May 14, 2018
What is the American Aerospace and Defense Industry?
It’s all about weapons, flight, and military might.
War. What is it good for? Well, a lot, if you’re invested in the aerospace and defense industry.
The Spartans and Mongol hordes of ancient times were embroiled in conflict—their cultures were defined by it. That’s a far cry from modern America, where only 3.5 million, or roughly 1%, of the population, are members of the military or Department of Defense.
Though a relatively small number of people actively suit up as members of the U.S. military, the costs of outfitting them have increased substantially over the years.
While a Spartan warrior needed only a spear, helmet, and shield to go to war, modern soldiers are equipped with much more than that; And often enter the battlefield in vehicles or aircraft that cost millions, if not billions of dollars.
To put it another way, modern defense is big business. It’s not merely banging on a piece of steel to produce a sword anymore. It involves researching and developing aircraft, satellites, and ever-bigger weapons.
And if President Trump is serious about getting his space army, he’s going to rely on that very same industry to get it.
What is the aerospace and defense industry?
The aerospace and defense industry comprises companies that produce aircraft and spacecraft for both military and civilian use. It also includes manufacturers of military equipment, vehicles, and weapons, such as missiles and bombs.
It does not, however, include companies that manufacture or sell guns and ammunition for hunting and recreational use. It also excludes companies engaging in non-aviation related commercial services at airports, like restaurants and shops.
Even excluding those industries, aerospace, and defense is a prodigious industry that employs tens of millions of Americans and drives billions of dollars in revenue every year.
16% of the national budget, or more than $600 billion, goes directly toward defense and homeland security-related activities. Most, if not all of that money ends up going to companies in the defense industry.
In 2016, the sector employed 2.4 million people in the U.S., and generated $872 billion in sales.
Though there are hundreds of active firms, some of the sector’s largest companies include Boeing, Lockheed Martin, and Northrop Grumman.
The American taxpayers pour an enormous amount of money into the defense and aerospace sector. While a lot of that money seemingly disappears into a black hole (literally, perhaps—you never know what DARPA is up to), a lot of it goes toward developing products and technologies that directly benefit the public.
So, what does the sector actually produce? Perhaps the easiest way to break it down is like a Navy SEAL: By land, air, sea, and beyond.
While aerospace companies mostly operate in, well, the air and in space, defense companies produce all sorts of terrestrial weapons and technologies.
For example, military and defense contractors play a huge role in shoring up our national security measures, and the fact that most of America is relatively safe is due, at least in part, to these companies.
They build military bases and facilities to defend the borders, tanks and related vehicles for the military, and other arms and weapons.
Defense and aerospace companies are always hard at work on next-generation fighter jets and military aircraft. They’re also churning out orders for the U.S. and other militaries, too.
One example is the current-gen Lockheed Martin F-35 Lightning II, which can cost more than $122 million per plane. Another is the General Atomics MQ-1C Gray Eagle, an unmanned aerial drone made by General Atomics for the U.S. Army at a cost of around $31 million per unit.
But while they do design and sell weapons and military equipment for governments, companies like Boeing also build airplanes for commercial enterprises, too.
Airplanes, for example, have become more efficient over the years. This has led to cheaper airfare and shorter trips.
Don’t forget about the ocean, which is not only incredibly important for national defense, but is rife with resources and is perforated with valuable trade routes. While most of our battles are fought on land and in the air, the ocean is still the world’s biggest freeway for international trade.
And while it may not seem like much has changed in ship or seafaring technology over the years, defense companies are hard at work creating next-generation ships and floating fortresses with which the U.S. and other countries can engage in military operations.
A prime example is the Navy’s newest aircraft carrier, the USS Gerald R. Ford, which was commissioned in July 2017. The nearly $13 billion ship is the world’s largest aircraft carrier and will carry the F-35 fighter jet, among others.
While there’s still a need for classic military and defense equipment, the future of the sector may lie far beyond the sky—in outer space.
The U.S. and other countries have traditionally used public funds to pay for space travel and exploration, but we’re starting to see more private capital and investment enter the market.
Companies like Blue Origin and SpaceX, both founded by billionaire businessmen, are becoming integral parts of the American space program, and could soon start ferrying paying passengers past the stratosphere and into orbit.
There are also national security implications, as President Trump recently laid out in his idea for a space-based branch of the military, which could further increase public investment in the sector.
The sky may be the limit for some industries, but this probably isn’t one of them.
Want to explore the world of aerospace and defense? Check out these sector-related funds and single stocks available now on Stash.
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