Defense Industry
7:15 am
Thu April 17, 2014

As Defense Budget Shrinks, Local Contracting Not All Doom And Gloom

Employees of General Atomics Aeronautical, the manufacturer of Predator and Reaper drones, talk in the company's new Beavercreek office.
Credit Lewis Wallace / WYSO

Thursday is the second day of meetings at Wright-Patterson Air Force Base for small businesses in the defense industry. The event is part of an effort on the part of the Air Force to work more with small contractors; base officials say it helps them stay efficient as the government cuts defense budgets.

Those cuts have been bad news for local industry, which provides the Air Force with everything from computer systems to research to airplane parts—but not all contractors are feeling the same pain.


Large contractors cash in

While larger contractors have slimmed down since the Department of Defense began to shrink budgets in fiscal year 2011, they are in many ways still riding the wave of the wars in Afghanistan and Iraq; the conflicts were bonanzas for the aerospace industry in particular.

For example, the company that makes Predator and Reaper drones continues to be in a growth spurt.  General Atomics Aeronautical, which is based in San Diego, California and builds drones in the Mojave Desert, reports 150 percent growth in business with the Air Force in the last five years. Now the company is opening up shop closer to Wright-Patt to continue building on that success.

At an opening event in the Beavercreek office in early April, officials celebrated by slicing into a big cake with a Predator drone painted onto the frosting. State Rep. Rick Perales (R—Beavercreek) offered up a resolution of welcome from the state legislature, expressing a hope that the company will grow in Dayton.

“We’ve got the local community, we’ve got the feds, and we’ve got the state that all want to partner with this to make sure that we give you every opportunity,” he said, addressing the two current local employees of General Atomics Aeronautical. “Five or six years from now...you’ll have 60, 80, 100 people here by then, and both you two will be retired and have a lot of money.”

The company expects to add up to 10 workers in the coming years in the new office, which is located on Mission Point Drive directly across Colonel Glenn Highway from the base.

Frank Pace, head of aircraft systems for General Atomics, says the company is cutting the numbers of unmanned aircraft it’s building for the Air Force, but the technologies attached to the vehicles the military is ordering are increasingly complex. The company is also expanding into foreign military sales.

“I think there’s still money out there, I think unmanned aircraft are here to stay,” he says. “They’re kinda the wave of the future.”

Asked about the ethics of military drones, Pace says the military is a customer—he’s not part of the decision about how the technology is used, and doesn’t feel responsible for it.

“I don’t think that using an unmanned aircraft is any less ethical than any other way to fight a war really,” he says. “And, you know, I think we’d all prefer that wars didn’t have to be fought.”

General Atomics has gotten more than $8 billion in government contracts in the last five years—which still puts it behind behemoths like Lockheed Martin, Boeing and Northrup Grumman in sheer numbers. That said, almost all major Air Force contractors have seen cuts in recent years; the Aerospace Industries Association at the end of 2013 reported a 6.3 percent decline in military sales for that year and an expectation of further declines to come.

An expensive draw-down

During the same five years that General Atomics saw net growth in drone business, something important happened: the war in Iraq ended, and troops have started coming back from Afghanistan. From about 2001 the national defense budget was like a plane in a steep ascent—and it just began to come down in 2010.

Todd Harrison with the Center For Strategic and Budgetary Assessments prepared these slides showing the drawdown with Budget Control Act cuts in place compared to patterns following previous wars.

Todd Harrison, a defense analyst with the Center for Strategic and Budgetary Assessments, says while the total U.S. defense budget has gone down by 20 percent, it still hasn’t caught up with past drawdowns.

“At the end of Vietnam, we saw a decline of about 25 percent, and of course at the end of the Korean War, we saw a decline of almost half,” he says. The recent across-the-board cuts known as sequestration are more like caps on defense spending. “Those spending caps actually just keep the budget basically flat where it is today.”

In other words, despite a lot of hand-wringing from the industry, the defense budget isn’t really in a nose-dive—it’s leveling out, still high in the sky.

Small businesses still playing catch-up

At the same time, small Miami Valley companies are still trying to figure out how to get into the industry, which continues to be a major economic driver for the region. According to the website USAspending.gov, in the last five years, at least $2.5 billion in defense contracts have gone to businesses based around Wright-Patt—but a lot of those are for services, as opposed to actual manufactured products, parts or hardware.

The Air Force is currently pushing to reduce the force’s dependency on contractors for services, while increasing efficiency in relationships involving supplies.

Lt. Gen. C.D. Moore is the commander of the Air Force Life Cycle Management Center at Wright-Patt.
Credit Lewis Wallace / WYSO

“Small businesses have been most critical of us because of our inability to accurately forecast opportunities,” explains Lieutenant General C.D. Moore, commander of the Air Force Life Cycle Management Center at Wright-Patt. The AFLCMC is in charge of buying equipment for the Air Force.

Lt. Gen. Moore says they’re trying to do a better job working with small business, and the dialogue with industry this week aims to let small businesses from the region know more about the government’s future plans. With that information, he says, companies can let the AFLCMC know what they have to offer, and tailor technologies they’re working on to fit the Air Force’s needs. They can also cut out the middle-man by going straight to small contractors rather than going to them through large omnibus contracts.

“Frankly, I would tell you that the federal government and the USAF is not always the easiest entity to work with,” Lt. Gen. Moore concedes. But he says the force is striving to make contracting more accessible: “Our success is tied inextricably with our connection to industry.”

Leveling out

Small companies, large companies and military employees alike have been on a turbulent ride the last few years as military cuts have begun to sink in.

Chuck Evanhoe of Evanhoe and Associates has an office in a little gray house just up the street from the Air Force museum. He says his 50-person IT company, founded in 1996, took a hit during the Recession—and the government became their main customer. Just last year, they saw one government contract cut off after sequestration and laid off a couple people. But last week, his IT company just got news of a lucrative subcontracting deal with an Air Force agency in Virginia.

It’s the instability he says is difficult; he’s hoping budgets will eventually level out.

“You just don’t know, you don’t know where the money’s gonna come from, where it’s gonna be cut,” he says. But Evanhoe says he does understand that, adding that the government only has so much money, “just like most of us.”  

And yet the amounts of money at stake may be hard for most of us to conceive. Total contracts issued from the Department of Defense in all areas just since 2009 add up to $1,849,196,065,911—close to 2 trillion dollars, and that's in the years since the Recession.

Maurice McDonald, VP of Aerospace and Defense at the Dayton Development Coalition, says he’s observed a mixed bag for contractors as defense cuts sink in, but “it’s not all gloom and doom.”

He thinks Dayton-area companies have every reason to continue competing for their piece of that pie—and to continue pushing their representatives in Congress to maintain and build upon Wright-Patt’s presence in the Miami Valley.

“We have a strong workforce here in the Dayton region, a strong workforce supporting Wright-Patterson Air Force Base and on Wright-Patterson, and we feel that’ll continue. Wright-Patterson is a jewel of the Air Force, and we want to make sure that it remains that way.”