No end in sight for aero, defense boom

By Bill Rigby

NEW YORK (Reuters) - Wall Street may be fretting that the U.S. economy is slowing down, but the aerospace and defense industries are hard pressed to figure out when their party will end.

Defense spending is at record highs, boosted by operations in Iraq, while a surge in leisure and business travel is pumping demand for commercial airliners and business jets.

Even long-suffering airlines are raising ticket prices after five years, racking up billions of dollars of losses.

"This is the first simultaneous civil and military upturn in several decades. If you are a contractor, you are doing great," said Richard Aboulafia, an analyst at the Teal Group. "Every sector of the industry: jetliners, fighters, business jets, helicopters are doing really well, by all indicators."

Top defense contractors Lockheed Martin Corp. (LMT.N: Quote, Profile, Research, Stock Buzz), Boeing Co. (BA.N: Quote, Profile, Research, Stock Buzz), Raytheon Co. (RTN.N: Quote, Profile, Research, Stock Buzz), and General Dynamics Corp. (GD.N: Quote, Profile, Research, Stock Buzz), have all risen sharply this year, pushing the Standard & Poor's Aerospace and Defense index .GSPAERO up 26 percent over the past 12 months. That has easily outpaced the 10 percent rise in the S&P 500.

The Amex Airline index .XAL, after two years of losses, is up 14 percent so far this year, ahead of an 11 percent rise in the S&P 500.

The question now is: when will the explosive growth start to fade? Next week Reuters hosts 20 leading CEOs, analysts and government arms buyers at the annual Reuters Aerospace and Defense Summit in Washington, D.C., to try to answer that question, and others.

REGIME CHANGE

For defense firms, the main issue is whether a Democrat-controlled Congress will clampdown on Pentagon spending or clear the way for further increases.

"The Democrats are unlikely to want to appear weak on defense, so they're not going to call for big cutbacks on defense spending," said Cowen & Co. analyst Cai von Rumohr, in an interview this week with Reuters Television.

That said, big programs like cargo planes for the U.S. Army and Air Force, or refueling tankers for the Air Force, may get nudged backward to save money for repairing equipment worn out in Iraq.

"Clearly the cost of war in Iraq exceeded everyone's estimates last year, so we still have a relatively tight budget and yet we have a number of potential new programs," said von Rumohr. "Are they really going to fund all these programs this year or is it more likely that some of those are going to move to the right?" he said, using the industry slang for delaying a project.

War in Iraq and Afghanistan and other operations have cost $437 billion since September 11, 2001, according to the nonpartisan Congressional Research Service.

The resignation of Defense Secretary Donald Rumsfeld -- the chief architect of the Iraq war -- may actually prompt a rise in spending, as Congress admits the war is costing much more than expected.

"There's an argument to be made that the (budget) flood-gates will open with Rumsfeld out of the way," said Aboulafia.  Continued...