More Layoffs in Aerospace & Defense Despite Progress in Bi-Partisan Talks on Budget Cuts
European Aeronautics Defense and Space Corporation has announced layoffs of 5,800 employees - about 4% of its workforce - in the Defense and Space segments over three years ending 2016. These layoffs are a part of a major restructuring program enacted in the face of falling orders.
The company will also take on the name of its flagship brand, Airbus, and will be known as the Airbus Group.
The news follows layoffs by US-based Lockheed Martin Corp. (LMT), which announced plant closures and job cuts of as many as 4,000 employees last week. Northrop Grumman Corp. (NOC) also offered voluntary layoffs earlier this year in its Aerospace Systems segment.
While Europe has been implementing austerity measures including debt restructuring and has been cutting spending across the board, defense contractors in the US have also been under a cloud of uncertainty surrounding the budget cuts.
A bipartisan agreement led by Sen. Patty Murray (D, Wash.) and Rep. Paul Ryan (R, Wis.) yesterday, however indicates there is a chance of progress over the implementation of the spending cuts.
The agreement calls for the spread of spending cuts equally between domestic and military programs over the next two years. The agreement also calls for reducing the impact of the budget cuts over the next two years and spreading it out over the next decade.
The industry is still awaiting details of the bipartisan agreement, however, any agreement reached would have to pass through a bitterly divided house and the senate before it can be implemented.
Defense budget cuts for FY13 totaled $34 billion and are projected to increase to $52 billion in the current fiscal year. Even with the reduced military spending and lower sales for defense contractors, Aerospace and Defense (A&D) stocks have been one of the best performing this year. The A&D industry ETF (ITA) is up 50% year-to-date (YTD) whereas the S&P 500 is up 26.4% over the same period.
Stocks for companies with a balanced portfolio of commercial and defense products, such as The Boeing Co. (BA) and EADS have led the industry with over 70% returns. Boeing and EADS have benefited from a revival in the Airline industry, which has in turn benefited from global passenger growth. The bulk of this growth has come from the Middle East and the Asia-Pacific region. Boeing and EADS - parent company of Airbus - have received record orders and are sitting on backlogs that extend as far out as seven years.
Defense contractors such as Lockheed and Northrop Grumman have seen year-to-date gains of close to 50% in their stock price but the companies face a sobering reality going forward. Both companies generate over 70% of their revenues from government contracts and have little room to maneuver when military budget cuts are implemented going forward.