By Emily Sachar
Crain’s New York Business
Robert Arrighi was already concerned about defense-budget cuts last summer when the Obama administration issued a stop-work order for the alternate engine for the F-35 joint strike fighter plane. Mr. Arrighi’s Long Island City, Queens, company, Kerns Manufacturing, was planning to work on the joint General Electric and Rolls-Royce project. He had hopes of hiring 50 people and bringing in an additional $12 million a year in revenue.
“That was a tough hit,” said Mr. Arrighi, general manager of the firm, which was expecting the project to be on the books for 20 years. “Now we wonder what’s next. The details of the latest proposed cuts will be the key to projecting the future.”
The release in mid-February of a federal defense budget that calls for 9% cuts to what was a $571 billion pie has defense contractors like Kerns Manufacturing worried. If the cuts are spread evenly among states, New York state companies are expected to lose $799 million of their defense-related revenues. And New York City firms face a $78.5 million slash off their $872.6 million total for 2010, according to the Center for Security Policy, a Washington, D.C., nonprofit, nonpartisan national-security organization. The city has historically represented about 10% of the state’s defense allocation. Figures for 2011 are not yet available.
“New York City business leaders should be deeply concerned about these cuts, because the ability to conduct business—from trade and commerce to finance—is directly impacted by the security of our country,” said Frank Gaffney, president of the center. “These cuts affect the New York economy, even for firms that don’t work in the defense sector.”
The center also predicts that New York state, which had $8.8 billion in defense-related revenues in 2010, could lose 26,768 jobs and $1.6 billion in earnings, with the typical defense-related worker earning just shy of $60,000.
In addition, under the proposed 18% “sequestration”—a proposal to continue cuts into the 2012-13 budget cycle—4,926 military active-duty employees could lose their jobs, along with 3,080 civilian Department of Defense employees, the center predicts.
In 2010, New York City firms received 1,892 contracts for a total of $872.6 million. New York state took in about 2.5% of the national total.
Companies are vulnerable
Mr. Arrighi, whose firm employs highly skilled workers and engineers for a range of military and commercial engine components projects, says he and others among the roughly 975 New York City contractors who took in defense work between 2000 and 2010 are on tenterhooks.
“We are vulnerable to any defense-spending cuts,” Mr. Arrighi said. “Anything that’s dramatic like this is of significant impact to us.” Most of Kerns’ work is for General Electric, for which Kerns is a subcontractor.
One project Mr. Arrighi believes is safe is the firm’s engine work for the F/A-18E/F Super Hornet, a strike fighter powered by two General Electric F414-GE-400 engines for which Kerns makes components.
“Globalization also can really help us,” Mr. Arrighi said. For instance, when India buys a U.S. engine, even if the Indian government requires that 60% of the engine be made in India, 40% can be made in the U.S. “That helps our business,” Mr. Arrighi said. India just ordered GE-F414 engines for its light combat aircraft, “and we expect a piece of that business, though we don’t yet know how much,” he added. The number of engines ordered was not immediately available.
Companies like Kerns, which had 2011 revenues of about $45 million and employs 165 people, are trying to fill in the defense gaps with commercial engine work. Currently, the firm’s commercial/defense split is about 60-40, but Mr. Arrighi said that might push closer to 70-30 in the months to come. Kerns has seen a nice uptick in the commercial aircraft engine business. For instance, when Boeing buys GE-90 engines for the Boeing 777 or GE-nx engines for the 787, or when Airbus buys the GP7200 for its A-380, Kerns benefits.
“Diversification is always important,” Mr. Arrighi said, “especially when the defense budget is taking a hit.” The commercial engine work, he said, is more susceptible to lean economic projections. Defense work is vulnerable to changes in military tactics, he added.
The Washington center has also examined projected impacts on various subtypes of defense contractors, among them the roughly 212 minority-owned defense firms that did business in New York state between 2000 and 2010. The center also counted 78 small business contractors, 406 women-owned firms, and 58 black-owned companies, as well as 272 firms owned by veterans, of which 61 were owned by disabled veterans.
Most vulnerable, the center argues, are firms working on several specific weapons systems. Among those are the E-2 (RMP) Advanced Hawkeye, for which firms in the state brought in $560 million in 2010, and the MH-60R helicopter, which accounted for some $345 million in revenue to state contractors.