10 Jul

The American aerospace and defense industries have recently found themselves in an odd situation of simultaneous growth and decline. To be more precise the non defense related component of the industry; the civilian aviation industries are bent on a course of growth, however the other component of the industry; the defense related aerospace industry is in decline.

Emerging Markets and the Fuel Efficiency

What lies beneath the surface for the expansion of the commercial aerospace sector is the increasing number of passengers especially in Middle East and Asia as well as continues demand for the new generation of aircrafts specifically designed for fuel efficiency purposes given the high and the volatile state of the fuel prices. It is easy to comprehend the reason behind the quest for the fuel efficiency when the weight of the fuel related costs within the operational costs are considered. A decade ago, such fuel related costs had only composed 13% of the total operational costs in civilian air flights and now the number is jumped over to 30% and increasing. Hence it seems that the aircrafts with enhanced technology combined with fuel efficient engines will continue to be the driving force of the industry.

Geographically speaking, the growth of the commercial aerospace industry is heavily contributed by the BRIC countries which have, until very recently, been growing in significant rates and adding up, as it is in the Chinese case, hundreds of millions of people in to the expending middle class section of their respective societies who are driving the newfound demand for civilian aviation. The continuing economic growth of the emerging countries is expected to fuel an average of 5% passenger increases over the next two decades.

Prime Importance of the Legal Framework for the Defense

However one is confronted with a bleak picture once the state of the defense related aerospace industry is considered. The global economic meltdown in 2008 and the ensuing period of ill managed, short lived and weak global recovery has led many governments to cut down national defense budgets which means a shrinking amount of money being earmarked for the defense needs. Moreover the fall in demand for the products of the American defense industry, despite their top notch quality, is related with the strict legal regime that the defense related items are subjected to in the United States. Not only the Arms Export Control Act which equips the President with wide ranging powers over the export of the defense related items but also the International Traffic in Arms Regulation (ITAR) which includes the U.S Munities List that enumerates the items to be subjected to ITAR and the countries to be banned from the export of such defense related items, serve as the legal framework that the American defense industry players have to operate in. Even though the concerns for national security are both legitimate and understandable, the negative impact of heavy and stringent regulations on the export of defense related and dual use items in a global economic environment where the major buyers of the American defense related items, including the United States government itself, are less willing to divert its national resources to the defense related spending and the ill effects of such heavy regulations on defense exports which might lead some foreign buyers to seek for other suppliers with less stringent regulations for the export of the defense related items should be taken in to account and addressed by the American law makers.

Two sub sectors of the American aviation industry are going through diverging periods of their business cycles. The future prospects for the commercial aviation is bright mainly due to the current and prospective demand, mainly generated by the emerging economies, of passengers and the increasing demand of more fuel efficient aircrafts by the operators. On the other hand, the defense related aerospace industries are operating in a heavily regulated legal framework in which the export licenses are only issued after a process of strict scrutiny based on the legal requirements stated by International Traffic in Arms Regulation (ITAR)and the Arms Export Control Act. Hence a more holistic analysis of the American aviation and defense industry would be to asses these two sub components of the industry separately and to diagnose and prescribe different sets of legal and economic advise for each of them.

Herdem Law Firm, Istanbul Turkey

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