1000 Wilson Boulevard, Suite 1700 | Arlington, VA 22209-3928 | 703.358.1000 | aia-aerospace.org

The Aerospace Industries Association (AIA) is undertaking a study of the effects of the Budget Control Act of 2011 (BCA) on mid- and lower-tier suppliers that support key U.S. defense capabilities. This study will attempt to move beyond widespread anecdotes about the damage done by ‘sequestration’ by depicting actual examples of lost suppliers, program delays and other turmoil in the defense industrial base.

Since enactment of the Budget Control Act (BCA) in 2011, funding for the Department of Defense (DOD) has been reduced, and made arbitrary, unpredictable, and inconsistent. While the full impact of sequestration has been somewhat mitigated by short-term Congressional budget agreements, effects of the cuts have been felt widely in the defense industry. Neither the government nor the private sector can operate effi ciently under these conditions.

The BCA requires the President to withhold (‘sequester’) discretionary appropriation accounts to stay below arbitrary annual spending limits – automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years, split evenly between defense and domestic discretionary spending. The entire national security establishment has struggled to support its respective missions in response to these reductions.

Although sequestration is itself the result of Congressional gridlock, both the House and Senate defense authorization committees have expressed dismay over the impact of the budget caps. House Armed Services Committee (HASC) Chairman Mac Thornberry (R-Texas) has stated,

“ The problem with sequestration is not primarily about numbers and statistics. It is about whether we have the capability to do what the nation needs and the times demand. It is also very much about the increased danger that comes from diminished training, aging equipment, and a tempo of operations that stretches our people and their families too far.”

In the same vein, Senate Armed Services Committee (SASC) Chairman Senator John McCain has stated,

“ Sequestration was applied halfway through Fiscal Year 2013 and the defense budget was reduced by $41 billion. What was worse was how those cuts were applied: every defense program, regardless of priority, was reduced equally across the board. Readiness, for example was cut the same percentage as administrative overhead. The havoc that sequestration wreaked on each of the military services is still being felt to this day.”1

The Effects of the Budget ControlAct of 2011 on the Defense Industrial BaseMarch 2017

1000 Wilson Boulevard, Suite 1700 | Arlington, VA 22209-3928 | 703.358.1000 | aia-aerospace.org

The sense of alarm over sequestration has reverberated in the Defense Department and industry alike. Former Army Secretary John McHugh stated, “Sequestration is the enemy here at home that could mean a dangerous future for the Army if it’s not repealed.” The defense industry has not fared much better. Anticipating the worst, former CEO of BAE Systems Linda Hudson offered, “We may have to lay off more than 13 percent of employees in the United States if sequestration becomes a reality.” Each of these perspectives suggest that the arbitrary sequester cuts have done significant harm to U.S. national security.

Our study’s thesis is that the BCA has unforeseen consequences beyond the military services and top tier of the defense industry. Of particular concern is the impact on mid- and lower-tier defense suppliers that support the Services and larger defense prime contractors. These suppliers’ support for defense capability can be found across all operational domains (sea, air, land, space, and cyber), and all of our military services; sometimes they are the only supplier of a particular part, component or capability.

The most severe examples can be seen in crippled military operational capability and readiness levels. For example, for the last two years Marine Corps aircraft operations tempo has continued to increase, without the increased budget to support it. Furthermore, Marine Corps maintenance and repair funding levels have not kept up, leading to gaps in repairs and spare parts contracting. As of early 2017, a shortage in spare parts has significantly degraded U.S. Marine Corps aviation capability from fulfilling operational missions.2

_____________________________________________________________________________________________________________________1 “Restoring American Power,” Senator John McCain, Chairman, Senate Armed Services Committee (January 2017)2 http://www.military.com/daily-news/2017/02/10/spare-parts-shortage-grounds-most-marine-corps-aircraft.html?ESRC=eb_170213.nl

Defense Spending in the Sequestration Era

Since the last pre-sequestration Presidential Budget Request (PB 2012) was submitted in 2011 – even with modest Overseas Contingency Operations (OCO) funding, above

the BCA caps – defense spending has been dramatically reduced.

In Current Dollars FY 2011 – FY 2021

(Do

llars

in B

illio

ns)

1000 Wilson Boulevard, Suite 1700 | Arlington, VA 22209-3928 | 703.358.1000 | aia-aerospace.org

Lack of spare parts has caused the entire force of Marine aviation assets – transport, fighter and rotary-winged aircraft – to have difficulty meeting their required operational readiness levels. Of the Marines’ total aviation fleet of more than a thousand aircraft, fewer than half are now qualified as operationally ready owing to the lack of spare parts. The readiness level of some fleets are at staggeringly low levels: 50% for MV-22 Ospreys, 55% for F/A-18 Hornets and 61% for AV-8B Harriers. The lack of spare parts made it impossible to deploy the 12 MV-22 Ospreys needed to support the Special Purpose Marine Air-Ground Task Force Crisis Response-Africa, with only six available to support the entire theater. Even newly-established Marine squadrons are facing a total of 4,000 back orders of needed parts, supplies and materials.

More broadly, the Navy recently declared that major ship maintenance efforts are experiencing delays as a result of sequestration.3 The shortfall in aircraft carrier maintenance is now expected to reach well over $800 million.4 This problem is exacerbated by suppliers downsizing in response to budget cuts. For example, Fairlead Incorporated, a supplier of precision metal fabrications for the Navy’s aircraft carriers, now employs 200 people as a re-branded company downsized from 1,200 employees.5 Fairlead and other small companies are in a weak position to help address current aircraft carrier maintenance shortfalls, let alone any increased production that may result from the Trump Administration’s commitment to grow the size of the Navy.

Suppliers are increasingly finding themselves in a market that supports less competition and innovation, and where they must bear extraordinary risk. The business climate caused by sequestration makes it difficult for companies to compete and limits the stretch of innovation that companies are willing to fund. The CEO of IXI Technology, an electronic systems supplier for the Navy’s Aegis system, stated,

“In years past, we could have received funding for co-development or NRE [non-recurring engineering costs], but with sequestration it has dried up. All product development at IXI Technology today is performed 100 percent via company funds with zero commitment from contract awards.”6 7

Some large contractors have already shuttered production facilities employing thousands of workers, while many small businesses in our national supply chain are at risk of going out of business. Smaller defense companies deserve attention because they lack the tools to deal with budget cuts that are available to large firms with multiple sectors and sources of revenue, such as distributing cash flow disruptions across programs and reassigning employees from one program to another to retain essential personnel. Yet these smaller firms play a significant role in defense procurement; or the loss of some of these key mid- to lower-tier level companies could potentially have a catastrophic effect on present and future U.S. warfighting capabilities.

1000 Wilson Boulevard, Suite 1700 | Arlington, VA 22209-3928 | 703.358.1000 | aia-aerospace.org

WHAT’S NEXT?

As America restores the vitality of our current force, and contemplates building a larger force for growing threats, we must better understand the plight of the smaller companies that play a critical role in our nation’s defense.

To support our clear perception that these problems exist in the defense industrial base, and to provide leaders with concrete examples of the damage done by the BCA, this study will highlight:

> The effects of the BCA on a limited set of mid- to lower-tier companies that perform critical work on major defense programs;

> The impact on those major programs of having to manage turbulence and degraded capability among their mid- and lower-tier suppliers

> The ultimate consequences of these effects for U.S. warfighting capability.

This effort is not intended to be a comprehensive, quantitative study of the entire industrial base. However, by depicting challenges across a range of sectors and products, we hope to illustrate the need to end the BCA’s devastating impact on the U.S. defense industry, and more importantly, on its support to our warfighters.

The completed study will be presented by the end of April, to coincide with the expected submission to Congress of the President’s Budget Request for Fiscal Year 2018.

____________________________________________________________________________________________________________________3 http://breakingdefense.com/2013/03/sequester-cr-and-carriers-how-postponed-overhauls-ripple-throug/4 http://www.defensenews.com/story/defense-news/2016/05/26/navy-maintenance-overhaul-funding-submarine-aircraft-carrier-forbes-mcrae-davidson-stearns-norfolk-

congress-sequestration/84994640/5 http://pilotonline.com/inside-business/news/maritime-and-transportation/safe-passage-earl-industries-founder-jerry-miller-has-settled-into/article_beecbcf4-2be3-5e8f-

8158-48cc4834dedb.html6 http://mil-embedded.com/articles/sequestration-and-defense-electronics-market/7 http://ixitech.com/seaport-e/