No scenario for escalation inevitable incentives for conflict minimization

Econ/Trade

Aerospace Industry

Civil aircraft sales are the biggest internal link to aerospace and they are predicted to grow in the coming years.

Aerospace sector predicted to rise despite budget cuts due to market for commercial jets.

Reading 2/29 – strategy and corporate finance professional, runs a corporate development consultancy (2/29/12, Tony Reading, “The Aviation Sector is Soaring” http://www.fool.co.uk/news/investing/2012/02/29/the-aviation-sector-is-soaring.aspx) // CB

The market for large commercial jets is booming. That is good news for companies in the aerospace and defence sector, which are otherwise beset by Western government defence cuts. In the atmosphere of general economic gloom, at first sight it's perhaps surprising that airlines should be queuing up to buy large jets. Air travel is strongly correlated with economic growth. But a moment's thought yields the familiar answer. It is, of course, the dynamic and confident economies of Asia and the Middle East driving demand. While we in the West are paying the price of a decade's overspending, these countries are consuming more and investing more. That means they are travelling more, too. China is at the forefront with its four largest domestic airlines, which are protected from foreign competition, expected to buy more than 4,000 jets over the next 20 years. But other Asian economies are seeing markets driven by the emergence of low-cost carriers such as Indonesia's Lion Air, which plans to buy 230 Boeing 737s. Duopoly The duopoly of Airbus and Boeing (NYSE: BA.US) are the primary beneficiaries. At the end of last year they had a combined order book of over 8,000 aircraft, representing eight years of production at current rates. Orders grew by 2,200 in 2011, twice the rate of production. A third of the order book is in Asia, and another 25% in the Middle East. Orders from North American and European airlines are motivated by the greater efficiency of newer aircraft such as Boeing's 787 Dreamliner, which use 25% to 40% less fuel than older models. Even allowing for cancellations it's a very healthy position for the industry, and both the major builders are ramping up production. But there's a limit to how fast and far they can take that, so the visibility of future production is high. In contrast, the regional/business jet market is more subdued, with the biggest manufacturers Canadian Bombardier and Brazilian Embraer both increasing deliveries in 2011 but seeing their order books reduced. The market structure is different, and China, Russia and Japan are in advance stages of developing their own jets. But what is good news for Airbus and Boeing is also good news for UK companies further down the supply chain. Rolls Royce (LSE: RR) has already reported record profits. Senior On Monday, it was the turn of FTSE 250 firm Senior (LSE: SNR) to announce record results and to give out positive signals, with a 22% dividend increase. The company makes a wide range of high-tech components for original equipment manufacturers. Its aerospace division produces air ducts and other pressure-carrying systems used on commercial and military aircraft. The division contributed 60% to 2011 sales, within which large commercial aircraft were another 60%. Boeing is a significant customer, and the entry into service of the Dreamliner will boost sales further, on top of the 26% increase in this market in 2011. Defence made up another 30% of the division's sales, increasing by 10% despite defence cuts, with the company supplying parts for the Sikorsky Black Hawk helicopter and Lockheed Martin air transporter. Last year, Senior acquired the small Lancashire-based aerospace component company Weston, which brings it a manufacturing capability in Asia and exposure to Airbus as a customer. More than 70% of Weston's output is used on Airbus aircraft. Senior's other division, 'Flexonics', makes flexible automotive components, mainly for diesel engines, for both heavy truck and off-road markets, and passenger vehicles. It also serves industrial applications; as a result, the multiple markets served by the company diversify its exposure to any one sector. Profits Overall, Senior saw adjusted profit before tax up 19% in the year, on revenues up 13%. This was the second consecutive year of record operating margins. Adjusted earnings per share were up 21% and mirrored in the dividend increase. For once, the adjusted figures actually painted a more modest picture, as they excluded a large impairment charge taken in 2010. The company generates cash, too. £83m of operating profit produced £96m of cash, which easily covered £54m of interest, tax, dividends and capital expenditure. Consequently, £69m expenditure on acquisitions required only a £29m increase in net debt to £93m. That makes for a net gearing ratio of 34%. The company is well with the covenants on its fixed-rate debt funding, and has headroom for further bolt-on acquisitions. At 196p, the shares are trading on a price-to-earnings (P/E) ratio of 13.5, and yielding 1.9%. But the forward P/E drops to 12.2 and, given the visibility of Senior's earnings from its commercial aerospace business, some weight can be put on that. And, though the yield looks a little sparse, it's covered 3.8 times -- so there is plenty of scope for the dividend to grow. The shares have soared from just 24p in 2009, but with the company's potential to benefit from the boom in large commercial aviation, they still have much further to go.

No impact to aerospace collapse -- empirics prove.

Hill et al 10 – Edward, Independent Defense & Space Professional, 10 (“Economic Shocks and Regional Economic Resilience” May 10, 2010)

Employment downturns in the Seattle regional economy have occurred around the time of national recession periods. The region experienced shock-induced downturns in 1980-81, 1990, 1993, and 2000-01. It was resilient to the 1993 and 2000-01 shock-induced downturns, but not resilient to the 1980 downturn. (There was little opportunity for resilience to the 1990 downturn because the 1993 downturn occurred so soon thereafter.) Shocks to the region’s major export industries preceded or accompanied the aggregate regional downturns. Wood products (formerly a major regional export industry) suffered employment downturns in 1978-79. Software had such downturns in 1993 and 2000-01, although these downturns appeared as sharp reductions of the industry’s employment growth rate rather than as job losses. (Microsoft, the region’s largest information technology employer, laid off workers for the first time during the Great Recession.) Aerospace experienced downturns in 1980-82, 1990-93, 1998-99, and 2002, and all these downturns were employment declines. However, their impact on the region as a whole probably became less severe over time as Boeing, the region’s largest manufacturer, accounted for a declining (though still substantial) share of the region’s employment . The regional economic development policymakers and practitioners we interviewed perceived the Great Recession as the region’s most severe economic downturn since the early 1970s, although as of the time we conducted our interviews (July 2009) the region’s employment was higher, as a percentage of pre-recession employment, than at the same time after the 2001 recession, and it had not hit the employment trough that it reached after the 1981 recession. After the severe early 1970s recession, policymakers perceived a need to diversify the region’s economy away from its strong reliance on aerospace manufacturing in general and Boeing in particular. Local government and business leaders created the King County Economic Development Council, now called Enterprise Seattle, to recruit new firms to the region. However, diversification of the employment base came about not as a result of any deliberate policy or strategy but because of a historical accident: Bill Gates moved Microsoft to the region in 1979. Other information technology-intensive firms (Starbucks, Amazon, and Costco, as well as suppliers to them and to Microsoft) sprang up subsequently, in part to take advantage of proximity to Microsoft and the large pool if information technology workers that it attracted to the region. (Some local information technology companies were founded by former Microsoft managers or engineers.) As of July 2009, no public or private organization had undertaken or planned any policy or strategy to restructure the regional economy in response to the Great Recession. Our interviewees did not think any such restructuring was necessary. They viewed the regional economy as sufficiently diverse because it is built around two large firms, Boeing and Microsoft, which have steadily introduced new products and around which distinct industry clusters (in aerospace and information technology, respectively) have formed. Our interviewees believed that the region’s eventual recovery from the Great Recession would be a continuation of pre-recession trends, including further growth of the information technology industry and the gradual movement of Boeing away from the region (including the relocation of the firm’s headquarters to Chicago and its opening of a new aircraft production line in South Carolina, its first outside the Seattle area). They also anticipated further growth of the nonprofit sector, which has been fueled largely by funding from current and former Microsoft executives. Hartford Employment shock-induced downturns in the Hartford regional economy occurred around national recession periods in 1980-81 and 2001-02. However, the region experienced a downturn in 1988-90 rather than in 1990-91 as the nation as a whole did. The region was resilient to the 1980-81 and 2001-02 shocks within two years but was not resilient to late 1980s shock. The early 1980s downturn was accompanied by precipitated by shocks to manufacturing industries: fabricated metals, electrical equipment, printing, and aerospace. The late 1980s downturn was preceded and followed by shocks to the insurance industry and accompanied by a downturn in fabricated metal manufacturing (largely aerospace suppliers). The 2001-02 downturn was preceded by shocks in insurance, aerospace, and fabricated metals. Policymakers and practitioners perceived the late 1980s shock-induced downturn as the region’s most severe before the Great Recession, and the employment downturn of that shock was largest of any of the last four recessions, including the Great Recession. A large downturn in the commercial real estate market, in which local insurance companies were heavily invested, precipitated the late 1980s shock to insurance and probably to the region as a whole. In 1993 the Greater Hartford Chamber of Commerce created a regional economic development (business recruitment and retention) agency in response to that shock. After reorganization, this eventually became the Metro Hartford Alliance (MHA), which gradually expanded its mission to include attraction and retention of highly educated workers, regional place-marketing, public policy advocacy, and entrepreneurship assistance. A large number of sometimes competing regional industry-specific nonprofit organizations, some supported by CT’s state cluster initiative, were founded during the 1990s and early 2000s to deal with industry-specific production, technology, workforce, education, and place-marketing issues in manufacturing, insurance, high technology, and medical devices, but these were not founded as responses to industry or regional aggregate shocks and they do not view responding to these shocks as their primary mission. Neither MHA nor these industry-specific organizations deals with the regional economy as a whole. No public or private organization undertook or planned any policy or strategy to restructure the regional economy in response to the late 1980s downturn. However, the economic structure has changed gradually following that downturn. Large aerospace manufacturers have gradually shifted production overseas. Insurance companies have moved more routine clerical work to lower-cost regions while maintaining R&D in the Hartford area. Both insurance and aerospace manufacturing, the region’s dominant export industries, account for smaller shares of employment today than thirty years ago. The regional economy has become smaller but richer; regional average productivity and wages have grown by much more than the national average over the last three decades, while regional employment has never regained its 1988 peak level. Although local (zoning), state, and federal public policies influenced these developments, organized public or non-market private activity did not. The economic development practitioners and public officials we interviewed attributed the lack of such activity to the region’s local government fragmentation and the proliferation of small, often competing private economic development organizations.

Lack of experienced workers is an alt cause that the plan can’t solve for.

SCPR 2/16 – news agency (2/16/12, Shereen Marisol Meraji, “Aerospace manufacturing jobs are here, skilled workers are not” http://www.scpr.org/programs/madeleine-brand/2012/02/16/22561/aerospace-manufacturing-jobs-are-here-skilled-work) // CB

Owe Carlsson is sick and tired of hearing that to find manufacturing jobs you should look east, far east. “No, manufacturing is not all in China,” says the exasperated 73 year-old engineer. “The manufacturing base in the L.A. area is phenomenal, but if we do not get fresh blood into our industry, yes, those jobs will disappear.” Carlsson is a Senior Principal Engineer at Alcoa Fastening Systems. The company makes nuts and bolts for airplanes under the umbrella of the multinational aluminum producer, Alcoa. Eighty percent of all the nuts and bolts for airplanes are made right here in Southern California. Survival is not mandatory On a tour of Alcoa Fastening System’s Torrance facility, Carlsson stops to admire a mountain of plastic bins filled with tiny aluminum parts in jewel tones. “When you look out the window of an aircraft and look out onto the wings and you see all those little screws, on the inside is invariably one of these,” he says. Carlsson laments that most of the high-skilled machinists making those turquoise, emerald, and copper colored jewels of the aerospace industry have gray hair and, like him, are long overdue for retirement. “I run into operators, retirement age, they say, ‘Where are the young people, I want to train someone!’" says Carlsson, adding that those workers "are seeing that the next generation is not there, they’re not stepping up.” Carlsson’s office is a Zen-like refuge from the noisy shop floor and visitors are greeted, first, by a black and white framed portrait of Albert Einstein. (Carlsson calls him Uncle Al.) Carlsson’s also a fan of inspirational quotes; one of his favorites is written on his whiteboard. It’s from William Edwards Deming, the American consultant best known for helping revolutionize Japan’s manufacturing sector in the 1950s. It says: “It is not necessary to change, survival is not mandatory.” Carlsson worries that if California doesn't change the way its schools educate future workers, aerospace manufacturing in Southern California will die. “We get so many people knocking on our door, but they have absolutely nothing they can bring to the table," he says. "They don’t have the basics of adding or subtracting. It is catastrophic. Those are things they should have learned in school.” Skills in demand Lucas Pacheco teaches at Hawthorne High's School of Manufacturing and Engineering. The public school is just a couple of miles away from the most powerful aerospace companies in the world. “Northrop Grumman and Boeing and Raytheon are all asking us to make sure that we provide them with a workforce that’s skilled enough to walk in the door and get jobs,” says Pacheco. According to California’s Employment Development Department, the median income for an aerospace engineer is $53 an hour, $19 an hour for skilled machinists. EDD predicted a 12 percent increase in the demand for aerospace engineers between 2008 and 2018. But Pacheco says the prospect of a job sometime in the future isn’t enough to get high school kids psyched about manufacturing. Bubbly sophomore Gesenia Grejeda says she was wooed away from the visual and performing arts academy on campus after watching the manufacturing students race mousetrap cars they designed and built. “I was hooked,” says Grejeda, “and I was like, ‘This is what I want to do!” “I want to be a manufacturer,” says Grejeda’s classmate, David Castro. ”I want to work with machines and design things that we’re going to be using in our lives.” Castro cuts metal tubes on a computerized machine in Hawthorne High’s metal shop, one of the few left in California. He talks about his dream of creating machines that will make life easier for the disabled. Castro says he gets to school at 6 in the morning and leaves around 9 or 10 at night because making parts for student designed projects “is really fun.” School administrators say 85 percent of the teens at Hawthorne High’s Manufacturing and Engineering school are considered at-risk; their families can’t afford college without help, and don't speak English at home. “My mother barely made it through elementary school,” says William Valverde, an alumnus of the program. ”We’re not pushed toward education in the first place, much less are we expected to win the science fair or be a part of the professional Society of Manufacturing Engineers before we’re old enough to vote.” Valverde now studies engineering at Cal State Northridge. He says he never would have considered that path without Lucas Pacheco and the manufacturing academy at Hawthorne. Pilot programs The Society of Manufacturing Engineers, a network of professional manufacturers founded during the Great Depression, also sees the school’s potential. The group recently gave Hawthorne High $16,000 for more equipment and an after-school program. Members of the SME know workers in their industry are graying. So the group is backing high-school programs that encourage teens to study engineering, and funding a reality TV-show pilot called "Edge Factor." The show's trailer features a narrator; in a booming baritone, he intones, “For over 200 years man has been surrounding themselves with machines; they shaped our history and our future.” Now Hawthorne is shaping the future. SpaceX, founded in 2002 by entrepreneur Elon Musk, is a private rocket and satellite company gearing up for a test launch to the space station in the coming months. One thousand of its 1,600 employees work in Hawthorne. “A hunk of metal comes into our factory in Hawthorne and a rocket goes out,” says Kirstin Grantham, the communications director at SpaceX. “On our website there are over 200 jobs posted today, we’re looking for engineers who can help us design this next generation of rockets and spacecraft, we’re looking for technicians who can help us with the assembly process. We want the best and the brightest minds.” Grantham says recruiters are working around the clock to find them and warns other aerospace companies that SpaceX is not above stealing talent. Wouldn't it be nice, if they didn't have to?

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