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Industry Outlook -- MANUFACTURING


Everyone should have the aerospace industry's woes. Its biggest problem is demand so strong that neither the dominant player, Boeing Co., nor its suppliers, can keep up. So don't be surprised by data showing a drop in industry earnings, to $6.7 billion, down from a record $7.2 billion in 1996. The dip in Aerospace Industries Assn. data stems from a $1.6 billion write-off at Boeing. The industry has been on a hiring frenzy to keep up, boosting payrolls from 798,000 at the end of 1996 to 869,000 by mid-1997.

If the industry gets over its growing pains and a robust economy keeps the airlines healthy, 1998 could be stellar. Profit margins should get a boost as the hiring frenzy slows down, and the AIA expects civilian sales to fuel an 11.5% revenue increase in 1998, to $144.5 billion, from an estimated $129.6 billion in 1997. Leading the charge should be a jump in aircraft shipments, to 2,284 from 2,092 in 1997. The space-launch business and sales of products such as air-traffic controls and electronics also should see healthy growth.

All of this could translate into stronger bottom lines, despite Boeing's plan for a $1 billion charge in 1998. One reason: New customers for planes may have to pay a premium to get a slot in the busy production lines, despite the competitive slugfest between Airbus and Boeing. "We should see price increases," says Wolfgang H. Demisch, aerospace analyst at BT Alex. Brown Inc., who predicts hikes in the 10% to 20% range.

NUPTIALS. On the military side, merger mania is likely to subside after the $11.6 billion Lockheed Martin-Northrop Grumman marriage is inked in the first quarter, possibly after trustbusters demand changes to preserve competition in some electronics technology. The big prime contractors are instead likely to reshape their portfolios, jettisoning noncore assets. Second-tier and infotech firms, though, will follow the lead of the TRW-BDM and Litton Industries-TASC nuptials to keep the merger ball rolling.

The corporate streamlining and tight Pentagon budgets will make top-line growth difficult. Defense spending on procurement and research and development will inch up from $81 billion in fiscal 1997 to $82 billion in fiscal 1998. And it will be tough to slash infrastructure and overhead costs to help boost the procurement budget from $45.4 billion to the $60 billion experts believe is needed to modernize the current force. Bottom-line prospects are better, though, thanks to already completed acquisitions. "You'll see some nice reported earnings as companies continue to prune and garner more consolidation savings," predicts Jon B. Kutler, president of Quarterdeck Investments Partners Inc., an aerospace and defense investment banking firm. So while the commercial side is looking at another boffo year, defense contractors' performance won't be too bad, either.By Stan Crock in WashingtonReturn to top


Prognosis 1998


-- Commercial orders for planes will remain strong for at least a year

-- Defense spending for procurement, research, development, and testing has finally stopped declining


-- Boosting capacity enough to satisfy demand will be costly

-- Uncertainty remains over whether Washington will shift enough money into defense procurement to allow higher spendingReturn to top

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