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Upbeat report on aerospace defense sector

Military markets are doing well despite planned spending cuts, the Pacific Northwest Aerospace Alliance is told.

By Michelle Dunlop
Herald Writer

LYNNWOOD -- The sky is not falling after all for defense contractors, despite planned cuts in military spending.

That's what Teal Group analyst Richard Aboulafia told participants at the Pacific Northwest Aerospace Alliance's annual conference in Lynnwood.

"Military markets are doing just great," Aboulafia said.

The conference focused on the defense market Monday but switched to discussion of commercial airplanes Tuesday and Wednesday. Conference organizers said that registration for the event was up from the approximately 300 people who attended last year.

Aboulafia, who was to present his forecast for the commercial sector today, said that defense companies do have to keep a wary eye on budget cuts scheduled to start in 2013.

However, most lawmakers in Congress want to prevent the cuts -- they just can't agree on a way to do it, he said.

"It's kind of like playing chicken -- for adults," Aboulafia said.

The analyst expects Congress to push out some of the planned acquisition of F-35 fighter aircraft to free up funding for other programs. The F-35 is the military's biggest budget item, with nearly $70 billion in allotted funding through 2021.

Eric Tibbets, a business development executive with Bingen, Wash.-based Insitu, expects defense spending for research and development of the unmanned aerial vehicles his company creates to ramp up in the near future. Insitu, a Boeing subsidiary, based that forecast on that of Aboulafia's Teal Group.

So far, UAV makers have made do with tentative budgeting by the defense industry. But increased funding for research would provide stable long-term dollars.

"The big dollars are in the small vehicles ... both in terms of numbers and dollars," Tibbets said.

As for Boeing's U.S. Air Force aerial-refueling-tanker contract, Aboulafia noted that the Defense Department shifted most of the risk for budget overruns to Boeing.

"If you're a defense contractor, you're going to have to make adjustments, like closing Wichita," he said.

Boeing announced in January it plans to shut down its defense site in Wichita, Kan. That facility initially was going to do some of the military installation work on the 767-based tanker. The work now will be done in the Puget Sound area.

Although Boeing won the $35 billion contract with the U.S. government, Aboulafia doesn't foresee a lot of other international sales for the Everett-built 767 tanker. Many of those opportunities already have been snatched up by the competitor for the tanker contract, EADS, the parent of Airbus.

Michelle Dunlop: 425-339-3454; mdunlop@heraldnet.com.