Washington is 0 for 5 in recent aerospace industry competitions

RECENTLY, Forbes magazine ranked Washington No. 2 in its "best states for business" poll, up from No. 3 in the 2006 study. Washington ranked near the top in labor costs, regulatory environment, economic climate and growth prospects, and near the middle in business costs and quality of life. Clearly, great recognition for the region.

Unfortunately, the reality is different for the aerospace industry. As in sports polls, rankings based on a won-lost record tell the real story, and for Washington, the standings read 0-5. That's zero wins and five losses.

The state has lost all of the recent major competitions to attract significant aerospace jobs:

• Global Aeronautica, a joint venture between Alenia and Vought Industries, selected South Carolina to build composite assemblies;

• Rolls-Royce selected Virginia to build its jet-engine-assembly plant;

• Spirit AeroSystems chose North Carolina to build its next factory;

• Bombardier selected Queretaro, Mexico, to build parts; and

• EADS chose Alabama to assemble the Air Force aerial refueling tanker, should they win all or some of the work.

These five aerospace assembly locations are expected to generate 4,800 jobs — jobs Washington could have won.

So, then, why is Washington losing out on these significant job-creating opportunities? It is because of the tectonic economic and technology shifts that have been occurring for manufacturers and their customers, as well as the significant actions being taken by Washington's competitors.

Commoditization, relentless cost pressures

Airplane construction is being commoditized, resulting in intense price competition. It is now more efficient, automated, standardized and cheaper because of computerization of design processes, i.e. digital product definition.

This revolution has allowed Airbus to grow from a startup business in 1970 to the world's largest airplane manufacturer in 40 years. It also allowed a new Chinese entrant, COMAC, to start up with an aggressive goal to grow in similar fashion. Computerization allows design data to be downloaded to cheaper manufacturing locations around the world that can make certified parts with lower-skilled and lower-paid labor. Thus, automated design is allowing the industry to become more portable, resulting in lower costs of production. Washington has a great skilled aerospace workforce — but it comes at a price.

In Charleston, S.C., average wages for engineers are 36 percent lower and home prices are 70 percent lower than in Washington's King County. These cost gaps are increasingly harder to justify in the new world of portable and digital airplane production.

Airline customers having trouble paying

Airlines are in tough shape with bankruptcies rising and airlines consolidating because of worsening financial results. Globally, 99 airlines declared bankruptcy in 2008, and another 40 airlines will do so this year, with industry losses in 2009 expected to be $11 billion. The picture is worse because the industry has experienced negative profits history to date since 1954 — thus the difficulty in selling airplanes. Leasing companies are also key customers of aircraft manufacturers, and are interested in keeping their assets in revenue-paying service with airlines in order to maintain the asset valuations of their portfolio.

Unfortunately, as airlines go bankrupt and airplanes are grounded, leasing companies are incented to place these planes back in service. As a result, there are a number of new airlines resulting in higher supply of seats in the market. This fundamental mismatch in supply and demand, although good news for the paying public, causes airlines to cut airfares and results in more bankruptcies. The impact is the same — airlines require lower-priced and more efficient aircraft from the manufacturers.

Significant competition for aerospace jobs

The industry is a highly valued sector, where states, regions and nations mount significant economic campaigns to attract and retain aerospace jobs.

For example, in 2000, several nations provided Airbus approximately $3.5 billion to help launch the A380. Also, the Canadian government provided $350 million to support the launch of the Bombardier C-Series jet. France, Germany, Spain and the United Kingdom were instrumental in providing economic development support for the development of Airbus. China, Russia and Japan are following the same path.

The industry is recognized for its job-multiplier effect and represents positive economic impact beyond its own work force, and it powers economic development because of its high technology, skill, academic, infrastructure and services impact. For Washington state, key competitors are South Carolina, North Carolina, Alabama and Texas, states that have lower labor costs and, importantly, are "right to work" states.

Why are we losing and what should we do?

Despite the polls, the facts show that aerospace companies are looking away from Washington. The region needs to objectively assess the reasons why, in order to take meaningful action.

Companies note the disadvantage of potential work stoppages — this is key. They note high aerospace wages, cost of living, real-estate prices, cost of unemployment and workers' compensation insurance. Of these, labor, business and government leaders can impact the risk of work stoppage, and unemployment and workers' compensation insurance.

If Washington wants a winning season, it needs to address these disadvantages with a sense of urgency. Washington's economy depends on it — the aerospace industry has a 15-percent economic impact with direct and indirect employment of 209,000 jobs.