The State of the U.S. Aerospace & Defense Industry

The Strength to Lift America:

DECEMBER 2016

PREFACE

In January 2016, the Aerospace Industries Association (AIA) partnered with business information group IHS Markit to produce an economic impact study of the U.S. Aerospace and Defense industry. The study, which was published in April of 2016, provided a comprehensive picture of the A&D industry through an array of key metrics that assessed industry size and performance at the national and state level.

AIA’s new State of the Industry Report features the fi ndings of the IHS Markit study along with the fi ndings of AIA’s independent research efforts to track the industry’s foreign trade activity and related economic indicators. Combined, this report provides a comprehensive and credible picture of the industry’s economic impact over the 2013-2015 period.

On the front cover: A Lockheed Martin technician inspects the core stage of NASA’s Space Launch System

Alcoa’s redesigned and rebuilt 50,000 ton forging press in Cleveland, Ohio.

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EMPLOYMENT

The U.S. Aerospace and Defense (A&D) industry is the world’s leading innovator and producer of technologically advanced aircraft, space and defense systems and supports one of the largest high-skill and high-wage workforces in the nation. Indeed, in 2015, the U.S. A&D industry supported nearly 1.7 million jobs in companies producing products and services for the industry’s commercial aerospace and defense manufacturing sectors. Of the jobs supported, 697,000 or 42 percent, were attributable to fi rms producing end-use goods and services, such as aircraft, space systems, land vehicles, ships and armaments, while 965,000, or 58 percent were attributable to the industry’s extensive supply chain. Combined, these jobs accounted for approximately two percent of the nation’s total employment base and 13 percent of the nation’s manufacturing workforce.

Employment in the industry’s commercial aerospace subsector, which includes the manufacture of civil

aircraft, rotorcraft, space systems, engines, and related subsystems and parts, accounted for 547,000 workers, while the defense and national security subsector, which includes the manufacture of military aircraft, space systems, land vehicles, ships and armaments, accounted for 519,000 workers. Jobs supported by providers of industry-related services including engineering design, wholesale distribution and program management, among others, accounted for an additional 596,000 jobs.

It’s important to note that the A&D industry’s full impact on employment goes well beyond the industry’s immediate workforce. Jobs throughout the broader economy are supported when A&D workers spend their wages on consumer products and services such as retail, food and transportation. In 2015, this induced effect on the labor force supported an additional 1.1 million jobs across the U.S. economy, resulting in a total A&D impact of nearly 2.8 million jobs.

A&D IMPACT AT THE NATIONAL LEVEL

Boeing 787 assembly line in Everett, Washington

The largest share of jobs directly supported by the A&D industry reside within the U.S. manufacturing sector. In 2015, the A&D industry directly supported 917,000 manufacturing jobs, which included jobs primarily in the following subsectors: aircraft, engine and engine parts, land vehicles, ships, armaments and related subsectors. Moreover, the industry supported an additional 52,000 induced jobs for a total industry impact of 969,000 jobs in the manufacturing sector. The information and professional services sector realized the industry’ssecond largest employment impact. In 2015, the A&D industry accounted for 465,000 jobs in the informationand professional services sector and supported an additional 392,000 induced jobs for a total sector impactof 857,000 jobs.

The average labor income per job within the A&D industry, which includes producers of end-use goods and services and the supply chain, amounted to just over $93,000 – or approximately 44 percent above the national average. Overall, the U.S. A&D industry paid out a total of $155 billion in wages and benefi ts in 2015, which represented 2.3 percent of the nation’s total labor income. The expenditure of this income also supported an additional $58.2 billion in induced labor income throughout the broader U.S. economy.

INDUSTRY SALES AND VALUE ADDED

In 2015, the U.S. A&D industry generated $604.7 billion in sales, expanding at an annualized rate of 1.6 percent over the 2013-2015 period. End-use manufacturers of A&D systems accounted for 58 percent or $349 billion of total sales, while sales in the industry’s supply chain accounted for the remaining 42 percent or $256 billion. Additionally, the industry’s direct sales activity supported an additional $181 billion in induced sales in unrelated sectors throughout the U.S. economy.

The commercial aerospace segment of the A&D industry represented the largest share of sales in 2015, accounting for 46 percent of total sales or $276 billion, while the defense and national security segment accounted for 34 percent or $204 billion. Sales generated by providers of services, including engineering services, program consulting and wholesale distribution accounted for an additional $124 billion in sales activity.

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U.S. AEROSPACE & DEFENSE EMPLOYMENT IMPACT BY ECONOMIC SECTOR – 2015

The largest share of sales supported by the A&D industry occurred in the manufacturing sector, which accounted for 65 percent of total sales activity ($514 billion) in 2015. The information and professional services sector along with the fi nancial services sector were the second and third largest contributors of total sales activity in 2015, accounting for $117.7 billion and $62.7 billion, respectively.

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– In Billions of Dollars

– In Billions of Dollars

– In Billions of Dollars

Technicians assemble Orbital ATK’s Helical Quadrifi lar Antenna Coilable Boom for installation on Sierra Nevada Corporation’s Orbcomm Generation 2 satellite constellation

TAX RECEIPTS

In 2015, the U.S. A&D industry generated a total of $62.6 billion in federal and state tax receipts, up 2.9 percent from $60.9 billion in 2014 and $60.6 billion in 2013. Tax receipts at the federal level amounted to $41.7 billion – a contribution that represents approximately 1.6 percent of the total U.S. federal budget of $3.8 trillion in the 2015 fi scal year. State and local governments also received an estimated $20.9 billion in 2015, which is roughly on par with the total 2015 state budget of Georgia ($20.8 billion), and greater than the combined state budgets of Vermont ($3.6 billion), South Dakota ($4.3 billion), Delaware ($4.7 billion) and New Hampshire ($5.4 billion).

VALUE ADDED Between 2013 and 2015, the A&D industry produced an average of $301 billion in total economic value which amounted to 1.8 percent of total nominal U.S. gross domestic product (GDP). Over this period, the industry’s contribution to the nation’s GDP grew an average of 1.6 percent annually, or from $297.2 billion in 2013 to $306.6 billion in 2015. The largest share of value added supported by the A&D industry occurred in the manufacturing sector, which in 2015 accounted for 43 percent of the industry’s total value added or $132.3 billion. The information and professional services sector was the second largest contributor, accounting for 25 percent or $76.1 billion of the industry’s value added in 2015

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TOTAL SALES SUPPORTED BY A&D BY U.S. ECONOMIC SECTOR – 2015 DOLLARS IN BILLIONS

In 2015, the U.S. A&D industry continued to make strong gains in the export of manufactured goods, reinforcing an upward trend that has seen the industry’s gross exports increase by 63 percent over the past fi ve years. In 2015, manufacturers of A&D systems shipped a record $142.8 billion of exports, which accounted for 9.5 percent of total U.S. exports in goods. Imports of A&D systems also experienced considerable growth, climbing by 65 percent over levels set in 2010 to a record $61.2 billion in 2015. Combined, this trade activity resulted in a positive trade balance of $81.6 billion – the largest positive trade balance of any U.S. industry. Commercial aerospace exports, which include aircraft, engines, space systems and parts, accounted for $121.8 billion, or 85 percent of total A&D exports in 2015. Over the past fi ve years, commercial aerospace exports have grown by 69 percent, driven largely by increased demand from the Asia-Pacifi c region, Middle East and Europe. Defense exports, including military aircraft, vehicles, subsystems and parts, accounted for the remaining 15 percent, or $21.1 billion of A&D exports in 2015. Overall, defense exports experienced positive growth between 2010 and 2014 but declined marginally in 2015 by less than two percent from a record high of $21.3 billionin 2014.

In 2015, deliveries of A&D products and services covered by the U.S. Foreign Military Sales (FMS) program accounted for 79 percent ($16.7 billion) of total U.S. defense exports. Over the past fi ve years, FMS sales agreements have signifi cantly outpaced the growth of deliveries, resulting in a growing backlog for U.S. manufacturers of defense systems. Indeed, over the past fi ve years FMS sales agreements grew by 83 percent, or from $22 billion in 2010, to $40.2 billion in 2015, while FMS deliveries climbed by 28 percent, or from $13 billion in 2010 to $16.7 billion in 2015. According to the U.S. Defense Security Cooperation Agency, demand for U.S. defense systems has been driven by partner countries seeking modernize a full spectrum of capabilities in Asia, the Middle East and Latin America.

On a comparative basis, the A&D industry is the second largest gross exporter among major U.S. industries and retains the largest positive trade balance of any sector – a distinction the A&D industry has enjoyed for several decades. In terms of gross exports, A&D places second behind the computers and electronics sector, and is followed by exports from the motor vehicles, chemicals, machinery and coal and petroleum sectors. On a trade balance basis, A&D is one of seven major industriesto retain a positive trade balance in 2015. The remaining industry sectors with a positive trade balance exceeding $1 billion in 2015 were chemicals, agriculture andpower equipment.

DECEMBER 2015 AIA YEAR-END REVIEW 5

FOREIGN TRADE

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EXPORTS, IMPORTS AND BALANCE OF TRADE FOR U.S. AEROSPACE AND DEFENSEDOLLARS IN BILLIONS

COMPARATIVE ANALYSIS OF FOREIGN TRADE BY U.S. INDUSTRY SECTORDOLLARS IN MILLIONS

The top fi ve export destinations for U.S. A&D systems accounted for $52.3 billion or 37 percent of total A&D exports in 2015. The industry’s largest export customer was China, which accounted for $15.6 billion of U.S. A&D exports, followed by the United Kingdom ($10.5 billion) and France ($9.8 billion). By industry sector, U.S. commercial aerospace exports were led by China, France and the United Kingdom, while exports of defense systems were led by Saudi Arabia, Taiwan and Australia.

The top fi ve countries from which the U.S. imports A&D products accounted for $43 billion or 70 percent of total A&D imports in 2015. The industry’s largest import partner was France, which accounted for $12.6 billion of U.S. A&D imports, followed by Canada ($11.6 billion) and Germany ($7.2 billion). By industry sector, commercial aerospace imports were led by France, Canada and Germany, while imports of defense systems were led by the United Kingdom, Canadaand France.

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TOP COUNTRIES FOR U.S. A&D TRADE

COMMERCIAL AEROSPACE SUBSECTOR

DEFENSE SUBSECTOR

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U.S. FOREIGN MILITARY SALES (FMS) DELIVERIES AND AGREEMENTS: 2010-2015DOLLARS IN BILLIONS

A soldier launching an FGM-148 Javelin anti-tank missile manufactured by Raytheon and Lockheed Martin

EMPLOYMENT BY STATE

The geographic distribution of the U.S. A&D workforce is pronounced in Washington, California, Texas, Michigan and Florida, which collectively accounted for 918,500 jobs, or 55 percent of the industry’s total workforce in 2015. Much of this employment concentration can be attributed to the presence of the industry’s major manufacturers and service providers for both commercial aerospace and defense systems. States with the smallest A&D employment footprint are Wyoming, South Dakota, the District of Columbia and North Dakota, who averaged less than 1,000 jobs over the 2013-2015 period, respectively.

The full impact of the A&D industry on employment goes beyond the industry’s immediate workforce. Jobs throughout the broader economy are supported when A&D workers spend their wages on consumer products and services including retail, food and transportation. In 2015, this induced effect supported an additional 1.1 million jobs across the U.S. economy, resulting in a total A&D employment impact of nearly 2.8 million jobs. At the state level, Washington, California, Texas, Michigan and Florida, who collectively support 918,000 A&D industry jobs, also supported an additional 644,900 induced jobs, resulting in a total employment impact of nearly 1.6 million jobs in 2015.

State-based gains in A&D employment over the 2013-2015 period were led by Michigan, South Carolina, Georgia, Oregon and Oklahoma, which collectively added a net of 23,300 jobs over the period, while net job losses, either through relocation or other business factors, were led by Washington, Texas and Kansas.

AEROSPACE & DEFENSE AT THE STATE LEVEL

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U.S. AEROSPACE AND DEFENSE EMPLOYMENT IN 2015 (TOP TEN STATES)

1,661,900

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A&D EMPLOYMENT BY STATE – 2015

U.S. AEROSPACE AND DEFENSE EMPLOYMENT IN 2015 (TOP TEN STATES)

States with more than 40,000 A&D employeesStates with less than 39,999 and more than 20,000 A&D employeesStates with less than 19,999 and more than 5,000 A&D employeesStates with less than 4,999 A&D employees

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LARGEST JOB GAINS OVER 2013-2015

INDUSTRY SALES BY STATE

At the state level, industry output largely corresponds to the overall geographic distribution of the industry’s employment base. In 2015, the top fi ve states as ranked by sales output were Washington, California, Texas, Michigan and Connecticut, which collectively accounted for 58 percent of total industry sales, or $347.8 billion. The states with the lowest sales output were Wyoming, South Dakota, the District of Columbia and North Dakota, each averaging less than $100 million in A&D output over the 2013-2015 period. The fi gure below illustrates the impact of sales output for the top ten states in 2015.

Employees at Lockheed Martin celebrate the delivery of the 200th C-130 J Super Hercules

Cessna aircraft assembly line in Wichita, Kansas

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INDUSTRY PAYROLL BY STATE

Employee wages and benefi ts paid out by the A&D industry were led by Washington, California, Texas, Michigan and Connecticut, which collectively accounted for 57 percent, or $88.4 billion of the industry’s total labor income in 2015. The states with the lowest labor income contribution in 2015 were Wyoming, South Dakota, North Dakota, Alaska, Nevada and Montana, which individually averaged less than $100 million in labor income over the 2013-2015 period. The fi gure below illustrates the industry’s labor income distribution by the top ten states.

U.S. AEROSPACE AND DEFENSE SALES IN 2015 (TOP TEN STATES)DOLLARS IN BILLIONS

U.S. AEROSPACE AND DEFENSE LABOR INCOME IN 2015 (TOP TEN STATES)DOLLARS IN BILLIONS

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TAX RECEIPTS BY STATE

In 2015, tax receipts generated by the A&D industry were pronounced in Washington and California, which together accounted for 40 percent ($19.3 billion) of the industry’s total federal tax receipts, and 38 percent ($9.5 billion) of the industry’s total state and local tax receipts. Texas, Michigan and Connecticut followed Washington and California as the third, fourth and fi fth largest tax contributors, while Wyoming, South Dakota and North Dakota generated the lowest tax receipts in 2015. The fi gure below illustrates the estimated federal, state and local tax receipts generated by the A&D industry in the top ten states.

CONTRIBUTION TO STATE GDP

In 2015, the A&D industry generated $307 billion in value added goods and services, which accounted for 1.8 percent of the nation’s total GDP. At the state level, the A&D industry made the largest GDP contribution in Washington, accounting for almost 17 percent of the state’s total GDP, followed by Kansas (4.9%), Connecticut (4.8%), Missouri (3.5%) and Arizona (3.4%). As a function of manufacturing-specifi c GDP, which measures the total value added by a given state’s manufacturing sector, the A&D industry made the largest contribution to Washington, accounting for 53 percent of the state’s manufacturing GDP in 2015.

U.S. AEROSPACE AND DEFENSE TAX RECEIPTS IN 2015 (TOP TEN STATES)DOLLARS IN BILLIONS

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FOREIGN TRADE AT THE STATE LEVEL

Exports of A&D products play an important role in supporting high-wage and high-value manufacturing activity that often exceeds the contribution of other major industries on a state-by-state basis. Indeed, A&D exports account for more than 20 percent of total state exports from fi ve states including Washington (60%), Connecticut (51%), Kentucky (31%), Kansas (21%) and Hawaii (65%), and more than 10 but less than 20 percent from eight states: Arizona, Arkansas, Florida, Georgia, Maine, Ohio, Oklahoma and South Carolina.

In 2015, the top fi ve states with the largest contributions to the industry’s export volumes were Washington, California, Kentucky, Connecticut and Georgia, which collectively accounted for 62 percent ($87.9 billion) of total U.S. A&D exports. Over the past fi ve years, A&D exports have experienced the largest dollar growth from Washington, California, Kentucky, South Carolina and Georgia, and the largest percentage growth from South Carolina, Hawaii, New Hampshire, Kentucky and Maine. Washington experienced the largest dollar gain over the 2010-2015 period, with exports increasing by $28.3 billion to a record $51.7 billion in 2015. South Carolina experienced the largest percent increase in exports of 90.6%(5-Year CAGR), with exports growing from $158 million in 2010 to $3.97 billion in 2015.

A&D AS PERCENT OF TOTAL STATEGDP (2015)

A&D AS PERCENT OF STATEMANUFACTURING GDP (2015)

A Bell-Boeing V-22 Osprey landing on the USS New York, a San Antonio class transport dock manufactured by Huntington Ingalls Industries

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A&D EXPORTS BY STATE – 2015

A&D EXPORTS IN 2015 BY STATE (TOP TEN STATES) DOLLARS IN MILLIONS

A&D is more than 20% of total state exportsA&D is less than 19.9% and more than 10% of total state exportsA&D is less than 9.9% and more than 5% of total state exportsA&D is less than 4.9% of total state exports

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LARGEST A&D EXPORT GAINS BETWEEN 2010-2015 (TOP TEN STATES)DOLLARS IN MILLIONS

A technician inspects Lockheed Martin’s Airborne Laser Turret

SOURCES & METHODOLOGY

Estimating the Economic Impact of A&D

In January 2016, the Aerospace Industries Association (AIA) partnered with business information group IHS Markit to produce an economic impact study of the U.S. A&D industry. The study, which was published in April of 2016, provided a comprehensive picture of the A&D industry through an array of key metrics that assessed industry size and performance at the national and state level. Specifically, these metrics include: employment, output (or sales), value added, labor income and tax receipts.

National and state level data with regards to employment, sales, value added, labor income and tax receipts were developed through a detailed economic impact analysis that leveraged proprietary industry insights and market analyses in the development of economic models that were then used to estimate the impact of the U.S. A&D industry. For the purposes of this report, the A&D industry was defined by a set of associated sectors categorized under the North American Industry Classification Systems (NAICS) that include firms that produce goods and services for end-use by A&D industry customers, and sub-sectors that are predominantly comprised of suppliers that support production. Firms that supply management consulting, transportation services and related services to the supplier community are not classified in the A&D supplier base but are included as part of the industry’s indirect and induced economic impact.

A detailed analysis was conducted in order to identify NAICS sectors providing components directly to end users of industry categories. Some NAICS sectors that were determined to have a direct impact were also considered part of the supply chain in which case only a portion of that sector was used. Additionally, multiple NAICS sectors were found to include non-A&D activity which was subsequently removed through a detailed market analysis by industry experts at IHS Markit and AIA. The result of this industry segmentation then served as the inputs for the national and state level input-output models that were used to determine the full economic impact of the A&D industry.

The industry’s direct, indirect, and induced economic impact estimates were quantified through input-output modeling and social accounting matrices using customized IMPLAN models. The results from the national model yielded employment, value added, labor income and tax revenue generated by the A&D industry. State-level models were primarily driven the by the levels of direct employment determined in the data analysis and industry segmentation conducted by IHS Markit and AIA. The results of this analysis provided industry-specific income, employment and value-added data for each state.

Estimating A&D Exports and Imports

National and state-level trade estimates are based on data published by the U.S. Census Bureau and the International Trade Commission. Commodity classifications are based on the U.S. Harmonized Tariff Schedule (HTS) and are aggregated at the HTS ten-digit level based on their relevance to the A&D manufacturing value chain, which includes the manufacture of parts, components, subsystems, systems and end-use platforms unique to the A&D sector. Commodity codes are then grouped into two subsectors, commercial aerospace which includes civil aircraft, engines, parts and space systems, and defense which includes military aircraft, engines and parts as well as land vehicles, ships, armaments and space systems. Final trade estimates are computed as Total Exports and General Imports in accordance to the statistical guidelines established by the U.N. International Merchandise Trade Statistics and the World Trade Organization.

Data on military exports subject to the U.S. Foreign Military Sales program were retrieved from the U.S. Defense Security Cooperation Agency’s Historical Facts Book: As of September 30, 2015.

On the back cover: A technician inspects Orbital ATK’s UltraFlex Solar Array System

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