Aerospace & Defense

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Aerospace and Defense: Are we Still Reaching for the Sky?

30 Apr, 2009

By: Michael P. Hickey
All Industries Pay Heed

With the current economic environment and a new administration in the White House, the aerospace and defense industries may be facing a bearish road ahead. This means there maybe no better time to take advantage of public financial incentives and new business strategies. Arm your company with the best opportunities for growth and expansion.

The economy is struggling, consumers aren’t buying, business-to-business spending is off, but the federal government is focused on infusing significant cash into the economy, while many states (although facing deficits) are ratcheting up incentive programs for business. When the economic choke cycle breaks, the new cash flows, and the states continue to aggressively pursue business, then the private equity and corporate “sideline” cash will get “into the game.” Consumer spending will pick up and business will again require other business services and products.

All industries pay heed – public incentives are available and can be significant. We have been involved in a few recent deals where states have stepped up to partner with companies to help mitigate the risk of investing by providing significant upfront and ongoing financial incentives.

Incentive specifics will be discussed later – let’s focus on the Aerospace and Defense industry first.

Aerospace and Defense: The Sky is Still the Limit
In a recent speech to the National Aeronautics Association, former Federal Aviation Administrator and Aerospace Industries Association President and CEO Marion Blakey provided some positive numbers from the previous year, even though many industries witnessed major drawbacks.  According to Blakey, preliminary numbers for 2008 are portraying a record level of total sales on pace to reach $204 billion, which amounts to an increase of $2.1 billion over the prior year.  The preliminary trade numbers are showing a positive foreign trade balance of $61 billion, as exports are expected to have reached $99 billion.  Employment numbers are also proving to be encouraging for the aerospace industry.  Blakey anticipates the employment average to have reached 655,000 jobs, roughly 10,000 more than in 2007.  Even though last year was difficult for many sectors of our economy, the aerospace industry found themselves still in a period of growth.

Without question, it is difficult to foresee the future of the aerospace and defense industry, especially with a new administration in the White House. Fortunately, from a federal spending standpoint, funding levels are set for the 2009 fiscal year. In his inaugural budget request for fiscal year 2010, President Barack Obama called for an increase of 4 percent in basic military spending to $534 billion. With an estimated level of war financing of $130 billion for the coming fiscal year, the total defense budget would be near $664 billion.

Aerospace initiatives put forth in the President’s budget proposal included the Next Generation Air Transportation System (NextGen) and the National Aeronautic and Space Administration (NASA). The long-awaited transition to NextGen may be finally taking off as President Obama requested $800 million to implement the state-of-the-art system, while also proposing a significant increased level of funding for NASA at $18.7 billion.

The long-term outlook for the defense industry is reportedly underway at the Pentagon. Set forth in the U.S. Code, the Secretary of Defense is required to conduct a comprehensive examination, known as the quadrennial defense review, of the national defense strategy, force structure, force modernization plans, infrastructure and budget plan, as well as other elements of the defense program and policies of the United States. The review is meant to be a vision of the Nation’s defense strategy for the next 20 years. The expected release date for the next quadrennial defense review is in early February 2010. With the wars ongoing in Iraq and Afghanistan, the continuous battle against foreign terrorism and potential threats from a multitude of unstable regions around the globe, there will be high anticipation for the review’s release.

American Recovery and Reinvestment Act of 2009
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, also known as the Stimulus Bill. In brief, the stimulus bill is a $787 billion spending package aimed at giving the nation’s economy a jumpstart by investing in infrastructure, healthcare, education and energy, along with other initiatives.

The stimulus bill includes several critical incentives and investments for the aerospace industry. Unfortunately, even though it was lobbied for by much of the defense industry, the stimulus did not include funding for weapons-related programs.

The following are notable provisions included in the stimulus package

  • To promote the sale of private jets during the economic downturn, lawmakers included a tax incentive originally implemented in the wake of 9/11. The incentive, known as accelerated depreciation, allows businesses to take a larger deduction in the early years of the life of an asset.

  • In order to strengthen our nation’s airports, the stimulus includes an additional $1.1 billion for the Airport Improvement Program (AIP).

  • To alleviate funding concerns at NASA, the stimulus package will provide $1 billion in additional funds for the space agency.

Arsenal of Incentives
Facing a dire economy and an uncertain future, it is critical for aerospace and defense companies to locate new partners in the economic development community and utilize public financial incentives and new business strategies. Across the nation, new opportunities abound to aid these industries to ensure their growth and development.         

With the aerospace and defense industries being a long-time staple in America’s economy, there are many states, especially along the East Coast, with well-established incentives, partnerships and programs for your company. Over recent decades, other states and communities across the United States have stepped up with their support for the industries. In particular, you will find attractive opportunities and incentives in the Southeast and Southwest, as well as along the West Coast.

Site Selection Factors
Selecting a site (new or existing) to grow and expand presents challenges. The diligent and professional site selector working with your internal team can assist the process to achieve the highest level of accuracy to ensure that the “right” location is chosen. Many key factors are imbedded in the right location decision. A few top factors will include:

  • Talent Availability - Clustering of the right talent pool – the right location for business should also possess the desirable geographic factors that attract the young, educated and skilled workforce. The challenge is at the mid-level skill and age talent. Baby Boomers who have driven the industry for many years are poised to retire. Universities and technical schools are graduating higher numbers of engineers, and math and science majors. The in-between (tweeners, thirty-somethings) are an increasingly critical workforce. These folks are the leadership of tomorrow and need to be developed into project managers and program leaders.

  • Cost of Doing Business - The time is even more important to locate in areas of reduced public community costs. Public incentives can offset some of these costs and become a key discriminating factor to lure and retain the A&D companies. Tax structures, wages, lease costs, land costs and impact fees can either attract or drive away business.

  • The bidding process to secure Federal contracts (cost and quality) drives the winning contract. Public costs cannot be controlled by the industry. As a result, if a community wants to attract this industry they must lower their costs of doing business. So assessing these immediate and reoccurring costs is important. Look for trends in tax structures and regulations, and talk to businesses already in the community.

  • Education – Everybody’s Business - In the aerospace and defense industries, it is critical for education to be a central part in your site selection decisions. Community must be able to partner with the aerospace and defense companies to continue to produce the high-quality, skilled and educated workforce demanded by the industry.

  • Suppliers and Vendors – There’s something in it for you, too. When considering your location decision, it is also critical to ensure there are shovel-ready sites, existing buildings, roads, runways, sufficient power and good transportation networks. Many states, regions and communities have also been able to successfully achieve industry clustering, which, along with convenient access to ancillary businesses and services, can provide a major advantage. Be sure to consider these communities, but be wary of over-saturation, particularly in regards to talent availability. Supply and demand of labor drives the cost of securing and retaining the right talent.

Incentives Available for All
At the end of day, all industries need to be aware of the available public financial incentives when choosing the best location for your company. By partnering with the state and local communities, companies can improve their bottom line. These incentives can come in various forms such as cash grants, tax credits, sales and property tax exemptions, training grants and infrastructure support.

Economic incentives can directly benefit a facility’s start up and ongoing operating costs, but only if the company makes good on their end of the agreement. As part of the process, compliance involves reporting requirements and audits that demonstrate the company’s performance. These tasks can sound daunting and cumbersome, but with the proper planning and data management, the burden of incentive compliance can be virtually eliminated by utilizing the best virtual and web based software.

But one would ask: Why would a community want to provide incentives when over 40 states are facing deficits? The answer is logical – companies bring jobs and capital investment. This in turn creates additional jobs and capital, which creates additional local capital circulation and tax revenue. Everyone wins!

Caution, before you announce any growth, remember the “But For” provision. That is “But For” the incentives the growth will not occur. You announce prematurely, you lose incentives.

If negotiated and managed properly, incentives can be worth millions of dollars. They fall in two basic categories – As of Right and Discretionary.

  • As of Right – If you meet certain goals, i.e., job growth and capital investment, then you are eligible. However, you still need to apply. Examples mostly include:

    • Certain tax credits

    • Special designated zones.

  • Discretionary – Require negotiations with the state and local economic development officials and are based on performance goals related to jobs, capital investment and wages. These can be the most lucrative and often include:

    • Cash grants

    • Training grants

    • Green incentives

    • Free or reduced cost of land

    • Reduced energy costs

    • Expedited permitting

    • Other creative programs.

A word to the wise should be sufficient, professional subject matter experts are well schooled and experienced in negotiating these incentives. You don’t do it every day, so hire a consultant who does.

You Have Landed on Your Site Choice, Now What?
The economy will not recover overnight, and the future landscape of America’s defense strategy is always uncertain. With this environment facing the aerospace and defense industries, it is critical to take advantage of the public financial incentives available across the nation. As you determine the next location for your business, make sure you are armed with the best opportunities for growth and expansion.

Your site is now chosen and incentives are in place. The site selection process is done, now the focus is on the business operations phase. The attention is turned to continuing the partnership with the community to draw down and manage the full incentive value. Remember the incentives are to reduce your start up and ongoing costs, so whatever you do, be aware of how they work to your benefit. A key ingredient is to create or purchase a sophisticated Public Incentives Management and Tracking System that is in real time. These systems are unique and well worth the cost. The old adage is true, “You get what you paid for.”

The entire process is worth the effort. The right site selection, the right incentives negotiation and the right incentives management will provide a soft landing in the right community with the right incentives at the right time.

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