Recent budget cuts by the US government and a low Air Force budget for this fiscal year has forced many an aerospace company to plan for a business optimization. The budget cut has been designed in such a way that its impact will be most felt by the military aerospace manufacturers. Boeing (BA), for one, has one more reason to go ahead with the plan. The company has lost not one but two major export contracts for tanker aircrafts this month. This is being viewed as a big loss for the aero-giant.
Impact on Boeing’s Military Division:
The company’s military division accounts for most of its revenue. The budget cut will although have a small impact on this division. If we look closely at the various divisions of this business segment we might be able to better analyze how much of an impact will the budget cut have on the company’s revenues.
The helicopter division has particularly been doing well. By far, the most rewarding segment, the helicopter division will be the least affected by the budget cut. The demands for AH64 Apache and H47 Chinook helicopters will remain high. Helicopters have a higher loss-rate than fixed-wing aircraft and require a lot of maintenance. But a clearer edge in short distance travel during actual war time situations over the monstrous fighter planes mean that the demand for these aircrafts will remain fixed.
Moving into the fighter jet segment, the analysts think that Boeing is not going to develop a new fighter aircraft anytime soon. The company was in consideration for a contract in Brazil for its F-18 Super Hornet. Once they lost it too Saab, they still haven’t found a prospective buyer for the aircraft. Even the US Air force has chosen Lockheed Marin’s Joint Strike Fighter Jets over Boeing’s F-18. This clearly shows that the combat aircraft segment hasn’t been doing well and with the current goings of the market it is unlikely that the segment showed some power.
A New Revolution In Boeing’s Fighter Fleet:
In service since 1957 and staying so for more than half a century, the KC135 Stratotanker is now old and outdated. The very agile and technologically advanced KC-46 Pegasus tanker aircraft is slated to make its entry into the market as a full timer, replacing KC135 Stratotanker. The budget sequestration in the US has reduced the procurement budget by 33%. The US Air Force procurement budget for that matter has been reduced to a paltry $ 1.6 billion. The only good thing about the fact is that it now wouldn’t be possible for the USAF to look for a solution outside their borders. They will have to depend on Boeing’s KC-46 now, given the budget constraint. The KC-46 is also a feasible option as LMT’s Joint Strike Fighter Jets are way too costlier. However, for the time being the company is still developing the KC-46 and the placements can only be made after fall 2014. LMT’s Airbus A330 MRTT (Multi Role Tanker Transport) is in operation in the forces. The aircraft is also being sold outside the US to armies as a replacement for KC135 Stratotanker.
Concluding Thoughts:
The current sequestration in budget by the US government is by far the largest. The impact felt by Boeing would be the highest as the US government is the company’s biggest customer. The government plans to go about it by squeezing costs. This means that most of the orders that the USAF had planned would have to be let gone. This would have its own repercussions in the revenue base for Boeing as most of the cancelled orders would be from Boeing alone. For the record, the government has already decided to shut down the C-17 production by the year end. This would be a big blow to Boeing’s maintenance and parts business revenues. The future doesn’t look bright for the company. When FY2013 ended, there were speculations that the stock would be one amongst the high flying ones. However, the budget constraints and heavy sequestration was not considered as a possibility by the analysts. Going by the past year’s performance, investors can expect decent returns. That, however, is hypothetical as market anomalies arise out of the blue. One thing that can be expected is that the revenues are set to take a huge blow in the coming months.
