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Aerospace Industries Association President Eric Fanning.
The growing assumption that inflation is largely over is presumptive, with the greatest effects yet to come because of the Pentagon’s tendency to push problems to the out years and a growing sentiment within industry to take less risk in bids, the head of the aerospace industry’s largest lobbying firm warns.
Eric Fanning, head of the Aerospace Industries Association (AIA), laid out a list of new legislative priorities as the House and Senate begin consideration of the fiscal 2025 budget request. The proposals come within the context of industry’s prolonged fight with inflation, one that the Defense Department has largely avoided dealing with directly.
“That’s my theory, that the ’26 budget is where we’re going to start to see the accumulated effect because … the Pentagon [is] very good at pushing things out into the future,” Fanning told a group of reporters May 16. “Someone when I was younger taught me that the most interesting year of the five-year plan is year six, because that’s where you hide everything. You just keep pushing into year six, but eventually it just accumulates and eventually it has to be dealt with.”
The defense industrial base has long been a “shock absorber” for inflation, seeing the impacts years before the government directly does, says Fanning, himself a former secretary of the U.S. Army and acting secretary of the U.S. Air Force. While the government writ large feels it is making its way through inflation because, for example, the price of groceries has dropped, there is a bow wave of problems coming.
“The burden was kind of placed on industry at the start, margins go down, to figure out labor rates, to figure out how to make this work because the government has all the cards. They have the contracts,” Fanning says. “But eventually, there’s new competitions, there’s new contracts, there’s new order quantities. If the price of the platform is variable and if the Pentagon planned for three and isn’t really adjusting for inflation, eventually they’re going to realize they get two.
“I think they have been able to find puts and takes, kind of keep their head down a little bit, let industry absorb some of it, but eventually that dynamic is going to shift and when the new costs come out, and there will be data on this I think, and that might be the ’26 budget.”
The fiscal 2025 request, with its congressionally mandated cap of $895 billion, is up 1% though because inflation purchasing power is going down. If it is not dealt with, there will be impacts felt beyond the major primes that are the ones that typically take on the contracts.
“It’s all through the supply chain. It’s not just that things cost more, it’s that companies are going to take less risk when they bid because of what happened to them and what’s happening to them now,” Fanning says.
For example, the Pentagon is placing a priority on multiyear contracts for key munitions for dependability, though inflation considerations make this tricky for some suppliers.
“Asking a company, some small company in the supply chain, to bid something out five years in the future, they’re probably going to be very conservative and bid in a high inflation number,” Fanning says. “So, I think we still haven’t even begun to see maybe some of the worst inflation.”
AIA represents 330 companies, and Fanning says he thinks some of the bigger ones are weathering the current impacts until the next round of contracts when they have more leverage.
“We can put the data in front and really show them how much materials have changed and particularly how much labor has changed, so I think that’s still something to deal with ... I’m just trying to warn people that, because I think some people feel ‘OK, eggs are going down or what have you, we have survived, we have made it to the other side here.’ But I don’t think people are focused on how successful we are pushing problems into the future where they just get bigger.”
AIA’s legislative proposals include multiple relevant measures, including increasing the threshold of congressional notifications because of the cost of defense trade items and limiting the use of fixed-price contracts for low-rate initial production lots.
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