good news!

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

from economy.com

Defense-Aerospace Profits Take Off
By Steve Cochrane
08/6/01 12:00 PM ET
There is no profits recession in the defense-aerospace industry. Not only
are the leading U.S. defense contractors posting positive net earnings, but
profits are generally rising. Last month, Lockheed Martin reported a
tripling of earnings. Boeing's operating earnings from military aircraft
and missiles rose by two-thirds. United Technologies' Pratt & Whitney
aircraft engine unit saw a 24% rise in operating profit. Profits at General
Dynamics were up by 11% while shipbuilder Newport News (which General
Dynamics is attempting to acquire) were up 16%. Among the majors, only
Northrop Grumman posted a profit decline, yet it was still positive and the
decline was due almost solely to losses in its pension fund.

This is not the sort of news we are used to hearing in these days of
exceptionally gloomy profit reports. But the defense-aerospace industry is
not the usual sort of industry. It operates on long-term cycles that differ
from the usual business cycle that are so reflective of consumer spending
and business investment trends. The business cycle is only affecting the
defense aerospace industry to the extent that the industry sells in
commercial markets. This is most apparent with Boeing, which is seeing a
moderate drop in civilian aircraft orders as airline earnings go into a
tailspin.

The defense-aerospace industry is indeed a cyclical industry, but its
cycles rarely conform to general economic cycles. Rather, due to the long
lead-time for product development and the long economic life of aircraft,
the industry's cycles are related to demand for aircraft upgrades and to
government procurement cycles.

The aerospace industry is coming off a long downturn in the cycle, nearly
completing the consolidation initiated by the Pentagon at the end of the
Cold War. Indeed, some of the consolidation is still going on. For example,
Northrop Grumman is still completing its acquisition of Litton industries
and Newport News Shipbuilding is being pursued by both General Dynamics and
Northrop Grumman.

Indeed, it is the rapid consolidation of the industry over the past ten
years that is helping to support the industry's profitability today.
Operating costs have been squeezed many times over as firms are combined
and as the remaining major contractors demand similar cost controls and
productivity improvements from their many suppliers.

Moreover, the slimming down of the aerospace industry occurred at the same
time that many technology and telecommunications industries were doing just
the opposite-spinning off subsidiaries and creating new firms through
venture capital investments and IPOs and investing huge amounts in capital
equipment that provided questionable returns. Thus, defense aerospace is
about as lean as it can be at the moment, while the economy is dragged down
by bloated inventories in tech and telecom.

Yet it will take more than being lean for defense-aerospace to continue to
produce such stellar results in the future. Rising defense expenditures
will certainly help. The nominal value of defense procurements has risen
15% from its cyclical low in 1997. But this does not give the industry any
particular advantage over others as the increase is no faster than overall
GDP growth in recent years. ....

more at: http://www.dismal.com/thoughts/article.asp?aid=1321

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine