AIA’s Fanning on Takeaways from Paris Air Show, Spending Trends, and Rocketry Contest

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Eric Fanning, President and CEO of the Aerospace Industries Association, discuss the key takeaways from the 2019 Paris airshow, defense and aerospace spending trends, the impact of mergers and acquisition’s on his membership base, and the international rocketry competition at Le Bourget on the 50th anniversary year of the Apollo 11 moon landing with Defense and or Space report Editor Vago Muradian. Our coverage of the 2019 Paris airshow is sponsored by Belle and Leonardo DRS

Vago Muradian:  Welcome to the Defense and Aerospace Report.  I’m Vago Muradian here at the Paris Air Show at Le Bourget where Charles Lindberg landed after his non-stop flight from New York in 1927.  Our coverage is sponsored by Bell and Leonardo DRS.

We’re here at the DoD corral to talk to AIA President and CEO Eric Fanning.  Eric, just an amazing week.  One of the largest American delegations in history at the show. Wilbur Ross, the Commerce Secretary, leading it on this also the 50thanniversary year of the Apollo 11 moon landing, something which I think still ranks as one of the most amazing accomplishments, and we had more of those heroes here than have been for a long time, right?  Charlie Duke, Al Warden, Walt Cunningham.  Those were the three Apollo astronauts that were here.

Talk to us a little bit about what as accomplished.  Big delegation.  We had the Acting Secretary of the Air Force.  We had the Secretary of the Navy, Richard Spencer.  Secretary Donovan, of course.  What was accomplished?  What were the highlights from your standpoint?

Eric Fanning:  I would say the presence of such a high-level American delegation, both government and industry, was really remarkable.  It sort of showed how seriously the United States takes this industry and how important this air show is.  And a big part of what’s important in these shows, and of course Paris is the big one, is that interaction, that convening, that engagement.  Because the partnerships are really important.  This is a global market.  It’s also really a global industry.  There are partnerships on both sides of the Atlantic.  The supply chain is international.  And so the coming together of all that parts of it is a really important part of the air show.

Mr. Muradian:  Let me ask, you mentioned about the international nature of this.  We’re in a time when trade tensions are running high. The President has been very clear that his philosophy is America first.  And I’ve been getting a flavor of that sometimes talking to folks here who are like well, if you’re America first we’re going to be Europe and France first.  And there’s a logic to that at the end of the day.

You’ve had probably far more conversations than I did on this and you do sit on the trade body, the overarching trade bodies that represent the defense and aerospace industries. What are you hearing from the membership and how palpable are the concerns?  And how can people address them to ensure that free and fair trade that’s created the safest air traffic system the world has ever seen, survives?

Mr. Fanning:  This administration certainly has been a strong advocate of American industry, particularly aerospace and defense.  But there’s no question we’re concerned about some of the trade issues because this really is an international market and an international supply chain. These companies are customers of each other, they’re suppliers to each other, and so it’s hard when you start getting into issues of tariffs to define where America starts, where it ends, because it’s so integrated internationally.  So we are watching that closely.

The deals are usually multi-year in terms of suppliers and what have you, and so it takes a while for us to see the impact of tariffs, but we’re definitely concerned about that because that free trade is important for the industry, but so is fair trade.  So we are watching competitive issues.  This administration is focused on those, and so we applaud that part.  But we do worry about the impact on the free trade aspect.

Mr. Muradian:  This is also a great place to sort of look at the kind of trends that everybody is going to be experiencing.  There is this concern that both commercial and defense for the first time are not going to be counter-cyclical, but kind of both arc downward.  IATA is showing a drop in passenger traffic, just like there is a little bit of a slowdown, an expected slowdown when it comes to defense spending.

What are you picking up in terms of how you’ve got to trim your sails say over the next year and prepare the organization itself for say two years ahead, which this is kind of a key element of that.

Mr. Fanning:  Well first starting, the numbers are good.  We released our facts and figures for 2018 right before the air show, and all the numbers are up.  $929 billion in economic output, up over 2017.  Work force growing from 2.4 million to 2.5 million.  Total wages up.  Exports up. The export surplus up.  So it’s good trajectories for the industry.

On the civilian side, there’s a backlog years in the making, and I don’t think I’m as concerned on that side about a down tick.  On the defense side, that’s always the big question, in part because of the political instability.  The inability to get a budget, have any predictability to that process, does make it hard to plan on the defense side.  But if we can sort of lock into the defense top line we have now, that’s a good place to be going into the future, both in terms of industry’s needs but also the military’s needs in getting at some of the problems it’s facing.

Mr. Muradian:  You had an extraordinary career at senior leadership across each of the military services including culminating to become the Secretary of the Army, but you were also a staffer on the Hill. How do you think this budget process is going to work this year?  There are some concerns that things are not moving as quickly as everybody would like. Are you confident we’re going to avoid, for example, a CR or even a sequester as some people suggest?

Mr. Fanning:  No.  I’m not. I don’t know what’s going to happen. I’ve kind of given up trying to predict what’s going to happen.  The entire eight years I was in government, the last run, we started every year with a CR. Things look to be going well with the NDAA and progress on that, but it has to be part of a larger package, of course. And that’s the budget deal.  I’m alarmed with recent developments that seem to indicate things are slowing down or progress isn’t being made.  But I can’t overstate enough the importance of that. I think it’s the most destabilizing thing for the industry and certainly for the military to start the year without a budget.  CRs are very expensive.  You don’t get the same bang for the buck you would if it were regularly passed, a regular order budget.  And certainly a shutdown is very disruptive and that would have a big impact on the industry side.

Mr. Muradian:  Two questions.  One, I’m not asking for a position on a merger and acquisition, but Raytheon and United Technologies, both very important AIA members, have agreed to merge into what would become Raytheon Technologies if approved by the government, which I think most people expect at least on anti-trust terms there’s no reason to really stop the deal.

What does that do from a membership dues standpoint for you guys?  Because the merger and consolidation trends put every one of the trade organizations into a lot of, put them under a lot of pressure because those dues are what allow you to do the advocacy on behalf of the industry, to host folks to come over for a rocketry challenge, for example, which I know you’re very passionate about, so I saved the best for last.

But how are you going to — and obviously L3 and Harris are merging as well.  So you’re going from four dues-paying members down to two dues-paying members.  How does that work out, and what’s the impact on an organization as you try to sort of position it for the next 100 years.

Mr. Fanning:  Well, if you look back 100 years, this is a normal aspect of this industry. We tried to map out, as you point out, it’s our centennial year this year, we tried to map out the companies that were involved 100 years ago to the companies today and it’s not easy to do because mergers, separations, new companies, new entrants, that’s a normal part of the evolution of our industry and we plan for it.  We plan in our budgeting process to lose members every now and then to these mergers.  But what tends to happen is new companies come along and grow and grow into the big members of the organization.  So these companies make these decisions based on their own strategies.  They don’t ask us about it.  I certainly don’t like losing dues, but we plan for that.  So I’m confident AIA is fine going into the future.

Mr. Muradian:  So what you’re saying is basically that when Google is operating more airplanes than the U.S. Air Force they’re going to become a dues-paying member of AIA.

Mr. Fanning:  They have to manufacture those airplanes, but if they do that, yeah. They are a member right now.  They’ve got money in R&D.  And if they decide to really push forward on that, yeah, Google could become a big member.

It will be interesting to see who the big aerospace companies are in 20, 30, 50 years.  We’ll have those consistent ones that have been around for a long time, but even those companies today, our big members, have the DNA of other iconic companies from the past that they acquired or merged with.

Mr. Muradian:  I did know that Google was, and you’re absolutely right, they have to be actually making it as opposed to, okay.

So with the exception of Huntington Ingalls, that was the oddity, and I think that’s just extraordinary that a major shipbuilder, aircraft carriers.  Anyway.

Going to the rocketry challenge.  So as we speak, we don’t know who’s won yet.  The United States is the incumbent on this and has been doing well.  Talk to us about the rocketry challenge.  Tell us about how important it is and how to sort of bring in a new generation of talent into the industry.

Mr. Fanning:  If you asked our CEOs what their biggest strategic concern was, nine out of ten of them would probably say work force.  Work force today, work force in the future.

The rocketry challenge is actually my favorite part of the job.  We run the world’s largest student rocketry contest.  We put about 70,000 kids, Americans, through it.  The winning team we bring to the Air Show each year — either Farnborough or Paris, alternating years, and they compete against the Japanese, the Brits and the French who also have similar programs.  The Americans have won four years in a row.  We’re hoping this is the fifth year.  They launched their rockets just an hour ago or so, so we don’t know what the results are yet.  They give presentations.  These are really smart kids.  Very complicated parameters that they have to hit.  So we’re optimistic.  They did a great job.  But the other three teams are really impressive as well.

Mr. Muradian:  And you mentioned that actually, right?  Tell our audience a little bit, that there’s no way you’re resting on your laurels when you come into this.  And what the new challenge this year is.

Mr. Fanning:  We don’t.  These kids, it’s so funny.  One of the prizes we give is for their notebook.  The winning notebook this year and last year, the two years I’ve been in this job, ended the same way.  They say we don’t know how we’re going to do, but we’re already planning for next year.  I mean this is a full-year thing that these kids do to do the national competition in Virginia and then come here for the international competition.  And this year, of course, so many anniversaries this year.  Our 100th, 75thof D-Day, but most importantly in many ways, the 50th, of course, of the Apollo moon landing.

So one of the aspects of this competition is the rocket has to have raw eggs in it and they have to come down without any cracks or else you’re disqualified.  And we had them go from two eggs last year to three eggs this year to represent the three Apollo 11 astronauts.

Mr. Muradian:  That’s just extraordinary.

Eric Fanning, President and CEO of the Aerospace Industries Association on its 100thyear at this great 53rdParis Air Show.  Eric, thanks very much.  It’s a pleasure, and I look forward to seeing you back in Washington.

Mr. Fanning:  Great. It’s good to see you again, Vago.

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