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Overview of the U. S. Civil Aviation Manufacturing Industry The civil aviation industry, including both manufacturers of aircraft and the commercial airlines, is in the midst of profound change. Some features of the change result from domestic actions and circumstances (for example, economic deregulation of air transport and the severe 1980-1981 recession), others from external developments (such as viable competition from Airbus Industrie in the large transport sector and erosion of U.S. industry leadership in international sales of civil helicopters, commuter aircraft, and business aircraft). The long-term implications of these changes are by no means clear. What is clear is that the stakes are of national importance because civil aviation is unique. Few other industries combine in as large a measure a crucial role in national security, a major contribution to national economic health and foreign trade, and a flagship role in the global posture of technical leadership accorded the United States. This study focuses on aircraft manufacture, but its connection with civil air transport is so close that some current and prospec- tive features of the latter must be included. Full assessment also requires examination of the relationship of civil industry to mili- tary activity. The civil aviation manufacturing industry can be divided into two broad categories. One comprises large aircraft and their parts, jet engines, and avionics and support equipment used in national and international air transport. The other is more heterogeneous--including rotorcraft, regional transport, business aircraft, and light piston aircraft and their parts, avionics, and engines. This study covers both categories and notes where findings and recommendations do not apply to both. 18

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19 TABLE 1-1 Civil Aircraft Shipments, 1968-1982 (millions of dollars) Transport General Total Aircraft Helicopters Aviation 4,267 3,789 57 421 3,598 2,939 75 584 3,546 3,158 49 339 2,984 2,594 69 321 3,308 2,660 90 558 1973 4,665 3,718 121 826 1974 5,091 3,993 189 909 1975 5,086 3,779 274 1,033 1976 4,592 3,078 285 1,229 1977 4,451 2,649 251 1,551 1978 6,458 4,308 328 1,822 1979 10,644 8,030 403 2,211 1980 13,058 9,895 656 2,507 1981 13,223 9,706 597 2,920 1982 8,610 6,246 365 1,999 SOURCE: Aerospace Industries Association of America, Inc., Aerospace Facts and Figures, 1983/1984, p. 34. THE INDUSTRY AND ITS IMPORTANCE TO THE ECONOMY The civil aviation manufacturing industry is a major compo- nent of the aerospace industry, which in turn is one of our largest and most technology-intensive industries. R&D expenditures, including both company and government funds, for aerospace (the only segment for which the National Science Foundation provides R&D to sales data), represent 15.4 percent of sales compared with 3.3 percent for all manufacturing. Shipments of large transports, helicopters, and general avia- tion aircraft are shown in Table 1-1. The variability of output for a major capital expenditure such as aircraft is reflected in the figures. Even within manufactured durable goods, commercial sales of aircraft (including exports of military aircraft) vary from just over 1 percent to more than 2 percent (Table 1-2~. Although transport aircraft represent the dominant factor in the industry, sales of helicopters and general aviation have been growing more rapidly, as also shown in Table 1-1. The industry is an important source of employment for both skilled production workers and for highly trained scientists and engineers, who represent 16 percent of the work force (Table 1-3~. Again, the highly cyclical nature of the industry is reflected in the wide swings in employment. The employment data in Table 1-3 are conservative in that they include only estimates of aero-

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20 TABLE 1-2 Companson of Civil Aircraft with Gross National Product, 1970-1982, and Manufactured Durable Goods Billions of Dollars C~vl1 Alrcraft Percent of All Durable (millions of Durable GNP Manufacturing Goods dollars) Goods 1970 992.7 633.7 338.6 5,880 1.74 1971 1,077.6 671.1 359.7 5,079 1.40 1972 1,185.9 756.5 408.5 5,199 1.27 1973 1,326.4 875.4 476.4 6,739 1.41 1974 1,434.2 1,017.9 531.0 7,560 1.42 1975 1,549.2 1,039.4 524.1 7,797 1.48 1976 1,718.0 1,185.7 608.4 7,622 1.25 1977 1,918.0 1,330.1 696.1 7,530 1.08 1978 2,163.9 1,496.6 798.1 10,581 1.32 1979 2,417.8 1,727.3 909.6 16,023 1.76 1980 2,633.1 1,845.9 936.0 20,097 2.15 1981 2,937.7 1,994.6 1,001.0 21,527 2.15 1982 3,059.3 1,886.0 918.2 17,338 1.88 SOURCE: Survey of Current Business, U.S. Department of Commerce, Aerospace In- dustries Association of America, Inc., Aerospace Facts and Figures, 1983/1984, p. 30. space-related employment in communications' instruments, and selected other industries at the 2-digit Standard Industrial Classification (SIC) level. Data on the massive 15,000-firm infrastructure that supports the industry are unobtainable. Foreign sales are increasingly important to the industry, representing approximately 60 percent of large transport sales, 50 percent of rotorcraft, and 25 percent of general aviation. U.S. exports of large transports represent approximately two-thirds of total sales in the rest of the world. Civil aircraft play a major role in foreign trade, representing 4.2 percent to 7.1 percent of total merchandise exports since 1970 (Table 1-4--highest of all export categories. Although the percentages vary, they seem to represent a relatively stable portion of the total. Even though imports of aircraft appear to have escalated dramatically in 1981-82, they are modest compared with exports (Tables 1-5a and 1-5b). Figure 1-1 shows the growth of imports since 1970 for large transports, helicopters, and general aviation aircraft. The increase in imports is troublesome, but year-to-year variations can be large and no conclusions can yet be drawn about trends with respect to large transports. The situation in helicopters and general aviation is quite different. As can be seen in Table 1-5a, penetration of imports is escalating rapidly. Exports of transports are a major part of total aircraft exports. The great importance of the extensive fleet of U.S.-built aircraft operated by foreign airlines is reflected in the large sales of aircraft and engine parts (Table 1-5b).

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21 TABLE 1-3 Employment in Aircraft Manufacturing, 1972-1982 (thousands) Production Scientists Year Total Workers and Engineers 1972 494.9 266.2 70.8 1973 524.9 284.2 72.1 1974 539.4 291.9 70.6 1975 514.0 271.1 67.5 1976 487.1 250.7 66.9 1977 481.7 246.8 72.0 1978 527.2 275.4 82.0 1979 610.8 332.1 86.5 1980 632.3 354.6 85.9 1981 648.9 344.6 95.2 1982 611.8 309.9 95.3 SOURCE: U.S. Bureau of Labor Statistics: Employment and Earnings (Monthly), U.S. Department of Labor. National Science Foundation. This U.S. export trade contributes significantly to the strength and cost-effectiveness of the U.S. aerospace manufacturing indus- try. A loss in foreign trade can have significant impact on U.S. jobs and the economy. It has been estimated that every $1 billion increase in aircraft exports could provide the equivalent of 16,490 direct and indirect full-time job-years per year in the 1982 to 1990 period. Of this number, 4,910 persons would be employed directly in the aircraft industry. In addition to the $1 billion in sales, follow-on orders of aircraft and spares would provide estimated sales totaling $6.5 billion in the 1982 to 1990 period. ECONOMICS OF THE INDUSTRY The manufacture of civilian aircraft, especially large com- mercial transports, is a long-term, high-risk, multibillion-dollar venture. The lead times required are on the order of four years for the aircraft and six years for the jet engine to power it. Since the expected life of the aircraft in the manufacturer's product line is approximately 15 years, the market at which the product is aimed may be 5 to 20 years in the future, i.e., long after the key product decisions are made. Only very gross data on economic growth, air travel, and cost of capital and fuel are available. Estimates contain huge amounts of uncertainty. Nevertheless, the aircraft manufacturer must risk $2 to $5 billion with the high probability that even a successful venture will not break even in terms of cash flow for at least 10 to 15 years. The jet engine

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22 TABLE 1-4 U.S. Exports of Civil Aircraft, 1970-1983 (millions of dollars) Percent of Total Other Civil Total Total Merchandise Transport Aircraft and Civil Aircraft Merchandise Year Exports Aircraft Products and Products Exports 1970 42,590 1,283 1,233 2,516 5.9 1971 43,492 1,567 1,513 3,080 7.1 1972 48,959 1,1 19 1,835 2,954 6.0 1973 70,246 1,664 2,124 3,788 5.4 1974 97,144 2,655 2,618 5,273 5.4 1975 106,561 2,397 2,927 5,824 5.0 1976 1 1 3,666 2,468 3,209 5,677 5.0 1977 119,006 1,936 3,113 5,049 4.2 1978 141,228 2,558 3,460 6,018 4.3 1979 178,798 4,998 4,774 9,772 5.5 1980 216,672 6,727 6,521 13,248 6.1 1981 228,961 7,180 6,132 13,312 5.8 1982 207,158 3,834 5,774 9,608 4.6 1983 195,969 4,683 5,912 10,595 5.4 SOURCE: U.S. Bureau of the Census, "U.S. Exports, Schedule B. Commodity by Country; Highlights of U.S. Export & Import Trade." manufacturer must invest an additional $1.5 to $2 billion with his return being dependent on the success of the aircraft. The financial record of commercial transport manufacturers since World War II is not reassuring. Only 5 of 22 manufacturers of large transports survive in the free world, and the viability of some of them is questionable. Furthermore, the profitability is below the average for all of manufacturing. The industry is subject to major swings in sales, employment, and earnings that create great difficulty in building and maintaining competitive development, design, and production teams. TECHNOLOGY BASE The technologies that underlie U.S. leadership in aircraft manufacture play a critical role in the total constellation of our technological leadership. These technologies include not only the more obvious ones that affect aircraft performance--aero- dynamics, propulsion, advanced structures, and avionics and control but also system integration in the design and manu- facture of complex, high-performance equipment; project management to meet demanding targets for performance, cost, and delivery; sophisticated manufacturing techniques for fabrica- tion, testing, and assembly; and computer-integrated manufac- ture, factory automation, and large-scale integrated information processing. Strength in these technologies diffuses throughout

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23 TRANSPORTS 20 15 UJ Cat tr: UJ Cal 10 30 20 1 5 10 5 o 30 25 20 /\ / \ / ~ / \ units/A\\` /Value ~ 1 1 1 1 1 HELICOPTERS I_ ~ 1 1 1 I '1 Units '' / OCR for page 18
24 TABLE 1-5a U.S. Civil Aircraft Imports, 1978-1983 (millions of dollars) 1978 1979 1980 1981 1982 1983 Civil aircraft total 284.5 508.6 969.1 1,336.2 1,266.0 892.2 Transports 58.1 199.8 285.5 195.5 231.4 188.0 General aviation 146.8 260.4 495.8 913.0 837.7 541.9 Helicopters 28.0 21.6 53.9 105.4 84.9 89.5 Other 51.6 26.8 133.9 122.3 112.0 72.8 Civil aircraft Engines and parts - 534.7 1,407.3 1,255.9 1,074.0 SOURCE: U.S. Bureau of the Census, Schedule B. Commodity by Country. TABLE 1-5b U.S. Civil Aircraft Exports, 1978-1983 (millions of dollars) 1978 1979 1980 1981 1982 1983 Civil aircraft total 6,018 9,772 13,248 13,312 9,608 10,595 Transports 2,558 4,998 6,727 7,180 3,839 4,683 General aviation 496 650 739 790 517 356 Helicopters 156 207 299 346 206 232 Other 277 875 556 784 783 420 Civil aircraft Engines and parts 2,116 3,220 4,436 3,915 3,997 3,954 SOURCE: U.S. Bureau of the Census, Schedule B. Commodity by Country. industry and contributes substantially to the overall strength and competitiveness of the U.S. economy. Furthermore, the experi- ence gained from operating and maintaining a large, heterogene- ous, intensively utilized commercial air fleet in itself constitutes a valuable technological resource that contributes to the national economy and security. These are some of the very reasons that foreign governments, both developed and developing, have tar- geted aviation as an important component of more general economic development programs.2 CONTRIBUTION OF THE INDUSTRY TO NATIONAL SECURITY A recent U.S. Office of Science and Technology Policy (OSTP) study highlighted the importance of aeronautics to national security.3 Among the key findings of the study were the following: The United States depends heavily on technical superiority of military aircraft for national defense--approximately one-third of the Department of Defense (DOD) budget is for procurement, maintenance, and operation of aeronautical systems.

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25 A healthy, competitive civil aeronautics manufacturing industry reduces the cost of providing an essential military- industrial base and wartime mobilization surge capacity. The contribution of civil aircraft manufacture to the military- industrial base is provided principally in two ways. First, the teams that could develop and apply new design and production technology to new military aircraft are kept in a high state of readiness by the continuing requirements of the civil market, which in normal times accounts for some 80 percent of the total production weight of aircraft produced. The design and production techniques and systems developed in civil operations can be, and are, transferred to the defense sector. Second, the massive production base that is marshalled to manufacture civil aircraft is available as a wartime surge capacity. The many diverse items needed to manufacture a modern jetliner involve contributions from some 15,000 com- ponents manufacturers and materials suppliers. The items range from complex subassemblies and engines to avionics, electrical equipment, hydraulic and mechanical equipment and interiors, to nuts, bolts, and rivets. The skills and equipment needed are easily adapted to the production of military aircraft. Military requirements for new aircraft would not in them- selves provide a sufficiently stable load to maintain the design and production teams in an adequate state of readiness for emergencies. The deterioration or disbanding of these teams would represent a strategic loss that would not quickly be repaired, no matter how serious the emergency. In addition, the cost benefits that come from shared overhead would be lost. These teams include not only the most visible top layer of scien- tists and engineers associated with design, but also thousands of skilled design, development, and production specialists working on such things as the development and production of components, sophisticated materials, advanced propulsion systems, electronics, controls, communications, and machine tools, as well as tens of thousands of skilled production workers. This vast network remains viable only if it is constantly challenged and employed. Civil aircraft manufacture provides the base load of work for this network. Civil aviation manufacturing also provides available, off-the-shelf aircraft for mission support for U.S. defense. Furthermore, the competitive drive for efficiency stimulates improvement in the productivity of this infrastructure by devising new machines and techniques for production, from which the mili- tary establishment also can benefit. This improvement occurs, of course, only if the aircraft industry is sufficiently profitable to be able to afford new equipment and training. This readiness-to- serve capability helps reduce the start-up costs and time that . . . .

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26 would otherwise be incurred in expanding capacity in an emergency. If this development and production infrastructure deterior- ates--as it inevitably will if the U.S. aircraft industry (or its civil customer base) is not financially healthy--the defense establish- ment will undoubtedly do whatever is necessary to help maintain the industry at an adequate level. Consequently, it is in the vital interest of the United States to ensure a healthy aircraft industry and to achieve effective coupling between defense and civil plans and programs where there is opportunity to benefit from such coupling. (Needless to say, our NATO partners also benefit from a healthy U.S. aircraft manufacturing industry.) Rotorcraft represent a special case. Civil helicopters have been principally derivatives of aircraft developed for militar y use. But new third-generation U.S. military helicopter develop- ments have not yielded aircraft suitable for civil certification and commercial use. DOD has in general recognized the values of commonality with commercial products in providing increased economies of scale and logistics, but its helicopter commonality policy has not considered the additional values that derive from inclusion of civil-certificated derivatives of military helicopters. New military requirements have created such specialized aircraft that they have limited commercial attractiveness to the market. REASONS FOR PAST SUCCESS OF THE INDUSTRY The U.S. aviation industry has dominated world markets since the end of World War II. It is important to understand the reasons for this success before examining some of the trends that are now generating concern. Part of the success results from the large- scale technology and production resource created for World War II. Additional powerful factors that have been decisive in estab- lishing and maintaining U.S. dominance are: (a) a productive, decades-long relationship among the government, the major airlines, and the aircraft manufacturers in the context of a free market economy; (b) a combination of economic and geographical considerations in the United States that has favored air transport over other modes of transportation; (c) the size, diversity, and rapid growth of the U.S. air transport industry that provided a major domestic market; (d) an aggressive, effective program of technology development combined with an advanced, productive aircraft design and manufacture capability that received con- tinuing infusions of resources; and (e) a system of product support that earned customer loyalty. These factors and relationships, including the productive linking of government to manufacturers and airlines, began as early as World War I. The National

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27 Advisory Committee for Aeronautics (NACA) at its Langley Center, the Army at Wright Field, and the Navy Bureau of Aero- nautics established the basic foundation for aeronautical and propulsion technology. The U.S. Post Office contributed signifi- cantly by establishing transcontinental airmail service via lighted airways in 1924, and the Kelly Bill in 1925 encouraged private investment in air mail contracts. The modern structure of the industry began to emerge in 1934, with the separation of airlines from manufacturers by government fiat to increase competition and industry development. Direct subsidies to promote passenger travel, economic regulation of airlines, air traffic control, and safety authority were fully codi- fied in the 1938 legislation establishing the Civil Aviation Adminis- tration (CAA) within the U.S. Department of Commerce. The functions of the CAA were divided in 1948. Two separate agencies, the Civil Aeronautics Board (CAB), and the Federal Aviation Administration (FAA) were established. The CAB was assigned to handle route and economic matters (economic regula- tion). The FAA was charged with technical, safety, and certifica- tion matters. Both were charged with encouraging the expansion of the industry. The combination of the NACA, Army Air Corps, and Navy technical research In aerodynamics, structures, engines, and fuels, together with R&D by private manufacturers and the development of far-flung airline operations, assisted the United States in becoming the world leader in commercially successful aircraft (e.g., DC-3) and services (e.g., extensive domestic routes and long-range overseas routes using the China Clipper). U.S. civil aircraft, and especially engines, benefited from the continuous stream of large R&D investment by the military estab- lishment, especially the competition for jet bombers. They also benefited from the economy of scale afforded by the growing domestic market, and from the aggressive, market-focused management of the industry. U.S. civil aircraft offered excellent performance, excellent quality and reliability, size and perfor- mance range that matched market needs, lower operating costs than European aircraft, competitive purchase prices, and excel- lent logistics and field operations support. European manufac- turers sometimes led in introducing new technology, e.g., first use of jet engines in commercial transports and first smaller two- engine jets, but they did not succeed in marshalling the array of competitive factors that led to commercial leadership. The principal reasons for the past success of U.S. large trans- port aircraft manufacturers have been a strong technological base, a good perception of airline and business requirements, and a willingness to accept the risk of implementing new technology and to tool up for early high production rates so that the market opportunity could be exploited as rapidly as it developed. United

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28 States manufacturers have been able to make decisions about product selection, prices, costs, and production facilities with relatively limited government involvement, in contrast to their counterparts in Europe where governments have often been involved, e.g., the VC10 and the A300. Business aviation directly benefited from the large U.S. tech- nology base developed for commercial jet transports, described above. In the early 1960s business aviation was a small U.S. industry. Some large corporations had flight departments and recognized the benefits of rapid air transportation, but the fleet was composed of reconstructed military aircraft and a few cabin- class, twin-engined, piston-powered aircraft. Turboprops and jets were just being introduced. In the ensuing 20 years progress has been enormous, due to rapid technological advances in U.S. aircraft design and manu- facture, U.S. government support for small airports and naviga- tion infrastructure, and the willingness of U.S. general aviation manufacturers to accept the risk in applying new technology in new products. As the market developed--helped by the expansion of industry and growth of small population centers--general aviation manufacturers frequently offered aircraft with much improved performance and service capability through advances such as high-bypass engines, increasingly useful avionics, long- range navigation systems, and structural and safety advances. Most other regions of the world had neither the domestic market, technological base, nor the government support that the United States enjoyed, and thus little competitive foreign industry developed in general aviation until the last half of the 1970s. NOTES 1. National Benefits of Aerospace Exports, The Aerospace Research Center, Aerospace Industries Association of America, Inc., Washington, D.C., June 1983. 2. F.J.L. Diepen, "Aviation and Technology in the European Economy," AICMA-Symposium, London, September 13-14,1967. 3. Aeronautical Research and Technology Policy, Executive Office of the President, Office of Science and Technology Policy, Volume 1: Summary Report, November 1982.