interview with Swan Hunter’s website; it told me “the carriers could guarantee years of work for the region's troubled manufacturing sector.”)

As a corollary, this all goes to prove, once and for all, that offsets are incredibly, mind-bogglingly stupid. Nine times out of ten, they don’t involve technology transfer. Instead, they involve the transfer of politically popular metal bending jobs, an expensive form of welfare, with the receiving country’s taxpayer footing the bill. This could complicate Lockheed Martin’s efforts to distribute JSF work; they might have made the common mistake that countries actually want skills and technology. In reality, much of the time they are looking for JSF manufacturing jobs.

And what of the new Boeing plane? If it transitions from the DreamLiner to the RealityLiner, Boeing will probably take those assembly site Best And Final Offers to Olympia, Washington, and use them to extract concessions (“You want to dump toxic waste in the governor’s mansion? Sure!”). After all, think of the situation from a Washington State politician’s viewpoint. He can give Boeing what it wants, or he can be immortalized by a statue, erected in some pigeon-intensive area, with a plaque that says “This Idiot Lost Boeing.” (I obtained an exclusive interview with Boeing’s website; it told me “The final assembly location will be announced by the end of the year.”)

As for those other state government folks who sent those e-mails and submitted 7E7 line bids, they’ll get a form letter from Boeing, thanking them for playing their little game. If they’re lucky, some local factory may get to build those “Vacant/Occupied” signs outside each 7E7 lavatory.

August’s aircraft reports include an update of the Commercial Jet Transports Overview, a few Russian planes (An-38, Il-96, Tu-204), the 767, F-117, AS.350, the SJ30, and the Military Aircraft Inventory appendix. September will bring a Military Transports Overview update, plus updates of the C-17, F/A-22, ATR, Tiger, and others. Enjoy the end of summer.

Yours, ‘til Market Analysts Start A Union,

Richard Aboulafia

 

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