Dear Fellow Wannabe Travel Writers,
The best travel story I’ve ever heard came from my friend Dan, who spent six months on a tropical island. The island had palm trees, beaches, and a pizza restaurant. One day, he ordered a medium pizza, which was cut into four slices. A week later, he returned with a friend and ordered a large pizza. He was served exactly the same pizza, but cut into eight slices. Complaints got him nowhere. “The best thing about it” Dan reported, “was that they were genuinely embarrassed for me, because I didn’t understand.”
“Oh well.” Dan concluded, “Far be it for me to corrupt their charming native ways with my cold Western logic.” Yet before you make fun of these islanders, consider the sanity of Europe’s defense ministries. As I wandered the chalets of Farnborough this year, it suddenly struck me that this was exactly what they’ve been doing. Since the Cold War ended they launched new program on top of new program while keeping defense budgets static. Over the past 20 years they’ve started production or development of the Eurofighter, Gripen, Rafale, Tiger, TTH 90/NFH 90, A400M, Nimrod, AGS, and others, while defense spending stayed tight. More slices, same pie.
The result so far has been very thin pie slices, but no program budget catastrophes (no budgetary train wreck, to use a different visual metaphor). But the eurozone economic crisis and the associated budget cuts mean the pies will shrink. We don’t know how much; European politicians spent the summer throwing out budget anecdotes. The new UK government is looking at a 20% defense cut. Germany may cut defense from 1.49% of GDP for defense to 1.35% (NATO members have pledged to keep that number above 2%). France is cutting 3.5 billion euros over the next three years, with more cuts to come.
Export markets have been Europe’s traditional way out of a budget jam. But the new budget cuts badly compromise this hope. The new European defense plans leave key programs in a kind of existential limbo, with no past and no future, only the present. They aren’t cutting current procurement levels. Those are largely locked in by contracts. Instead, they’re cutting legacy fleets, and future anticipated purchases.
The best example of this is the RAF’s fighter plans. The UK MoD is now short 20 billion pounds to pay for equipment over the decade. They’ll still take delivery of Eurofighter Tranche 2s and 3As because those are under contract. But the legacy fleet of Tornados will likely be retired much faster than expected, and Eurofighter Tranche 3B will be cancelled. If the home market retires planes, it doesn’t develop upgrade and support packages for them. This basically puts export customers on notice: They might be buying a plane that turns into an orphan faster than expected. And killing the line means the window to search for exports is going away fast.
France faces a similar situation. Rafale fighter production has been at a steady state of 11 planes per year (presumably, like all of France, they take August off). But on July 15th Defense News reported that French Defense Minister Hervé Morin said this minimum rate could only be afforded with export orders. That’s like ordering a medium pizza and hoping someone else will pay for one of the four slices. Before Rafale, all Dassault fighters enjoyed enormous export success, with over 60% of Mirage III/V, F1, and 2000 orders coming from export customers. Yet Rafale has been on the export market for over 20 years, with no takers. Given the French MoD’s attitude, that’s not likely to change soon. It refuses to pay to create an advanced version, as the UAE wants. Similarly, in Sweden, the Gripen line is in danger of going cold, and while the Swedish MoD talks about buying Gripen NGs, there are no concrete plans to fund an acquisition. Without domestic support for these planes, their export prospects look grim.
This brings up the second catastrophe of the summer for Europe’s defense industries: The Mideast’s big US buys. Saudi Arabia, for decades the biggest export market for European fighters, was revealed at Farnborough to be finalizing the largest contract ever for US defense products. This includes 84 F-15s, largely removing hope of a second Eurofighter buy. Historically, Saudi Arabia has served as Europe’s biggest combat aircraft export market. In fact, the Mideast, particularly Saudi Arabia, has served as emergency relief for European military companies. The Al Yamamah II deal in the mid-1990s basically saved British Aerospace from bankruptcy after its BAe 146 regional jet program collapsed.
Also this summer, Oman decided to buy F-16s, all but ending hopes of a rumored Eurofighter sale (hilariously, Oman says it might buy both). The long-awaited UAE Rafale deal seems to have stalled. Switzerland, the only export fighter customer looking exclusively at European planes, decided to postpone its buy until 2015. And Brazil, where President Lula favors a Rafale buy, appears far from any kind of firm contract signature. Like India, Brazil might just put off a decision until a series of line closures makes their decision for them.
The result of this aestas horribilis will likely be a day of reckoning for European military aircraft contractors. Unless something changes at home, or unless there’s an India MMRCA win, the last Eurofighter will be delivered in about five years. Rafale might make it to 2019. The last Gripen might be delivered, well, now. The last European military plane of any note might be the A400M, assuming it survives.
This aircraft implosion will have a profound impact on US-European relations. For one, there will be more transatlantic trade friction. With EADS’s defense revenue under pressure, European politicians will be eager to support Airbus with commercial product development cash. The current WTO battle will likely get more contentious. And in the context of European defense desperation, KC-X looks like the shape of things to come: a strong European push to get into the only market that matters, and an equally strong push back from US contractors seeking to preserve their domestic market pie for themselves.
Meanwhile, US politicians and pundits are unlikely to offer much sympathy. As noted neocon Charles Krauthammer put it,“[W]ith America spending over half a trillion a year, keeping open the sea lanes in defending the world, Europe is spending pennies on defense. It’s hard to appreciate an entity’s leading role in the world when it’s been sucking on your tit for 60 years.” (For more on the US anti-European element, see Simon Tisdall’s Venus Envy in July’s Foreign Policy – www.foreignpolicy.com/articles/2010/07/15/venus_envy.)
As for Europe, it needs to think about what it’s doing. Sure, there’s a budget crunch, but that will change in a year or two. In the meantime cutting defense spending from 1.49% of GDP to 1.35% (to use the German example) will provide negligible and short-term benefits to the bottom line but will inflict serious damage to Europe’s defense industrial base. It also badly compromises Europe’s global power position.
In between pie metaphors, we’ve just finished the annual Teal World Rotorcraft Overview, in this WMCAB supplement. Other updates include the F-22, C-130, Cessna’s Citation series, the Il-96, Tu-204, AW139, AS350/EC130, SJ30, and the HondaJet. Have a great month.
Yours, ‘Til Saudi Arabia Buys Nimrods,
Richard Aboulafia