“The Countdown to Sequestration”

HARTFORD, Conn., Wednesday, August 15, 2012

Remarks for AIA Supplier Management Council, Summer Meeting by Pratt & Whitney President David P. Hess

Pratt & Whitney President David Hess, in his role as chairman of the Aerospace Industries Association, spoke at the summer meeting of the AIA Supplier Management Council in Hartford, Conn. In his remarks, Hess discussed the potential impact of budget sequestration on the aerospace and defense industry and urged suppliers and partners to make their voices heard in Washington.

"Instead of a self-inflicted surprise, what we need is a solution," Hess said. "An alternative to sequestration must be found that keeps us on the path of continued job creation, growth and innovation – and not just for our industry, but for our entire economy."

Full text remarks:

Good morning and thank you for joining us today. Thank you, David, for that generous introduction, and I would also like to thank Marion and the team at AIA for putting together some great events this week. I continue to be impressed by the industry leaders and experts who are willing to share their knowledge and insight with AIA and its members, especially during such a critical time for our industry.

It’s great to see so many of our partners here today. I want to extend a special welcome to new AIA members, pending AIA members, and new members of the Supplier Management Council. It goes without saying that your engagement with AIA comes at a time when your voices need to be heard. Now, more than ever, our leaders in Washington need to understand the impact their policy decisions have on the workers and employers that contribute so much to our national security and the economy. Membership and participation in AIA ensures that you have an effective voice.

Today, I can report that we are being heard loud and clear. This year we have made a compelling case to our leaders in Washington against a wholesale dismantling of a cornerstone of the American economy.

Of course, I’m talking about sequestration. I know everyone here has heard a lot about sequestration lately. Maybe another dire warning is the last thing you want to hear right now, but we’re just a few short months away from another $500 billion cut taking hold that will indiscriminately slash funding for programs across the aerospace and defense sector. It’s important to understand what’s at stake.

Our industry generates around $324 billion in revenue each year, accounting for 2.3 percent of the U.S. gross domestic product. Aerospace exports last year produced a $42.2 billion trade surplus. The industry directly and indirectly employs more than 3.5 million people in the private sector alone. And these jobs aren’t just in a few big cities or around major air bases – these are jobs created and sustained by large and small businesses in all 50 states.

There is simply too much on the line to stand by and watch sequestration happen. Jobs and our communities are at stake. A recent study by Dr. Stephen Fuller of George Mason University leaves no room for doubt. According to Dr. Fuller:

  • • Sequestration threatens 2.14 million American jobs across all 50 states.
  • • It will cost $109 billion in lost wages and salaries.
  • • It will lower the nation’s GDP by $215 billion in 2013.
  • • And, it will raise unemployment by 1.5 percent nationwide.

In short, it has the potential to drive the country back into recession, or worse.

If this sounds grave, it is. And yet to some, the more dire the prediction, the harder it is to believe.

Lately, a new dimension has emerged in the debate over sequestration – that sequestration isn’t real, that it won’t really happen, and that we shouldn’t worry.

Well, as Charles Baudelaire once said: “The greatest trick the devil ever played was convincing the world that he did not exist.”

Let me assure you that when the words of a French poet are invoked at an aerospace conference, you know things are bad.

Denying the threat of sequestration doesn’t make it any less real. The greatest trick the critics will ever play is to convince us, the American people and our elected leaders is that sequestration won’t really happen, or that it won’t have an impact.

But we know otherwise. Sequestration is real, it will have a devastating impact, and it is a direct threat to our industry, national security and the strength of our nation’s economy.

One of the issues fueling sequestration denial is the relative strength of the industry, and I agree that with sequestration out of the picture, there are reasons to be optimistic.

By AIA’s own estimation, 2011 was an up year for the aerospace industry. Sales reached $218.1 billion, up $8 billion from the year before.

In 2012, we feel like we’re turning a corner – in the midst of a slow but discernable recovery that we expect to continue through 2015.

Airline passenger traffic growth is steady at 7.5% this year, and we think it will continue at about 6% next year.

Airline yields continue to rise, but profits are forecast to be low this year at around $3 billion worldwide, with losses incurred by European carriers.

The long-term outlook is also good – 29,500 commercial passenger aircraft are forecast for delivery over the next 20 years, and aircraft production is projected to grow at 10% every year for the next five years.

New technologies and investments are also going to create opportunities for us over the next decade.

Unmanned systems represent a tremendous opportunity for growth. Some reports say that UAV spending will almost double over the next decade, generating $89 billion in revenue.

The increase in UAV flight hours and commercial traffic in the U.S. will be enabled in part by NextGen, the FAA’s multi-year effort to modernize the nation’s air traffic control system.

Satellites and GPS technology will take the place of 1960s-era radars, increasing the accuracy of location information, enabling planes to safely fly closer together and provide pilots with a real-time picture of air traffic. The system will also allow planes to land and depart more quickly, with less noise and greater fuel efficiency.

Fuel savings and other efficiencies will amount to $29 billion of net benefits each year after full deployment.

Still, amidst all these positive indicators, there are very real reasons for concern.

We are all working to mitigate the potential of raw material and parts shortages that could cause delays. A recent study found that 21% of aviation suppliers are worried about capacity and their ability to finance retooling and other investments they need to keep up with demand.

When you’ve got your head down and are racing to fill orders, it’s often hard to look up and see a storm coming. What happens if the storm comes? What happens if the clock counts down and the sequester takes hold? The answer is that we’ll be poorly equipped to take advantage of the opportunities presented by rising passenger volume, new technologies and increasing demand.

An immediate consequence will be a massive cut to the FAA. Congestion on the runway would be rivaled only by congestion in the terminal. AIA has looked at the consequences of a sequestration cut to FAA, which would result in the closure of 246 airport control towers, and the loss of 2,000 air traffic controllers, 9,000 TSA screeners and 1,600 customs officers.

The result would be economic losses of up to $80 billion through 2035, an annual decrease of 32-64 million in passenger enplanements, and annual reductions of 1 – 2 billion pounds of transported airfreight.

The forecasted loss in output to the U.S. economy is estimated to reach $7.2 to $14.4 billion, with $2.1 to $4.3 billion lost in earnings to workers.

Like other sequestration warnings, this one comes in the form of a study – but when someone says that forecasts like these are merely academic, I like to remind them that when a program is cut, there is nothing academic about it.

The last time our industry faced a downturn, the impact on employment was severe. From 1989 to 1994, for example, about 700,000 people lost their jobs in U.S. defense industries.

When programs are cut, the impact is immediate. At Cape Canaveral last year, NASA dropped 3,200 contract workers the day after the final shuttle mission. This year, the total space shuttle workforce of 16,000 will fall to 1,000 by the end of August.

At Pratt & Whitney, we’re worried about a cut to the F-35. We’re on track to deliver about 50 engines this year, but next year we may deliver fewer, and that is before considering the impact of sequestration. Cutting this program not only puts jobs at risk, but threatens our international partnerships as well.

Jobs are already being lost under from Budget Act cuts and the 2010 efficiency initiatives:

  • • In 2010, Northrop Grumman eliminated 500 aerospace positions in Southern California.
  • • In 2011, Boeing cut 900 jobs at its C-17 plant in Long Beach.
  • • In Maryland last year, layoffs among defense firms doubled from 2010. Seven firms in the state eliminated 780 positions, including 190 employees from Honeywell and 790 from Northrop.
  • • Lockheed Martin planned a loss of 10,000 positions in 2010, and another 1,500 aerospace jobs in 2011 in Texas, Georgia and California.
  • • In 2010, General Dynamics, Raytheon and L3 Communications also announced layoffs.

About 70-80 percent of what goes into an airplane or satellite is provided by subcontractors, and much of that comes from the people in this room.

So if you think you don’t have a stake in this fight, you’re wrong. Don’t take my word for it. Listen to people like the Secretary of Defense, who said that sequestration is like “shooting ourselves in the head.”

Fed Chairman Ben Bernanke says it’s leading us over a “massive fiscal cliff.”

And Jeffrey Zients, President Obama’s own budget director, calls sequestration “a blunt, indiscriminate instrument.”

I’ve had the opportunity to meet with Secretary Panetta several times, and my request to him is simply that we inject some much-needed predictability into defense and aerospace budgets.

We understand that we can’t undo the cuts that have already taken hold, but we are in the business of trying to anticipate the needs of our customers, and make investments that align to their future requirements.

To the extent that government customers can articulate a long-term vision, it allows us to plan more effectively, be more efficient and productive, make better decisions about where we put our investments and assets and help you to maximize the value of precious federal tax dollars. A great example of this is Sikorsky’s 5-year, $8.5B multiyear contract for 653 BLACKHAWK helicopters for the Army and Navy.

On the commercial side, we’ve been investing for decades in technologies and systems that are clearly aligned with the needs of our customers, and we’ve constantly re-invented and transformed ourselves to face new requirements and challenges.

At Pratt & Whitney, our new Geared Turbofan engine is a great example. This new engine is 16 percent more fuel-efficient than any other engine flying today, lowers maintenance costs, emissions and noise, and we already have commitments from customers that will put these engines on four different types of jets.

But geared turbofan technology didn’t happen overnight. Our parent company, United Technologies, invested about $1 billion over 20 years to develop the engine we have today.

That was a huge, long-term commitment we were able to make because we could see where the market was going in terms of operating costs, environmental concerns and other pressures faced by our customers. It’s an investment that we think will pay off over the next 20 to 30 years, and we’ve laid out a technology plan that keeps reducing fuel burn by an additional 1% per year.

Our industry needs a long-range calendar, and sequestration will put too many plans on hold.

As my colleague Bob Stevens at Lockheed Martin has said, sequestration creates an unprecedented amount of uncertainty at a time when we need a transparent and predictable path forward.

This is often countered with the argument that defense spending tends to be cyclical, and that throughout history we have adapted to these cycles and even predicted them.

Loren Thompson of the Lexington Institute had it right when he said that the rhythms of defense industry cycles are occasionally punctuated by “colossal surprises” like the fall of the Berlin Wall and 9/11.

In my view, sequestration is one of these “colossal surprises” that defies the rhythm of any market cycle, and unlike global events, it is entirely self-inflicted.

Instead of a self-inflicted surprise, what we need is a solution. An alternative to sequestration must be found that keeps us on the path of continued job creation, growth and innovation –and not just for our industry, but for our entire economy.

As many of you know, Pratt & Whitney first set up shop in Hartford in 1925. Since then, we’ve been successful because of our ability to overcome obstacles and adapt. Whether you are part of a 5-year-old business or a century-old business, there isn’t a single day that goes by without the threat of change, loss or disruption. To survive those threats and grow a successful business is an accomplishment that is deeply personal to each and every one of us.

But as time wears on, I think it’s too tempting to say to ourselves that we’ve been here before, that we’ve seen it all and that a threat like sequestration is just another bump in the road.

Let me assure you that sequestration is much more serious. Do not be fooled by the claims of a few sequestration deniers.

The only way to keep us on the path of growth and job creation is to ensure that everyone hears our voice.

To quote Victor Hugo – yes, another French poet – “people do not lack strength, they lack will.”

Today, we have both the strength and the will. Let’s put an end to sequestration and keep our industry, our workers and our country moving forward.

Thank you again for the opportunity to join you today, and if time permits, I’m happy to take a few questions…